Protectionist Taxation
Protectionist taxation is the name for the fiscal policy of using revenue neutral taxes designed to protect domestic industries from direct competition from foreign imports. Such taxes are also known as revenue neutral tariffs and are usually set up to discourage the importation of goods from foreign countries by making them more expensive to the domestic consumer.
The rationale behind the use of protectionist taxes is to protect domestic employment opportunities and to secure the revenues of domestic manufacturers. It is argued that this practice assures the economic health of local industries, as well as enabling domestic companies to compete on a more equal footing with larger foreign competitors.
A revenue neutral tariff is different to a traditional tariff, which is designed to generate additional revenues for the government in the form of increased taxes. With revenue-neutral tariffs, the rate of taxation is generally set to equate the domestic price of the imported commodity to the historic equivalent of the cost of production in the domestic marketplace. This approach means that foreign imports must now pay the same proportionate costs as domestic producers in order to enter the market. It also ensures that domestic producers are able to raise their prices in proportion to the cost of imports, helping to preserve their profits and encouraging them to stay in business.
One of the most commonly used forms of protectionist taxation is the imposition of duties on imports. By imposing a tax on imports, the cost of these items must increase beyond the price of ordering them from abroad, rendering them economically unattractive to the domestic consumer. This practice has become increasingly popular in recent decades, as governments around the world look to impose measures to shield their economies from the threat of foreign imports.
Many countries also apply taxes to exports, from both domestic and foreign producers. Exporting products from one country to another can be expensive for businesses, as the cost of shipping and other associated costs can be high. Thus, taxes imposed on exports reduce the attractiveness of these exports to potential buyers, which serves to reduce the competitiveness of domestic industries.
Protectionist taxation has also been used to limit the growth of investment capital flows into foreign markets. For example, under US legislation, the Foreign Investment and National Security Act, any foreign investor wishing to acquire more than 10% of the shares of a US company must first seek approval from the US government. In this way, governments are able to protect domestic enterprises from being bought over by foreign businesses and investors.
Overall, it is clear to see why many governments employ protectionist taxation to shield their domestic industries from the threat of foreign imports. While it can pose significant economic costs to domestic consumers, it offers significant economic benefits to businesses, encouraging larger and more competitive domestic companies and helping to retain jobs and money within the local economy.
In the modern, globalised economy however, it is not just foreign imports that pose a threat to domestic producers. Domestic competition is now rife, as businesses compete for market share in the increasingly competitive global marketplace. As such, it is sometimes argued that the use of protectionist measures is an outdated strategy that should no longer be employed in the modern business world, as it fails to take into account the complex dynamics of the global economy.
