Tariffs are economic policy tools employed for all kinds of purposes. They have been used to raise revenue, to shield domestic firms from foreign competition, as a negotiating tactic against other nations, and as a means of imposing economic sanctions. In certain situations, even the threat of tariffs is enough to impel other nations to change course.

But what are tariffs, and how are they determined? In this Explainer, we’ll seek to understand what tariffs are, who gets to set them, and under what conditions. We’ll also dive into some real-world examples of efforts to shape and guide policymakers toward tariffs for some sectors and away from others.

What Are Tariffs and Who Pays Them?

At their base, tariffs are taxes on imported goods. The wording of the definition matters here: they are taxes on imported goods. Since other countries do not import goods into the United States (they export them to the United States) and it is the US citizens who do the actual importing, the legal incidence of tariffs is paid by Americans who are purchasing the foreign-produced goods.

When thinking about imports, most envision what economists refer to as final goods, purchased by an “end consumer.” We might think of iPhones, laptop computers, fully assembled cars, fruits and vegetables, garments, and a litany of other goods. Fewer people realize that the US also imports many “intermediate goods” — such as automotive components, semiconductors, lumber, and fabricated metal parts — that go into the (domestic) production of final goods. We also import raw materials like rare earth minerals, oil/petroleum, iron, aluminum, and such. Tariffs apply to these, too, unless otherwise exempted.

Even though US citizens bear the cost of these tariffs, it is important to distinguish between what we call the legal incidence of a tariff and the economic incidence of a tariff. It is true that US citizens bear 100 percent of the legal incidence of the tariff because we are the ones who must actually send the money to the government. The economic incidence, however, refers to the share of the tax that is paid by the buyers and sellers. Whenever there is a tax, the buyers will pay some portion of it in the form of higher prices. Sellers will also pay some portion of the tax in the form of reduced revenue kept.

For example, in 2009, President Barack Obama imposed a tariff on Chinese tires. The result of this was a 21.7 percent increase in the price of tires in the US, which was less than the tariff rates of 35 percent, 30 percent, and 25 percent. The sellers of the tires made up the difference in the sense that they got to keep fewer dollars after the sale of the tire than they did when there was no tariff.

How Tariffs Are Set: Non-Emergency Situations

Because tariffs are a tax, they are explicitly within the purview of the US Congress, as expressed in Article I, Section 8 of the Constitution, which grants Congress the power to “regulate Commerce with foreign Nations,” and the power to “lay and collect Taxes, Duties, Imposts and Excises.”

This is the constitutional basis by which the House Ways and Means Committee exercises original jurisdiction over tariffs. Here, “original jurisdiction” simply means that all bills pertaining to tariffs must originate in the House Ways and Means Committee. Other Congressional committees can have secondary jurisdiction over a bill dealing with tariffs. A change to the tariff rate on energy imports, for example, would originate in the House Ways and Means Committee but would likely then be referred to the House Committee on Energy and Commerce. The House Parliamentarian, in his advisory role to the House, would assist the Speaker in designating the path a proposed bill would navigate before reaching the floor for a vote.

The Speaker of the House, as the House’s Presiding Officer, has unilateral discretion to accept the House Parliamentarian’s advice or to ignore it. The only exceptions to this lie in situations where the Constitution itself dictates a certain legislative path a bill must traverse. All bills dealing with taxes (and tariffs), for example, must originate in the House Ways and Means Committee. No Speaker can override this rule.

From there, the proposed tariff bill would follow the standard process for any other bill. It must be approved by a majority of the House at which point it goes over to the Senate for approval and, once both Chambers have passed identical versions of the bill, it goes to the President for final approval.

All of this is the standard, or what we may call “normal” or “non-emergency” process, by which tariffs are set or changed.

How Tariffs Are Set: Emergency Situations

Congress was originally constituted as a “deliberative body” and intentionally designed to move slowly (see the Federalist Papers, especially numbers 41-43, 47-49, 51-53, and 62-66). In times of war or crisis, however, action may need to be taken more quickly than Congress can act. For this reason, it turned to the Executive branch. Because the President is elected by the nation as a whole, Congress expected the President could wield the power of tariffs judiciously and, more importantly, expeditiously in situations of genuine emergency.

Congress subsequently passed a series of laws which, under certain conditions, would grant the President “emergency powers” in areas that would typically be within the constitutional purview of Congress. Examples of this include the Trade Act of 1962 (President Donald Trump used Section 232 to impose tariffs in 2018) and Sections 201 and 301 of the Trade Act of 1974 (President George W. Bush relied on Sections 201 and 301 to impose steel tariffs in 2002, and President Obama invoked Section 421 to justify tariffs on Chinese tires). Numerous Supreme Court cases have upheld Congress’s authority to cede some of its power to the President.

Marshall Field & Co. v. Clark, for example, saw the Court uphold the Tariff Act of 1890, which directed the President to suspend duty-free importation of sugar, molasses, coffee, tea, and hides if the President believed that “any country producing and exporting [those products], imposes duties or other exactions upon the agricultural or other products of the United States, which… he may deem to be reciprocally unequal and unreasonable.”

In JW Hampton, Jr & Co. v. United States, the Supreme Court upheld the Tariff Act of 1922, which required the President “to increase or decrease tariff rates as necessary to ‘equalize . . . differences in costs of production’ between articles produced in the United States and ‘like or similar’ articles produced in foreign countries.”

The International Emergency Economic Powers Act

In 1977, Congress passed the International Emergency Economic Powers Act (IEEPA),  allowing the President to regulate a wide swath of economic transactions after declaring a state of national emergency. The IEEPA was an offshoot of the 1917 Trading with the Enemy Act, which gave the President the power to impose economic sanctions on enemy nations during wartime.

As the Congressional Research Service notes, the IEEPA gives the President the authority to “‘regulate’ a variety of international economic transactions, including imports. Whether ‘regulate’ includes the power to impose a tariff, and the scale and scope of what tariffs might be authorized under the statute, are open questions as no President has previously used IEEPA to impose tariffs,” (emphasis added). The report is quick to point out that President Richard Nixon used the Trading with the Enemy Act “to impose a 10 percent tariff on all imports into the United States in response to a monetary crisis,” which does engender some amount of a precedent for this type of activity.

Declaring a national emergency is straightforward. Between 1917 and 2025, a total of 90 national emergencies were declared, an average of once every 14 months. The National Emergencies Act (1976) requires that the President articulate that there exists an unusual and extraordinary threat, that he or she notify Congress immediately, and publish such a declaration in the Federal Register. Once that is done, a national emergency is officially declared and the authorities and powers of the IEEPA are “unlocked.” Dozens of these emergencies are still in effect today, with some dating back decades.

While scholars have contended that giving power over tariffs in situations of a national emergency has effectively nullified “the distinction between Congress’s constitutional power over tariffs and foreign commerce and the President’s national security and foreign affairs powers,” courts have traditionally sided with the President.

In Al Haramain Islamic Foundation, Inc v. US Dept of Treasury, the Court of Appeals for the Ninth Circuit said that they “owe unique deference to the executive branch’s determination that we face ‘an unusual and extraordinary threat to the national security’ of the United States.” In US v Groos, the Court of Appeals for the Tenth Circuit wrote that justices “cannot question the President’s political decision to deem this threat ‘unusual and extraordinary.’”

What these court cases establish is that 1) Congress has the power to delegate its authority to the President and that 2) the President is uniquely situated to understand whether a situation qualifies as a “national emergency.” Part of this is no doubt due to the simple fact that the President (presumably) has access to information that is privileged that the Court does not have. Because of that, the judicial branch trusts that Presidents will not abuse the IEEPA for political or procedural reasons. Another explanatory element, though, may be the Court’s hesitation to open Pandora’s box by hearing a challenge to a national emergency declaration. Once that box is open, the intent of the IEEPA would be effectively nullified as courts deliberate.

Beyond Procedure: How the Tariff Sausage Is Made

While this procedural explanation covers how a new tariff can be enacted, we must also consider where the idea for a new tariff comes from and what factors shape tariffs that are ultimately enacted.

Protected industries often gain from tariffs, which make the products and services of their foreign competitors more expensive, so industry actors will actively lobby policymakers to secure these powerful political favors. Requests for tariffs will often be couched in terms of “protecting critical industries,” or “necessary for national security,” and other such language. And while there is likely some degree of sincerity behind these statements, it would be foolish to assume that failing to tariff-protect every industry would result in the United States being unable to defend itself militarily.

Fortunately, policymakers actively soliciting cash payments in exchange for political outcomes is illegal in the United States. Directly bribing policymakers is similarly illegal under the Federal Election Campaign Act. Further, there are strict rules governing gifts for policymakers, making it difficult to blatantly offer a quid pro quo.

Less blatant corruption, however, is common. Promising campaign contributions, pledging endorsements or help with re-election, or casually mentioning that you might know of some highly-paid opportunities for a Congressperson after they leave office are not illegal activities. Savvy lobbying firms (and policymakers) can and often do find creative ways of arranging a sort of quid pro quo arrangement, regardless of stringent laws intended to prevent them.

Sugar tariffs, for example, protect domestic sugar producers by restricting imports and setting price floors, keeping US sugar prices artificially high — often double the world price. A small group of politically connected sugar growers and processors lobbies to maintain these tariffs. The result is a classic case of protectionist rent-seeking: concentrated gains for a few, who have not generated any additional value, and spread-out costs for many (including consumers and candy manufacturers).

Understanding Tariffs

The process of setting tariffs reflects a delicate balance of constitutional authority, wherein Congress holds unambiguous jurisdiction, and presidential powers during national emergencies and in his dealings with matters of foreign affairs. Examples such as the Obama tire tariffs through the use of the Trade Act of 1974 to Trump’s use of the Trade Act of 1962 to impose tariffs on steel and aluminum evidence how these emergency powers have been used by presidents in the past. Finally, acknowledging the role that lobbyists and special interest groups play in influencing and shaping tariff policy helps us understand the dynamics at play across both industry and government.

Understanding the procedural dynamics at play across the legislative branch, the executive branch, and industry equips both policymakers and citizens alike with the ability to critically examine tariffs in a way that not only allows for better, more informed discussions but also helps us keep the federal government in check. 

Understanding how tariffs are created, by whom, and for what purposes (both rhetorical and actual) is crucial to understanding their economic impact and political importance.

The latest Real Gross Domestic Product (GDP) release from the Bureau of Economic Analysis (BEA) shows a net decrease from Q4 2024. This net decrease “primarily reflected an increase in imports, which are a subtraction in the calculation of GDP, and a decrease in government spending…partly offset by increases in investment, consumer spending, and exports.”

The choice of phrasing can lead to some misunderstanding. Imports are subtracted from GDP as a matter of accounting, not because they hurt economic growth. Investment, consumption, and government spending already include imported goods so imports are subtracted from GDP calculations to avoid double counting.

Conversely, government spending is treated as a boon to economic growth while the cost of government spending is ignored. Government spending gets paid for through taxation, taking on debt, and/or printing money, all of which are a cost upon ordinary Americans.

It’s time our measures of economic growth reflect some hard truths: that government spending comes at a cost to our standard of living and that the economy grows despite government intervention, not because of it.

While the BEA publishes a measurement titled “Value Added by Private Industries (VAPI),” it does not get nearly as much attention as it deserves. The most recent data show that VAPI contributes to just under 89 percent of all economic growth. Despite this, GDP is still the more prominent metric, in part because the BEA treats government spending as a value added to the economy.

Last year, we examined GDP minus government spending, which we referred to as Gross Domestic Private Product (GDPP). Economist Murray Rothbard called this “Private Product Remaining.” Here are our latest findings.

This updated chart also shows the percentage of GDP made up by GDPP. Note that these percentages differ slightly from VAPI estimates. This is because VAPI includes private outputs that are purchased by government (i.e. a defense contractor) while GDPP treats those purchases as part of “Government Consumption and Gross Investment.”

A cursory glance at the BEA’s description of government assumes that all levels of government “contribute to the nation’s economy when they provide services to the public and when they invest in capital. They also provide social benefits, such as Social Security and Medicare, to households.”

The description also notes that the government gets its revenue taxes, transfers, and fines, as well as rent and royalties. It fails to mention, however, that government receipts come at a cost. That cost, what economists call opportunity cost, is the next-highest valued use of that money.

We can see this effect reflected in the BEA’s own data. When examining the growth of government and the private sector both before and after 2000 in our analysis published last year, government growth (both federal as well as state and local) outpaced that of the private sector. Below is an updated analysis of last year’s findings. Note that the same still holds true: Government outpaces the growth of the private sector, especially state and local governments.

Furthermore, we find that the private sector has grown 33 percent slower per year since the start of the new millennium. It is also important to remember that transfer payments, such as Social Security or unemployment insurance, are excluded from GDP estimates of government spending because those transfers are counted toward private spending.

As many Americans filed their income taxes earlier this year, their W-2 forms highlight how much money they hand over to the federal, state, and local governments. When they look at those amounts, they may be shocked to see how much was withheld and consider what they would have otherwise done with that money. Maybe it would be put toward groceries and gas, maybe it would be put toward car repairs or medical treatments, or maybe it would be set aside for a rainy day.

The same could be said for the government taking on debt. When any level of government issues debt, it takes private capital away from other projects in which private investors might have otherwise invested or provided financing for. Debt-financed spending also shifts tax burdens from the present to the future. While bond investors trust that their loans will be paid back with interest, future generations will bear the cost of government spending undertaken today.

Let’s not forget printing money. If the federal government finances spending with newly printed money, the resulting inflation destroys the purchasing power of the dollar, making everyday goods and services more expensive.

State and local governments also heavily rely on transfers from the federal government. These transfer payments allow policymakers at the state and local level to increase spending at the cost of federal taxpayers who live in other states.

Whether or not the benefits of government spending outweigh the costs is a debate worth having, but official metrics must more clearly communicate that government is a cost in the first place.

Consider Social Security payroll taxes, which the BEA claims, “employer and employee contributions to government social insurance.” If these contributions are not made, however, employers and employees could face penalties—including jail time. The sad truth is that employers and employees could have earned a better return on investment if they had put their payroll tax money in the S&P 500 instead of the required Social Security tax.

A recent review of the academic literature on government stimulus in the economy finds that government stimulus makes, at best, modest, short-term contributions to economic activity.  In the long-term, however, the review finds that government stimulus effects “often diminish or turn negative due to reduced private investment and consumption, emphasizing the role of anticipatory effects and private-sector responses.”

Economists, both past and present, have argued that calculating government contributions to the economy is more complicated than official GDP calculations claim. Economist Patrick Newman notes Nobel Prize-Winning Economist Simon Kuznets’s own objections that government was treated as “an ultimate consumer” on par with private consumers regardless of whether private citizens valued government consumption and investment. Newman takes Kuznets’s concerns further and argues that such positive treatment of government in economic growth calculations opened the door to the flawed views of Modern Monetary Theory.

Alternatively, economists Vincent Geloso and Chandler S. Reilly examine government consumption and investment minus defense spending, called “Defense-Adjusted National Accounts”. The result is a much lower level of GDP, but the clear lesson “that wars do not improve living standards.” These challenges to the status quo of economic growth calculations help, in the words of Geloso and Reilly, “bridge the gap between official economic data and the perceptions of the American public.”

If the average American can see the opportunity cost of the money the government takes from them, there’s no reason the economics profession or government officials cannot reflect and communicate those costs in economic growth measurements as well.

On January 1, 1993, the European Single Market came into being. The previous October, British Prime Minister John Major had looked forward to “a single European market of 330 million people…A market for British computers. British cars. British televisions. British textiles. British services. British skills. The biggest free trade area in the world.” 

By eliminating trade barriers within the European Economic Community, the Single Market would boost trade, economic growth, and, perhaps, political integration. These hopes have not been borne out. 

A report from the International Monetary Fund (IMF) in October found that while intra–European Union trade in goods increased from 11 percent to 24 percent of the European Union’s Gross Domestic Product between 1993 and 2023 compared to 8 percent to 15 percent for extra–European Union trade, intra–European Union trade in services — which account for 72 percent of the EU’s GDP — had grown at exactly the same rate as extra–European Union trade. Indeed, trade between EU countries is less than half that between US states. 

What accounts for this? As Luis Garicano, a former member of the European Parliament, notes in “The myth of the single market,” “The IMF puts the hidden cost of trading goods inside the EU at the equivalent of a 45 percent tariff. For services the figure climbs to 110 percent, higher than Trump’s ‘Liberation day’” tariffs on Chinese imports.” 

“The Single Market we all thought we have is largely a myth,” concludes Garicano, who gives three reasons for the Single Market’s failure.  

First, the principle of “mutual recognition,” which “states that whatever can be sold legally in one EU country can be sold in all others,” “fails in practice,” he writes. The principle “was never absolute,” he continues:

The EU’s treaties…do allow countries to block products for legitimate reasons like public health, security, or environmental protection. But these exceptions were supposed to be just that — exceptions, not the rule. The problem is the cost of enforcing the rule when a country claims an exception.

Among several examples:

Every product sold to French consumers must bear the national “Triman” recycling logo plus detailed sorting instructions specific to France. AkzoNobel’s paint cans fully meet EU chemicals and food-contact rules, but a single paint tin still has to carry France’s Triman recycling logo, Spain’s “Punto Verde,” and Italy’s alphanumeric material code. Space on a 1-liter tin is so tight that the firm now holds separate stocks for France, Spain, and Italy.

Second, “The EU directives do not harmonize EU legislation.” 

“There are two problems,” Garicano writes:

…first, rather than replacing national regulations, EU rules pile on top of them. Second, member states often engage in ‘gold plating’ – adding extra national requirements when implementing EU directives.

The result is that even when the EU does create common rules (directives or regulations aiming to harmonize), the outcome is often not a truly single market. New EU rules often don’t replace old national ones. Instead, they create additional layers of regulation.

As an example, he offers General Data Protection Regulation:

…which (in spite of being a regulation) still means we have regulators at EU, national and regional level. In January 2022, Austria’s data-protection authority held that NetDoktor’s use of Google Analytics breached the GDPR, and ordered the site to disable the tool or face fines. A few weeks later, the French data protection authority (CNIL) issued parallel decisions against three French websites, again declaring Google Analytics unlawful and instructing each operator to switch to an EU-hosted alternative. In June 2022, Italy’s authority (Garante) imposed the same ban on Caffeina Media, threatening to suspend its data flows to the United States unless it rewired its analytics stack within ninety days. A publisher that trades across the EU must now keep separate analytics setups for Austria, France, and Italy, while the same tool remains legal elsewhere. The Draghi report notes that there are around 90 tech-focused laws and more than 270 regulators active in digital networks across all EU countries. So much for the single market!

Finally, “The EU Commission is not doing its job in enforcing the Single Market.” “[E]xplicitly charged with ensuring the application of the Treaties,” Garicano writes, in the twelve months to December 2024, “the Commission opened just 173 new cases – only a quarter of the volume handled a decade ago.”

“There’s a paradoxical evolution in the Commission’s role,” he notes, “As it has taken on additional functions in areas like housing, defense, and geopolitics (the first von der Leyen Commission termed itself a “geopolitical commission”), it has retreated from its core task of policing the single market.”

An optimist might infer that the problem here is not too much EU but too little: the Single Market hasn’t delivered on its promises because it isn’t sufficiently “single.” A pessimist might note that if this hasn’t happened in more than three decades, it is unlikely to begin anytime soon. Yet another hefty report or review is unlikely to get the needle moving.  

This is bad news for John Major’s successor, Kier Starmer. With his government faltering less than a year into office, he has sought a new deal with the EU to improve Britain’s terms of access to the Single Market.

But services account for a relatively high 54 percent of British exports compared to 33 percent for the United States and just 31 percent for the EU, and this is exactly the sector in which the Single Market is most completely a fiction. This probably accounts for the British economy’s stubborn refusal to collapse in the wake of Brexit: whatever small benefit there is to being locked into a Single Market with a bunch of torpid economies is reduced still further when there are high barriers to you selling your main export to them — barriers that don’t appear to be going anywhere anytime soon.

If Starmer is hoping that his new terms of access to the “biggest free trade area in the world” will offset the economic harm done by his government’s disastrous fiscal policies, he is likely to be mistaken. It’s a myth.

The House of Representatives narrowly passed the One Big Beautiful Bill Act (HR 119) in dramatic fashion (215-214) last month. Most of the drama was on the Republican side. The House Freedom Caucus favored preserving the 2017 tax cuts but only if there were sufficient budget cuts to pay for it. 

A central sticking point was Medicaid, both in terms of rules and in terms of funding. In the end, the cuts were larger than almost anyone expected, $880 billion over the next 10 years, and all but three House Freedom Caucus members voted yes. Every Democrat voted no.

The Obamacare “expansion” changed the original mission of Medicaid, which was to ensure the working poor and disabled didn’t end up without healthcare insurance. Medicaid had been, up until the Affordable Care Act of 2010, the default form of insurance for anyone who was poor or unable to work. Since then, even the young and perfectly able-bodied can qualify for Medicaid. Adding millions of newly eligible enrollees burned through money that could have been put toward elements of Medicaid’s original mission, things like investing in prenatal care for poor women.

Medicaid’s budget woes worsened with the onset of COVID-19. Spending increased even more rapidly, in part from the absence of normal coverage interruptions that were eliminated during COVID’s continuous enrollment provisions. At the same time, an aging population has led to rapidly rising long-term care costs among the poor elderly. Finally, a Byzantine system of below-market mandated reimbursement rates at the state level has become increasingly onerous to save money, especially in states with ballooning rolls like California, where Medicaid has been opened up to illegal aliens. Below-market mandated rates have caused price-shifting distortions to accumulate, and make the entire healthcare system less efficient.

Medicaid is an outstanding example of how not to structure a government program. Its daunting complexity results in people frequently migrating into and out of the program (this is especially problematic for programs that provide some kind of insurance because of adverse selection problems). Because it is fundamentally a government bureaucracy, problem-solving is mostly through top-down edicts or acts of Congress. In contrast, in many parts of American society entrepreneurs continuously adapt, adjust, and innovate to deal with new problems and to take advantage of new opportunities to improve service, reduce costs, or both.

The bill now faces an uncertain future in the Senate. Changes to Medicaid are going to produce a political backlash, even in some red states, since there will be political pressure for state governments to pick up the slack. But most importantly, a very large and dysfunctional system will remain intact and dysfunctional.

The problem with Medicaid goes far beyond Medicaid. In a rich society like ours, everyone is going to get a fair amount of healthcare one way or another. We are empathetic, sympathetic, interconnected, and rich, so most of us feel compelled to do something to help the uninsured and those without access to care. If a person is writhing in pain because he can’t get healthcare, most likely neither you nor anyone you know personally would just step over him without concern.

This is the real problem: healthcare in America has effectively become a non-excludable good. A non-excludable good is one we cannot keep others from consuming (e.g., national defense). Long ago, economists worked out why such goods are inevitably underprovided by the private market because of free riding. Since virtually everyone is going to get at least some healthcare when they need it, some take advantage of that by not buying their own health insurance.

Among the many economic challenges specific to healthcare markets, economists of all political stripes agree that this is the deepest problem. Recall that perhaps the biggest bone of contention with Obamacare was the individual mandate, put into the bill specifically to address the free rider problem. Many opposed the individual mandate for a variety of reasons, but did not challenge its premise, which was that there was a deep free rider problem to be dealt with in American healthcare.

The bold — but probably politically impossible — course of action would have been for House Republicans to eliminate the federal role in Medicaid. But if they are not going to return this issue, and its financing, to the states, then rather than further tweaking Medicaid and creating new problems, a better approach would be to find an alternative path to get government out of the business of healthcare for the poor. In short: provide basic healthcare insurance through vouchers. 

To put it simply, eliminate Obamacare, Medicare, and Medicaid and replace them with a national healthcare voucher system. This transformative change for American healthcare could be limited to the level paid for with a national sales tax, and our unfunded liability problems would simply disappear. While, for practical reasons, this would likely have to start at the national level, the goal could be to then spin it off to the states. 

Milton Friedman introduced the idea of using vouchers with respect to education 70 years ago. His ideas were summarily rejected as too naïve, too impractical, and even as irresponsible. Now we are in the midst of an explosion of school choice across the nation. How much better off would we be if we had listened to him long ago?

Friedman did not advocate using a voucher system for healthcare insurance. While his diagnosis of the problems confronting the American healthcare system was unimpeachable, he did not explicitly consider the problem of de facto non-excludability. Since this induces some citizens to save money by not buying healthcare insurance, it guarantees there will always be uninsured citizens. That, in turn, ultimately guarantees some level of government provision of either healthcare or healthcare insurance.

I believe that if he were alive today, Friedman would support vouchers for healthcare insurance. Vouchers provide the government with a means of funding a solution without having the government be the mechanism that provides the solution. As such, it mostly avoids the ever-growing creeping bureaucracies that suppress competition and introduce innumerable distortions and never-ending political opportunism.

We can eliminate Medicaid, Medicare, and Obamacare by implementing a national voucher program for healthcare insurance for all citizens. By structuring the budget process to be self-balancing, we can ensure future generations are no longer saddled with a combination of increasing debt they never agreed to and lower quality of service than those who were responsible for that debt were able to enjoy. 

Ever notice that when the topic is unfunded liabilities, Medicaid is rarely mentioned? Is that because Medicaid is on a healthy budget path? Hardly. Medicaid is not included in such conversations because Medicaid is not a self-funding program in the sense that it does not have its own dedicated payroll tax funding. At the federal level, it is funded out of the general budget.

If the federal budget were experiencing year-over-year surpluses, one could argue that it is not burdening future Americans because it is being cross-subsidized. But we are, in fact, experiencing year-over-year deficits, so any dollar the federal government spends on Medicaid is effectively a dollar of additional federal debt at the margin. Rising federal spending on Medicaid equals rising federal debt. 

Far from a principled stand or a change in national direction, the latest Republican budget does little more than kick the can down the road — to avoid the political cost of actually doing what is best for the country.

How much more dysfunction and irresponsibility are we going to tolerate so we can pretend that our healthcare system is only for the deserving? We should be honest about the fact that we do, and will continue to, treat everyone. This is nothing to apologize for but it’s something we need to come to grips with.

A voucher program would redirect government power to unleash market competition among healthcare insurers and among healthcare providers. They will hate it. The NEA’s response to school vouchers should tell you everything you need to know.

In March, Florida Governor Ron DeSantis told lawmakers they have his full support to end property taxes statewide. 

“Taxpayers need relief,” DeSantis said. “You buy a home, you pay off the mortgage, and yet you still have to write a check to the government every year just for the privilege of living on your own private property… Is the property yours, or are you just renting it from the government?”

“You should own your property free and clear… I think to say that someone that’s been in their house for 35 years has to keep owing the government money, you know…you don’t own your home, if that’s the case.”

The Governor then described buying a flat-screen TV and then having to continue making tax payments on it. 

“That’s not how we do things,” he said. “It’s like, ok, if you’re going to tax something, tax it at the transaction, and then let people actually enjoy their private property, free and clear of the government. So that, I think, is the vision. That’s the philosophical insight.”

The most critical line is the last one: is it truly your property if you risk losing it to the government? Is this a “property tax” or a rent payment you make to the state to keep a roof over your head?

Philosophically, property taxes are arguably one of the most dishonorable taxes established in the modern world, not unique to the United States, as they are implemented in the vast majority of global legislations. Based on sources like Tax Foundation or Immigrant Invest, only a small handful of countries — approximately 175 to 185, over 90 percent globally — have some form of property tax, with the few exceptions typically being tax havens, principalities, or petrodollar monarchies like the United Arab Emirates. These are the exception, not the norm.

At the federal level in the United States, it is impossible to enact legislation to eliminate or dismantle this tax, which is why the governor of Florida is attempting to do it in his State. 

But he faces several legal, jurisdictional, and budgetary hurdles.

The Budgetary Hurdles

Economically, several aspects would need to be reconsidered before advancing such a measure. 

According to reports, property taxes in Florida generate $55 billion annually, funding 73 percent of school budgets and a significant portion of local services. Eliminating them would require alternative revenue sources for the government or, preferably, massive cuts in public spending. DeSantis has suggested that Florida should generate more revenue from tourism and reduce spending. While this sounds appealing — like Elon Musk’s chainsaw — it would still fall short of balancing the budget and would require political commitment from local leaders to move in this direction.

The state of Florida has experienced a real estate boom driven by mass migration from states like New York and California to the Sunshine State, which has driven up housing prices and, consequently, property taxes. According to a Redfin report, between 2019 and 2024, the average tax bill in Jacksonville and Tampa increased by nearly 60 percent, while in Miami and Fort Lauderdale, it grew by 48 percent. Statewide, the median property tax rose by 47.5 percent during the same period, according to CoreLogic.

On average, Florida homeowners pay about $2,338 per year in property taxes, with a state effective rate of 0.80 percent of the assessed value, though this varies by county. For example, in Miami-Dade, the average is $2,756 for properties valued between $350,000 and $400,000 (1.01 percent rate), while in Broward, it’s $3,305 for homes with a median value of $346,000 (0.95 percent rate). Although property insurance is not legally required by state law, homeowners are practically obligated to obtain it, as mortgage lenders and condominium or HOA regulations mandate it. The average property insurance premium in the state is $4,419 per year due to risks like hurricanes and increasing requirements such as flood insurance. Thus, Florida homeowners may end up spending over $6,500 annually to maintain a roof over their heads.

The Legal and Jurisdictional Hurdles

The great challenge for the Republican governor is to successfully promote legislation that aligns all local governments and reconciles their budgets, or at the very least, advances an agenda that creates a collaborative plan among various authorities with a common goal, as property taxes in Florida are collected by local governments, something DeSantis acknowledges.

“Property taxes are local, not state,” he said. “So, we’d need to do a constitutional amendment (requires 60 percent of voters to approve) to eliminate them (which I would support) or even to reform or lower them.” 

The problem lies in the fact that state spending has grown so much that many governments no longer know how to survive without high tax rates, imposing burdens on every transaction you make. This would require not only a massive economic adjustment but also a political responsibility that is difficult to achieve.

Currently, it seems challenging — indeed, nearly impossible — for such a proposal to move forward, especially in local governments dependent on these taxes. Therefore, one path the governor could take is to propose a constitutional amendment to strip local governments of their authority over property taxes, though this would require 60 percent of the vote to pass.

At the moment, support in the Florida Congress is divided, with Speaker Daniel Pérez, also a Republican, opposing DeSantis’s agenda. This has led the governor of Florida to declare that there are factions within the Republican Party in the state that have been co-opted by the left and are unwilling to cut spending and taxes, a problem that appears to be present at the federal level as well.

Other States Have Tried

Florida is not the only state that has embarked on a crusade against property taxes; other Republican-majority states have attempted to end this burden on homeowners. 

At least five states have tried in recent years to abolish this tax for citizens. However, most proposals consistently fall short, generally for the same reasons: budgetary deficits. 

In North Dakota, voters rejected Measure 4, fearing that the loss of $1.3 billion annually would harm schools and local services. In Michigan, the AxMiTax initiative failed to collect the required 446,000 signatures for the ballot, facing opposition due to the lack of a plan to replace $14 billion in revenue, including $2.5 billion for schools. In Nebraska, the Legislative Bill 388 stalled over concerns about budget cuts and the regressive impact of new consumption taxes. In Texas, a non-binding proposal gained Republican support but did not advance due to unaddressed budgetary concerns, as did Wyoming’s House Bill 203, which was rejected by the House of Representatives. 

Essentially, a national debate has emerged about the need to abolish property taxes, but the excessive growth of local and state budgets has, for now, made it an impossible mission to reach agreements to eliminate this burden on taxpayers. 

It appears challenging for any legislative proposal to move forward without first restructuring public spending. Nevertheless, it is a significant achievement that several states have initiated an open discussion on this issue, and that one of the leading political figures in the United States, like Governor Ron DeSantis, has highlighted property taxes as an extortionate burden on citizens, preventing taxpayers from retiring with dignity.

In the Biblical book of First Kings, Yahweh’s prophet Elijah challenged 450 pagans to a spiritual showdown on Mount Carmel in northern Israel. The stakes were high: whom would the Jewish people worship, Yahweh or Baal? Since the victors wrote the book, you can probably guess who won.

Some three millennia later, with the publication of Karl Marx’s three-volume Das Kapital, communism and capitalism began a similarly high-stakes contest for the soul of the world. Like Elijah and the prophets of Baal, these two competing systems brought irreconcilable spiritual roots to the fight. But can we say yet who won?

Regarding the soul of communism, to the extent it can be said to have one, it is the philosophy of atheism. Marx was an avowed atheist, though some of his writings also suggest surprising antipathy towards God. Seizing on this fact, at least one author has alleged Marx was a closet Devil worshipper. The consensus view, of course, is that he simply rejected belief in the divine. If he was an instrument of evil (not a stretch considering his quantifiable impact on the world), it must have been as an unwitting dupe.

One also finds evidence of communism’s atheistic heart in the implacable war that Marxist regimes in the Soviet Union, Maoist China, North Korea, and Cambodia waged against religious beliefs in their own people. Even today, after having scuttled the most economically dysfunctional aspects of Marxism, the Chinese Communist Party continues to oppress independent Christians and has imprisoned over a million Uyghur Muslims in reeducation camps.

Capitalism, on the other hand, while espousing no specific religious creed, first grew from a matrix of Christian cultures in Europe. In The Protestant Ethic and the Spirit of Capitalism, German sociologist Max Weber argues that this was not happenstance, but that the ethic of spiritual struggle and growth embedded in Protestant Christianity found a worldly analog in the capitalist economic model.

Additionally, Christianity’s view of the individual as the center of worth and agency also makes it a natural fit for the capitalist system. While the New Testament holds deep concern for the poor—in either spirit or pocketbook—the remedy it proposes is not collective command but individual love. Assets can, and often should, be given away, but as in the Old Testament, thou shalt not steal. Private property is just part of the Bible’s anthropology.

Today, over a century has passed since the ideological battle between communism and capitalism was joined by the publication of Marx’s massive, angry trilogy, one written from personal penury in the domed reading room of London’s British Museum. 

During that span, capitalist economies have elevated their people’s material well-being more than any other system in human history. In her own hefty (and refreshingly un-angry) three-volume masterwork, capped in 2016 by Bourgeois Equality, economist Deirdre McCloskey credits the intellectual paradigm shift of capitalism with a “Great Enrichment” that lifted average living standards more than 30-fold in two centuries, a period unlike any the world had seen before.

Peter McNamara credits McCloskey with demonstrating that “…commerce cultivates a certain set of virtues, consisting of highly modified Aristotelian virtues spliced together with the Christian virtues of faith, hope, and love. The ‘Bourgeois Deal’ undergirding the Great Enrichment is truly an economic and moral winner.”

On the other side of the scorecard, societies that embraced Marx’s system have left behind memories such as a 96-mile wall built to trap people in their own homeland, long lines of shoppers unable to purchase basic consumer goods, and a perverse moral ecology in which thought police crowded ideological dissenters into concentration camps which one brilliant inmate, Aleksandr Solzhenitsyn, styled a “Gulag Archipelago.”

Which of these two systems works best? 

There is only one rational answer. Nonetheless, the ideological struggle between communism and capitalism is not over. That’s because it actually goes back much further than Karl Marx or even the prophet Elijah. In the book of Genesis, the serpent convinces Eve to eat forbidden fruit, saying it will make her like God. Chasing this utopian vision, humanity’s parents lost paradise.

Like the serpent, communists say they can engineer utopia if only everyone aligns with the plan. Such a beautiful end justifies any amount of spilled blood.

Capitalists, on the other hand, are realists, understanding that mankind cannot perfect itself. This has been proven as consistently as the law of gravity. Better to have a system that accepts fallen human nature while endowing people with the freedom to struggle and better themselves as they see fit. The resulting individual growth aggregates into not only freer societies but wealthier ones, as the United States continues proving decades after the Soviet Union, once communism’s best hope, crumbled away.

Despite occasional political friction, the United States and Canada remain deeply intertwined economically and culturally. Their similarities make them ideal for comparison — especially when investigating the causes of rising rents and housing prices, which have surged in lockstep in both countries.

Between 2019 and 2024, Canada’s median home price skyrocketed 45 percent to CN $481,745, according to Zoocasa. In the United States, the increase was 34 percent over the same period, landing at $426,800, per the St. Louis Fed.

Rental costs followed suit. Nerdwallet reported Canadian average earnings rose 74.3 percent from 2003 to 2023, but home prices ballooned 227 percent. US income grew 86 percent, but home prices climbed 135 percent. Rents nearly doubled in both nations.

So, what’s to blame for this housing inflation? According to regulators on both sides of the border, the culprit is property management software — specifically, artificial intelligence-driven pricing tools like RealPage’s rent optimization algorithm. These tools suggest optimal rent levels based on a property’s characteristics and local market conditions. Politicians allege these AI tools amount to collusion, functioning as high-tech price-fixing. This regulation-happy narrative couldn’t be further from the truth.

A Fallacy of Central Planning

In Canada, a class-action lawsuit filed last December targets RealPage and 14 property management firms. However, the AI pricing tool in question is barely used there — it accounts for no more than 1 percent of the Canadian rental market, and even then, the pricing algorithm is not used — the software is largely relegated to back-office bookkeeping. Yet, Canada’s rent still surged. The software didn’t cause the crisis — it’s merely a scapegoat for deeper systemic problems.

Still, politicians and the press are pressing forward.

In the US, the now-departed Biden DOJ launched an antitrust suit that mirrors the Canadian claims. Senator Amy Klobuchar has also introduced legislation aimed at “curbing” rental AI software.

As Friedrich Hayek warned, “The more the state ‘plans,’ the more difficult planning becomes for the individual.” 

This is a textbook case of regulatory overreach founded on a flawed assumption: that prices are made in boardrooms or by algorithms, rather than in the marketplace through voluntary exchange and supply-demand dynamics.

The Real Drivers: Cantillon Effects and Regulatory Distortion

If we’re serious about diagnosing the problem, we must consider the Austrian theory of malinvestment and Cantillon effects. Central banks’ decade-long policy of artificially low interest rates — pushed under the guise of stimulus — has distorted capital allocation. Cheap credit flooded into real estate markets, fueling speculative bubbles and driving up housing prices beyond what middle-class incomes could support.

At the same time, government-imposed zoning restrictions, construction permit delays, and rent control laws have stifled the supply of new housing. This is a classic example of what Ludwig von Mises called interventionism — a patchwork of state interference that produces unintended consequences worse than the problems it seeks to solve.

A Toronto survey by Simplydbs reveals the public understands what many policymakers do not. Renters cited inflation, limited housing construction, and high ownership costs as the primary causes of rising rents. Landlords ranked lowest. The market participants themselves see the truth.

Spontaneous Order, Not Bureaucratic Panic

The market process is decentralized. Prices convey knowledge dispersed among millions of actors — what Hayek called the “use of knowledge in society.” AI pricing tools merely aggregate this knowledge more efficiently. They do not override it. Banning such tools won’t bring prices down. It will only cripple landlords’ ability to respond to local conditions in real time — likely causing even more inefficiencies.

Moreover, this crackdown on AI rent tools is not a principled stand against monopoly or collusion. It’s a case of political theater — an attempt to externalize blame for inflation that was caused by governments and central banks themselves. As Mises wrote, “Government is the only agency that can take a useful commodity like paper, slap some ink on it, and make it totally worthless.”

We are living with the consequences of unsound money, bad regulation, and housing policy shaped by political expediency, not market principles. That is the root of rent inflation — not software, and certainly not landlords using modern tools to navigate distorted markets.

If the goal is affordable housing, the answer lies in removing the regulatory roadblocks, ending monetary inflation, and letting the market perform its coordinating function free from coercive interference. Anything else is just a detour on the road to serfdom.

On May 16, Moody’s Ratings downgraded the US government’s long-term issuer and senior unsecured ratings from Aaa (the highest possible rating) to Aa1 and revised the outlook to stable from negative. The rating agency cited the likelihood of “persistent, large fiscal deficits [that] will drive the government’s debt and interest burden higher” due to deficits driven by increasing entitlement spending and plateauing tax revenues.

Moody’s, however, was late to the party. S&P Global ratings downgraded the US government’s credit rating in 2011, and Fitch Ratings issued a downgrade in 2023. Both cited similar concerns over growing budget deficits and doubts about the ability to pay them.

Unfortunately, when the US cannot keep its finances in order, American families will feel the squeeze through higher borrowing costs, higher taxes, a more aggressive tax collection regime, and a weaker dollar.

Government Debt Hurts Private Borrowers

At a basic level, the yield curve (a visual representation of how much it costs the Treasury to borrow money for different periods of time) serves as a benchmark for market interest rates, including corporate bonds and mortgage rates. Much like when a credit score downgrade results in higher personal borrowing costs, the US credit downgrade will mean higher borrowing costs to offset the increased risk of lending. These higher borrowing costs will be reflected on the yield curve and prompt private creditors to raise interest rates to firms and individuals as well.

Nobel Prize-winning economist James Buchanan noted that when private investors purchase government debt, they forgo the next-highest valued use of their capital. As Buchanan put it, spending that is funded by debt is “in effect chopping up the apple trees for firewood, thereby reducing the yield of the orchard forever.” 

Government borrowing diverts capital from more productive private sector uses (i.e. research, innovation, and/or business expansion) that could help improve the standard of living for everyday Americans.

Furthermore, the government’s growing demand for loanable funds puts upward pressure on interest rates (the price of borrowing). Lenders will demand higher returns, and individual borrowers will need to offer more competitive terms to access credit. This means higher interest rates on mortgages, credit cards, and personal loans.

Government Debt Hurts Taxpayers

As the US government faces higher borrowing costs, net interest payments (the interest the government must pay on its debt, offset by interest income) will dramatically increase. The image below comes from the AIER Explainer “Financing the Federal Government: How Government Takes & Spends Your Money”; it depicts a breakdown of how the federal government spent each dollar in FY 2024, which ended on October 1, 2024, long before the Moody’s downgrade.

Note that 13.5 cents of every dollar went to net interest payments. As borrowing costs increase, more spending is dedicated to net interest payments, which then crowds out funding for other federal programs. My former colleague Brooklyn Roberts and I discussed this after the Fitch Rating downgrade in August 2023, noting that cuts to transfer payments (particularly Medicaid) to state and local governments would be seen by federal policymakers as more politically viable than addressing bloated federal programs.

So far, the federal government has spent $578.7 billion on net interest payments out of the $4.16 trillion spent this fiscal year. In other words, 14 cents of every dollar this fiscal year is going to net interest payments, which is likely to increase by the end of FY 2025.

Buchanan also noted that debt-financed spending shifts tax burdens from present to future generations. While bond investors trust that their loan will be paid back with interest, future generations will bear the cost of the government spending undertaken today. 

A Declining Dollar Hurts Everyone

The credit downgrade, along with uncertainty in monetary policy, has hurt the dollar. The US Dollar Index (DXY) fell following the credit downgrade announcement and continues to decline. Analysts also note that the decline in demand for Treasury notes also led to a decline in demand for dollars.

As the demand for the dollar decreases, a sell-off of dollar assets could increase the supply of dollars in the foreign exchange market, leading to further depreciation in the dollar’s value. This depreciation is likely to lead to reduced living standards, weaker economic growth, and higher inflation.

Ultimately, policymakers in Washington are only hurting themselves. As my colleague Pete Earle aptly put it:

“The greatest threat to the soundness and utility of the US dollar, and in turn to the financial health and prosperity of American civil and commercial life, comes not from shadowy figures in faraway lands, but from unremarkable apparatchiks carrying out the edicts of US officialdom.”

As the US loses its status as the world’s reserve currency, politicians and bureaucrats in Washington have no one to blame but themselves.

Can Washington Course Correct?

Earle notes that there is still time to correct course through “economically coherent, consistently applied policies.” Ultimately, this must come from serious spending reform and (particularly) spending reduction.

My colleague Ryan Yonk and I lay out several options for spending reform in the AIER Explainer “Understanding Public Debt.” While the Department of Government Efficiency (DOGE) seemed to get off to a promising start in January, it failed to tackle the primary driver of spending growth: entitlements. Worse, members of Congress have thus far failed to make the few cuts DOGE recommended permanent. Now, DOGE Director Elon Musk is stepping down.

After the news of Musk’s DOGE exit broke, a headline from The Babylon Bee quipped “Elon Musk Leaves Job Of Making Government More Efficient For Much Easier Job Of Sending Humans To Mars.” 

Reversing course is possible, but it will demand political courage and coordination to overcome the incentives millions in the federal government have to maintain “business as usual.” Let’s hope such a transformation is still possible.