Tariffs Are a Regressive Tax that Penalizes the Poor.

by Pitt Griffin on November 29, 2018 · 0 comments

in Economics, Politics, Taxes

Donald Trump celebrated his monomania this morning in a text boasting, “Billions of Dollars are pouring into the coffers of the U.S.A.” because of tariffs on the Chinese. Yes, tariffs do indeed go to the federal government, but who pays them? Trump and his zealots will claim it’s the exporter. But is it?

Let’s say the Chinese currently sell widgets in the US for $15 each. While US companies must sell them at $18 to make a profit. In response, Trump levies a tariff of $3 per widget. The Chinese could pass along the whole cost, making American widgets competitive. The US Treasury would benefit by collecting $3 for each Chinese widget sold.

But who’s paying the $3? Whoever is buying widgets — in this case, the American consumer. Increasing the price of widgets by $3 is the equivalent of adding a 20% sales tax. However, that revenue would only come from Chinese widget sales. The Treasury would get no direct benefit from increased American widget sales.

Ultimately, the treasury would receive some money from an increase in corporate tax collected. But let’s remember Trump slashed the corporate tax rate —  and businesses are very good at hiding profit.

Let’s say the Chinese decide to absorb $1 of the tariff. The American consumer would still pay $2 (13%) more for a widget. And American widgets would still be uncompetitively priced. The Treasury would still receive tariff revenue of $3 a widget, but the American consumer would pay 2/3rds of that.

Also consider this: Sales tax is a retrogressive tax which burdens the poor more than the rich — because the poor must spend a higher percentage of their income on stuff than the rich do.

It gets worse. the Treasury needs more money because of Trump’s tax cuts. So while the rich get theirs, the poor are paying more to ease the deficit burden. In other words, tariffs aren’t just a sales tax they also shift wealth from the poor to the rich.

Let’s look at one last scenario. Trump slaps a tariff of $5 on each widget and the Chinese can’t afford to pay it. Now the consumer is paying a 33% sales tax. And where is that money going? Not to the government to fund things the consumer needs, but straight to American corporations to be paid out in executive bonuses and stock buybacks. Again benefiting the rich at the expense of the average consumer.

But here corporate apologists will cry triumphantly ‘but what about all the extra jobs created by a rise in American widget sales?’, I grant you there will be an increase in US widget jobs. But the Chinese are not sitting on their hands. They are targeting American exporters. So jobs in those companies will decline.

And what of Trump’s claim that foreigners can just shift production to the US? It’s magical thinking. The Chinese are not about to shift jobs to the US. They will do as stated above, put tariffs on American goods. 

Lastly, if the aim of Trump’s policy is to increase jobs and reduce the trade deficit he should forget tariffs and instead subsidize the labor cost of American widget manufactures. Now the domestic widget makers can hire more people and price their widgets competitively. 

The advantage here is that employment goes up. The consumer doesn’t pay any more for widgets. And the Chinese are priced out of the US widget market. Just imagine not subsidizing fossil fuels but instead training miners to make widgets in plants run on clean power. Feels good, doesn’t it?

Free-market types will protest — but it will be meaningless. Tariffs are just as big an interference in the free-market as labor subsidies are.  

The disadvantage from Trump’s point of view is that US widget manufacturers won’t profit from it. And it will increase the deficit. But step two is electing a Democratic President and Congress so that America can have a tax code that creates a more equitable distribution of wealth.

In other words, we can see an increase in American production. An increase in employment. A fairer tax code. And a move away from a new Robber Baron age to an era of Eisenhower-style wealth distribution. And don’t conservative always extol 1950s values? 

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