Trade is always a win-win proposition. In every exchange, each party gives up something valued less for something valued more. Each party to a transaction values differently the goods or services being exchanged. Each party anticipates a gain from the exchange or there would be no commerce between the two parties. And each party will repeat the exchange again if its estimated gain has proved to be satisfactory.
It is of no consequence that trade takes place between entities residing in two different countries. Exports are not preferable to imports. Trade deficits are an accounting fiction. Trade is not a national game in which one country gains at the expense of another. No country can steal Americans’ wealth by selling them goods or services.
These basic economic truths are lost on Trump — an ignorant protectionist and incoherent economic nationalist.
Here is one of Trump’s tweets from last December:
I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN.
Thus, no one should be surprised at what he recently tweeted about tariffs:
For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars….
….of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!
Trump may be a tariff man, but is he right about who actually pays tariffs?
It doesn’t matter the amount of the tariffs, what country the goods are imported from, or the reason the tariffs are imposed — there are two and only two entities that pay tariffs: importers, who directly pay tariffs; and consumers, who indirectly pay tariffs.
Just as an income tax is a tax on income, an estate tax is a tax on estates, and a capital gains tax is a tax on capital gains, so a tariff is just a tax on imports. This means that Trump firmly believes that taxing American importers and consumers for buying goods that are made overseas will somehow magically cause Americans to prosper.
Tariffs are taxes on importers that are paid to the customs authority of the country imposing the tariff. They are not a tax on the foreign seller of the goods. Foreign firms don’t pay tariffs for the privilege of selling their goods in the U.S. market. The importer of record must file entry documents at the port of entry and pay the estimated customs duties. Customs uses the 3,713-page Harmonized Tariff Schedule of the United States published by the U.S. International Trade Commission’s Office of Tariff Affairs and Trade Agreements to figure the applicable tariff rate. Trump couldn’t be more wrong. China doesn’t pay tariffs into the U.S. Treasury: U.S. importers do. Tariffs are a penalty on Chinese goods, not a tax levied on Chinese firms or the government of China.
Consumers also indirectly pay tariffs in the form of higher prices for imported goods or higher prices for domestic goods manufactured with imported raw materials. When the cost of doing business rises, firms are going to pass on as much of the increase as they can to consumers. A study conducted by two researchers at the University of Chicago and a Federal Reserve Board Governor found that Trump’s 20 percent tariff on imported washing machines raised their cost “an average of 12 percent more after the imposition of the tariffs, or roughly $86 to $92 more per appliance.” Collectively, “Americans are paying more than $1.5 billion extra every year from this tariff alone.” Another recent study by economists from Princeton and Columbia universities and the New York Fed found that “the combined impact of all the Trump administration’s trade sanctions costs Americans $1.4 billion each month.”
But didn’t the tariffs on washing machines create American jobs? Sure they did, but at an annual cost of $815,000 per job.
It’s not just tariffs that hurt American consumers. Any government burden placed on businesses hurts Americans who patronize said businesses, and especially tax burdens: corporate income taxes, Social Security taxes, Medicare taxes, and unemployment taxes.
The maximum corporate tax rate, although it held steady at a rate of 35 percent for many years, is still 21 percent. Most states also impose a corporate income tax. The corporate tax burden is borne by shareholders through lower dividends and share prices, passed along to consumers through higher prices and paid by workers in companies in the form of lower wages.
The Social Security program is funded by a 12.4 percent payroll tax (split equally between employers and employees) on the first $132,900 of an employee’s income.
The Medicare program is funded by a 2.9 percent payroll tax (split equally between employers and employees) on every dollar of an employee’s income.
Unlike payroll taxes, which are borne equally by employer and employee, unemployment taxes are paid solely by employers. A federal unemployment tax of 6 percent is imposed on employers on the first $7,000 of taxable wages paid to each employee during a calendar year. And then there are also state unemployment taxes, which are also paid solely by employers (except in a few states where employees pay the tax as well). Although the Federal Unemployment Tax Act (FUTA) allows an employer to claim a credit against his federal tax liability as high as 5.4 percent for payment of state unemployment taxes, the actual rate paid is higher in most of the states, and so is the wage base.
These tax burdens raise the costs of doing business — just like the minimum wage, health-insurance mandates, family-leave requirements, and government regulations. Anything that raises the costs of doing business will ultimately result in higher prices to consumers, including tariffs.
Because it is American consumers who ultimately pay tariffs, Trump’s tariffs are making Americans poorer, not more prosperous.
This article was published by The Future of Freedom Foundation.
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