Tariffs are, quite simply, regressive. This means they disproportionately
harm lower-income households – and it isn’t hard to see why. Tariffs increase the
price of goods uniformly, with no mechanism to adjust based on the income of
the purchaser.
Trump’s Tariffs Would Cost Trillions—And We Learned This A Century Ago
Andrew Leahey
Andrew Leahey is an attorney and professor that covers tax.
Oct 23, 2024
"Cast your mind back to the mid 1890s. One of the first income taxes in the
United States had just been levied through the Wilson-Gorman Tariff Act, which
was passed in an attempt to finance a reduction in deeply unpopular tariff rates.
Tariffs, the general public then knew, uniformly raised the cost of goods across
the board and did so in a way that was not responsive to income. A 50% tariff on
textiles, then, amounted to a 50% increase in the price of the good on the shelf—
with no regard to whether the purchaser was scraping by or living high on the
hog.
Protectionists were generally in favor of higher tariffs, believing it would drive up
the demand for domestically produced goods by increasing the costs of imports.
However, for those goods for which there was either insufficient domestically-
produced supply or no domestically-produced alternative, the result was simply a
price hike for the end consumer.
PROMOTED
Thus, in an era when the germ theory of disease held about equal sway with
theories involving the humors, folks knew tariffs were just regressive taxes.
Nonetheless, one hundred and thirty some-odd years later, former President
Trump has doubled down on advocating for a 20% across-the-board tariff on
imported goods, if elected.
Tariffs Are Deeply Regressive
Tariffs are, quite simply, regressive. This means they disproportionately harm
lower-income households – and it isn’t hard to see why. Tariffs increase the price
of goods uniformly, with no mechanism to adjust based on the income of the
purchaser. If the government imposes a 20% tariff on imported electronics, that
20% price hike will affect a low-income family in the same way it affects a
wealthy family in terms of dollar cost at the register.
However, that electronic purchase will constitute a higher percentage of the total
income for a lower-income family as against a medium or higher-income family.
To put simple numbers to the concept, imagine a laptop that would be priced at
$1,000 that now has a 20% tariff and costs $1,200 out the door.
Tax Breaks: Get timely tax tips, need-to-know deadlines and the latest tax-related
news delivered straight to your inbox.
Sign Up
By signing up, you agree to receive this newsletter, other updates about Forbes
and its affiliates’ offerings, our Terms of Service (including resolving disputes on
an individual basis via arbitration), and you acknowledge our Privacy Statement.
Forbes is protected by reCAPTCHA, and the Google Privacy Policy and Terms of
Service apply.
The tariff, effectively a tax on the laptop purchase, is $200 regardless of who the
purchaser is. If a college student making $10,000 per year purchases the laptop,
the tariff will constitute 2% of their income—for someone making $100,000 per
year, the tariff would only be 0.2%. This is the functional equivalent of taxing the
latter at a rate one-tenth that of the former—a regressive tax.
symbol
00:04
03:12
Read More
Tariffs Rarely Protect Domestic Industry
While tariffs are intended to protect domestic industries by making imported
goods more expensive, they rarely succeed without some form of collateral
damage. When there is no viable domestic alternative to an imported good,
consumers are simply stuck paying the tariff. There is no mechanism to pass the
cost back to the export country beyond a reduction in demand for the tariff-laden
good.
Thus, if there is a tariff on foreign-produced electronics, but no competitive US
manufacturer for those same electronics, the result is just a higher price for the
end consumer. A recent report by the Consumer Technology Association found
just that outcome: Trump’s tariff plan would increase the cost of laptops and
tablets by 46% and smartphones by 26%.
The optimistic take on these price hikes would be that they represent pent-up
demand for domestic alternatives to the imported goods. Even assuming this is
true, however, the upfront cost would be shouldered by consumers. A college
student purchasing a laptop for 46% more than its pre-tariff price will find little
comfort in the knowledge that, at some indeterminate time in the future, their
budgetary squeeze could give rise to a domestic laptop manufacturing industry.
The Cost of Tariffs Are Born by the Countries that Pass Them
Ultimately, the costs of tariffs are borne by the consumers in the country that
passes them. Former President Trump’s proposal would cost US consumers some
$3.9 trillion and there is no mechanism to make exporting countries foot that bill.
Additionally, higher consumer prices reduce purchasing power which lowers
overall demand in the economy. This can lead to slower economic growth, job
loss and, ultimately, recession. High tariff rates in the 19thcentury helped give rise
to the Panic of 1893, a depression unmatched in the country’s history to that
time.
In today’s global economy, the effects of high tariffs may not only come from
within—a 20% tariff would likely trigger retaliation from other nations, further
driving up costs and depressing economic activity.
Outlook
So here we are, over a century later, poised to make mistakes we learned while
Civil War veterans still lived. Tariffs are regressive, economically damaging,
ineffective at protecting consumers, ineffective at stimulating domestic industry
rapidly or in the long term, and ultimately not a replacement for progressive tax
policy.
Trump’s 20% tariffs would take a massive toll on American households—
especially those least able to afford it. History has shown us the damage that
tariffs can do, and it’s a lesson we would be wise to remember.
Follow me on Twitter or LinkedIn. Check out my website.
Andrew Leahey
Andrew Leahey
Follow
Andrew is a seasoned tax and technology attorney with a passion for delving into
matters at the intersection of tax, law, policy, economics and technology. When
not writing... Read More"
Editorial Standards
|
|
"As Trump’s former and proposed policies show, this history has all but been
forgotten. Of course, the Biden-Harris Administration continued some of Trump’s
earlier import duties, though in more targeted ways. Trump, however, has doubled
down on his pro-tariff policies, promising to make their expansion a cornerstone
of his next administration. Economic experts have predicted that such policies
would hinder economic growth, increase inflation, harm the working class,
balloon the deficit, and likely ignite a new trade war. As a result, his policies would
take us back to the first Gilded Age of wealth concentration and gross economic
inequality.
Trump’s calls to replace the existing federal income tax with protective tariffs is
not only impractical in the face of growing federal deficits; it is also clashes with
historical reality. It is one more reason why Democrats have accurately embraced
the slogan “we won’t go back.”"
|
|