Tariffs are Just Regressive Taxes

Last week I put up a poll on Twitter, asking all three of you readers to decide what I should write about.

Would you rather read a post on tariffs being regressive taxes or, what I assumed would be more popular, our latest life hack that involves a time delay safe?

Apparently a slight majority of you would like me to be an amateur tax policy blogger, so this week I will try to write again about the dumbest part of our revenue system: regressive taxes.

As you probably know by now, on Friday the Trump Administration raised tariffs, taxes a government places on foreign goods, from 10% all the way up to 25%. These tariffs will apply to $200B of Chinese products, roughly one third of the goods we Americans buy from that country.

As they have each time before, the Chinese government is expected to retaliate with tariffs of their own, targeting products they import from the United States like pork and soybeans.

A key point to understand is that when the President of the United States levies a tariff on foreign goods, that tax is not paid for by foreign countries or foreign businesses. It's American consumers who pay. Each new tariff is simply a new tax on US citizens, despite what the President tweets.

While there was a time, even fairly recently, when intelligent people could debate whether we were truly in a trade war with China (perhaps we were just in a trade kerfuffle) that is no longer in doubt.

Thanks to the current administration's attempts to bring mercantilism back, yes, we are in a trade war.

To be fair to President Trump, there are legitimately worrying business practices in China that this trade war could potentially address. Intellectual property is particularly critical to the United States as a world leader in technology. China's outright theft of that IP is an unfair practice that the WTO has not yet been able to curtail.

But what I want to focus on today is the uneven impact these tariffs, and this trade war, will have on US citizens: how the poorest Americans are the ones who disproportionately pay the costs.  Because tariffs are just regressive taxes, they are a particularly bad tool to raise revenue when one considers who is paying.

Economists Jason Furman, Katheryn Russ, and Jay Shambaugh published a paper in 2017 illustrating the regressive nature of tariffs. Because the costs of imported products like clothing, diapers, school supplies, and tampons represent a larger portion of a poorer family's household budget than that of a higher earning household, it's not particularly surprising that these taxes are regressive in nature. From their paper:

"We match import duties to standard consumer expenditure data to take a more detailed look and find evidence that low- and middle-income households do, indeed, spend a higher fraction of their income and non-housing expenditure on tariffs. The findings indicate that tariffs act as a regressive tax on American consumers..." 

What is somewhat surprising is that single parent households, and women, disproportionately pay for these tariffs.

"In addition, the average effective tariff on many categories of women’s apparel exceeds that for men’s apparel by a substantial margin.  The effective tariff is 23% for women’s varieties versus 14% for men’s on suits; 21% for women’s versus 13% for men’s on sweaters, shirts, and tops; 21% for women’s versus 7% for men’s on active sportswear; 15% for women’s versus 10% for men’s pants and shorts; and 13% on women’s undergarments versus 7% on men’s underwear.  And there is a ‘tampon tax’ in the tariff schedule: feminine hygiene products made of materials other than paper or cellulose (so cotton, synthetic, or artificial fibres or textiles) are subject to tariffs ranging from 3.6% to 16% (UISTC 2016: Chapter 96). The category which includes both feminine hygiene products and diapers, HS 9619, has an average statutory (MFN) tariff of 7.6% (WTO).  Thus, the tariff burden among single parents may be even higher for single mothers than for single fathers."

Even if these tariffs are hitting poor families, women, and single parents harder than the average person, one might waive them off as a minor issue because major news outlets regularly point out that these tariffs represent a very small portion of overall GDP. Additionally, the tariffs do not seem likely to push the US into a recession, so what's the harm?

But this framing misses the point. Comparing the size of tariffs to the entire US economy is misleading at best, and intellectually dishonest at worst. A comparison to other taxes is far more germane, and puts their cost in better context. Again from Furman, Russ, and Shambaugh:

"These conservative estimates of the direct tariff burden are large compared to other recent and hotly debated tax policies.  Removing the tariff burden would have a considerably larger impact on poor households than the 2001 and 2003 tax cuts, which were estimated to reduce taxes for the bottom quintile of households by $28 to $87 dollars per year. " [emphasis mine]

We should remember that these figures are from 2014, well before the current tariffs under the Trump administration.

A better way to see the size of these tariffs is to calculate the percentage they represent of household incomes:  how large an expenditure they represent for each income decile.

Source: US tariffs are an arbitrary and regressive tax

While most households probably won't feel the pinch of tariffs, the very poorest households pay a steep cost for these misguided taxes.

Mark Perry, an economist at the American Enterprise Institute, puts in another way:

"The economic lessons here are: a) America’s low-income households benefit the most from free trade and having access to cheap imports because they spend a greater share of their budgets on traded goods like clothing, footwear, household items, school supplies, appliances, toys, and furniture (think Walmart shoppers), and b) America’s low-income households have the most to lose from greater restrictions on free trade with import quotas, protective trade tariffs, border taxes, and other trade barriers. If Trump starts a trade war with tariffs and border taxes, it will be a “war on the poorest Americans"...

Johan Norberg, senior fellow at the right-leaning Cato Institute, explains further how a trade war is just "a war on the poor".

So why is the Trump administration so keen on raising taxes on American citizens through tariffs anyway? Aren't Republicans supposed to champion free trade?

And more to the point, aren't they supposed to eliminate taxes, instead of creating new ones?

But when we view these new tariffs in context of the Trump Administration's only major legislative achievement, the Tax Cuts and Jobs Act of 2017, then the regressive nature of these new taxes starts to make more sense.

With the TCJA, the US saw a large, unfunded tax cut that disproportionately benefited high earners, corporations, and business owners: those at the top of the the economic scale. Sure, there were some benefits seen throughout the income quintiles, but analysis from the Tax Foundation shows the higher your income, the more you benefited.

Without question, the Tax Cuts and Jobs act was a tax bill aimed at helping those at the top.

Source: Tax Foundation

Right after cutting taxes, when we see the same administration adding new taxes, and boasting about all the money being paid into its coffers, we see a bit of a pattern. The administration's policies are again created with the top earners in mind: additional tariffs are barely noticeable to those at the top of the income scale, but are painful to low earners, who bear the brunt of the costs.

Aligned with this approach, the benefits to any trade war won with China (assuming there is a winner) will again be realized by those already enjoying the benefits of our unprecedented wealth and income inequality: the small group of owners and investors of the companies whose IP will be protected. They'll see the benefits of this trade war, while bearing only a small share of any costs.

The Trump administration is not particularly concerned with lowering taxes for the middle class, or even caring whether they increase the national debt in the process. Instead, the goal seems to be shifting the burden of taxation away from the rich and the high earners, and onto people with lower incomes.

They see the current progressive tax system as a wrong that needs to be corrected: that the rich pay too much already, and poor need to start paying their fair share. If the 2017 Tax Cuts and Jobs Act was an elegant solution to reduce the taxes the rich pay, then tariffs are a blunt tool to make sure the poor pay a little more.

I see a lot of arguments that Trump just doesn't understand tariffs or how they work. I think that's a bit too neat a talking point: too clever by half.

This is a president who, despite his own mediocrity in business, is still wealthy. As if our current levels of wealth and income inequality weren't enough, he is deliberately pushing for policies and legislation that will only exacerbate both. I can't look at these tactics and assume they're just the unfortunate consequences of someone who doesn't really know what he's doing.

When someone shows you who they are, believe them.


*Photo is from Michael Vadon at Flickr Creative Commons.