10-30-2024 12:23am

Tariffs An Increase in Taxes to the American Consumer: What Is A Tariff And Who Pays It?

Chris Edwards Editor

Tarrifs have become a hot topic of conversation during this presidential election cycle. The Trump administration imposed nearly $80 billion worth of new taxes on Americans by levying tariffs on thousands of products valued at approximately $380 billion in 2018 and 2019, amounting to one of the largest tax increases in decades and his most recent proposal would be sn even larger indirect twx increase on Americans as a double taxation. A consumer buying an imported television set from China would pay the tariffs as proposed by the former president and then sales tax - double taxation.

What is a tariff?

A tariff is a tax on imported goods. Despite what the President says, it is almost always paid directly by the importer (usually a domestic firm), and never by the exporting country. Thus, if the US imposes a tariff on Chinese televisions, the duty is paid to the US Customs and Border Protection Service at the border by a US broker representing a US importer, say, Walmart one of America's largest importers. Tariffs would result in significant price increases at our Walmarts and via Amazon let alone small independent retailers and businesses.

The Biden administration has kept most of the Trump administration tariffs in place sadly, and in May 2024, announced tariff hikes on an additional $18 billion of Chinese goods, including semiconductors and electric vehicles, for an additional tax increase of $3.6 billion.

Former President Trump has shown a troubling lack of understanding about how the levies work. Pointing to earlier import duties he imposed, Trump bragged that “China is paying us billions of dollars in tariffs.” Treasury, he added, is collecting “tremendous amounts of money, which is great for our country.”

Facts:

Once, tariffs were an important source of federal taxes. Before the civil war, they represented nearly 90 percent of federal revenue. But that share fell as the US began exporting many of its own goods overseas and began to reach agreements with importing countries to reduce their tariffs on American products.

By 1915, less than one-third of federal revenue came from customs duties. Increasingly, revenue was collected from the modern income tax that had been enacted just a few years earlier. After World War II, tariffs become a tiny source of US tax revenue. In 2016, import duties made up only about 1 percent of tax collections. Worldwide, tariffs represent only about 3.5 percent of government revenue.

There may be other fiscal effects for the US, however. A substantial decline in Chinese exports to the US will drive down the value of the Chinese currency. That will offset some of the after-tax price of Chinese-made goods in the US. But any lost exports still mean China will collect fewer US dollars and thus buy fewer Treasury securities. That, in turn, will tend to drive up interest rates in the US.

So at the margin at least, taxing imports will drive up prices for US consumers and eventually may raise borrowing costs

Future effects are hard to predict, but no, China is NOT paying the US billions of dollars in tariffs. Not any more than Mexico is paying for that wall.