HENDERSON: A Tariff Is a Tax


This isn’t just hypothetical – Consider two kinds of tariffs

By David R. Henderson
 
A number of people who are against high taxes believe, at the same time, in substantial tariffs on goods from other countries. Here’s the problem: a tariff is a tax, a tax on imports. Americans and producers in that country share the burden of the tax. And tariffs, like all other taxes, distort people’s decisions in ways that reduce wealth.
 
Consider two kinds of tariffs: (1) tariffs on final consumer goods, and (2) tariffs on inputs into production.
 
Tariffs on final consumer goods cause us consumers to pay more for those goods. We adjust to those tariffs in a way similar to the way we adjust to sales taxes. We buy fewer of those goods and we look for substitutes. There are two sources of substitutes: imports from other countries whose goods are not subject to the tariff and domestically produced goods.
 
If we buy a good mainly from China, and the U.S. government imposes a tariff on that Chinese good, the good will be more expensive. So, we’ll buy less from China and more from, say, Vietnam.

This isn’t just hypothetical.

During his time as president, Donald Trump raised tariffs on Chinese goods four times, raising the average U.S. tariff rate on imports from China from 3.1% to 21%. One result was that imports of manufactured goods from 14 Asian countries were $90 billion higher in 2021 than in 2018, and approximately half of that increase was from Vietnam.
 
Tariffs on that import may also make it artificially profitable for U.S. producers to produce more. That may sound good, but it’s bad. It causes Americans to shift resources away from other uses into this artificially profitable use. It goes against what economists call “comparative advantage.”
 
If the tariff is on inputs into production, it makes those inputs more expensive for U.S. producers, which causes them to raise prices on the goods they produce. Americans then buy fewer of these goods than otherwise. When Trump imposed tariffs on steel imports, he hurt U.S. producers that use steel as an input.
 
Is there some good news here? There is.

Unlike income taxes, which are much higher than when they were first imposed in 1913, and payroll taxes for Social Security, which are a multiple of what they were when first imposed in 1935, tariff rates in the United States and in most other countries have fallen over time.

At the end of World War II, for example, average tariffs in the United States, Japan, and the countries that later became part of the European Union were about 22%.

They are now under 5%.

That’s progress.

Today's TaxByte was written by David R. Henderson, a research fellow with the Hoover Institution at Stanford University.



















 
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