Consumers Pay the Cost of Tariffs

Businesses Don't Pay Taxes

The debate over tariffs has resurfaced in the presidential campaign, and it’s frustrating. For those who haven’t kept up with it, Trump has pledged to impose an across-the-board tariff of 10 percent to 20 percent. He also will impose a tariff of at least 60 percent on imports from China. This is a continuation of the policies Trump imposed, and which President Biden has, to a large degree, kept in place, during his first administration.

Trump is, in a lot of ways, a much more extreme version of Ross Perot, who was the last serious independent/third-party presidential candidate. Perot made opposition to free trade—specifically, the North American Free Trade Agreement (NAFTA)—a centerpiece of his 1992 and 1996 presidential campaigns. When Trump briefly flirted with a presidential campaign in 2000, he was a member of Perot’s Reform Party.

You may remember, if you’re old enough, Perot complaining about the “giant sucking sound” caused by NAFTA. He was complaining of purported job losses in the United States caused by NAFTA. I should note here that the vast majority of job losses have occurred because of automation. Less than 14 percent can be attributed to trade. Blame the robots.

In 1930, more than 1,000 economists signed a letter in opposition to the Tariff Act led by Sen. Reed Smoot (R-UT) and Willis Hawley (R-OR). Vice President Al Gore would give Perot a picture of Smoot and Hawley during a debate on NAFTA. Commonly known as Smoot-Hawley, the tariffs were advertised as a way to boost an economy that was reeling from the Stock Market crash that began in September 1929.

The economists who signed the letter explained, “We are convinced that increased protective duties would be a mistake. They would operate, in general, to increase the prices which domestic consumers would have to pay. By raising prices they would encourage concerns with higher costs to undertake production, thus compelling the consumer to subsidize waste and inefficiency in industry. At the same time they would force him to pay higher rates of profit to established firms which enjoyed lower production costs. A higher level of protection, such as is contemplated by both the House and Senate bills, would therefore raise the cost of living and injure the great majority of our citizens.”

The letter also warned of retaliatory tariffs on American exports. “Countries can not permanently buy from us unless they are permitted to sell to us,” the letter stated, “and the more we restrict the importation of goods from them by means of ever higher tariffs the more we reduce the possibility of our exporting to them.”

The economists’ letter was delivered to President Herbert Hoover. He signed Smoot-Hawley into law in May 1930. At the time, job losses appeared to have leveled off. The unemployment rate in May 1930 was 3.4 percent. That was lower than the 3.6 percent rate registered the month before. By July, the unemployment rate hit 5 percent. Unemployment reached 10.8 percent by November 1930. It wouldn’t fall below double digits until February 1941. (No, World War II didn’t end the Great Depression.)

Thomas Sowell is one of the economists who would likely argue that the consensus is that tariffs hurt consumers. He did an interview with Reason in 2018 and discussed Smoot-Hawley. He was straightforward about his view of the impact.

“I happen to believe that the Smoot-Hawley tariffs had more to do with setting off the great depression of the '30s than the stock market crash,” Sowell said. “Unemployment never reached double digits in any of the 12 months that followed the crash of October 1929, but it hit double digits within six months of passage of Smoot-Hawley, and stayed there for a decade.” (I’ll note that Sowell’s view on Smoot-Hawley’s contribution to the Great Depression isn’t widely held, although his views on the impact of tariffs on consumers is part of the consensus.)

Sowell also said, “You do not make America great again by raising the price to Americans, which is what a tariff does.”

To Sowell’s point about Smoot-Hawley, the tariffs started a trade war in the middle of an economic crisis. Smoot-Hawley’s impact on the Great Depression can be debated, but we know it made matters worse, not better. Imports and exports declined by significant margins. The tariffs were such a problem that Franklin Roosevelt signed the Reciprocal Tariff Act in 1934, and trade became more liberalized as a result.

Trump says he’s pushing tariffs in part to pay for an extension of the Tax Cuts and Jobs Act (TCJA). He also believes that tariffs protect jobs in America. More the latter in a moment. Let’s get to the revenue side.

The tariffs Trump imposed when he was in office, and kept in place under Biden, have raised more than $230 billion in revenue. Since 2018. That’s not nothing, but it’s not a substantial amount over five years. On a static basis, those tariffs are a tax increase of a $79 billion annually and will cost more than 140,000 full-time equivalent (FTE) jobs.

The Tax Foundation did some back of the envelope math based on 2023 imports and got $311 billion from the 10 percent tariff and $213 billion from the tariffs on China. However, the caveat is that “[a]ctual revenue raised would be significantly lower because of avoidance and evasion, falling imports, and lower incomes resulting in lower payroll and income tax revenues.” This is because of the behavioral changes that would come because of the increased tariffs. We’d see a decline in gross domestic product of nearly 1 percent and a loss of 684,000 FTE jobs.

Recently, Trump said that countries pay tariffs, not people. His running mate, Sen. J.D. Vance (R-OH), said something similar in a recent interview. Vance took it a step further by claiming that “economists disagree about the effects of tariffs.” Vance, of course, didn’t name any economists who believe tariffs are a tax on countries.

While I’m not saying that these economists don’t exist, there aren’t many of them. One of them is Peter Navarro, who served in the Trump administration and has long advocated for protectionist trade policies. In a normal world, Navarro wouldn’t be taken seriously. For example, Dan Ikenson, formerly of the Cato Institute, once said of Narvarro, “He’s charlatan. He is absolutely saying things that 99.9 per cent of respectable economists would eschew.”

Tariffs aren’t paid by countries. Goods subject to tariffs are shipped to the United States by the company selling them. U.S. Customs and Border Patrol then collect the tariffs. Those goods are shipped to stores. The retail price you pay includes the cost of the tariffs just as much as it includes the costs of production, marketing, and shipping. This doesn’t take a lot of mental energy to grasp.

The result of tariffs is higher prices at the point of sale. That means less money for you and your family to buy basic necessities that we often take for granted. That’s just the initial impact of tariffs. Other impacts translate into higher prices as well, like retaliatory tariffs. It’s Smoot-Hawley all over again.

And, look, Vice President Kamala Harris isn’t any different. She wants to jack up the corporate tax rate. Americans, regardless of their income, would see that tax increase indirectly. Which leads me to this closing thought. Whether it’s a direct income tax or a tariff, business don’t pay taxes. Every tax is passed on to the consumer. Neither side is honest about it. But Trump’s tariffs are more of threat than Harris’s proposed tax increases because of the ability of the Executive Branch to unilaterally impose tariffs.