Who pays for tariffs?

The Georgia Bulldogs lost to Ole Miss on Saturday. This was a heartbreaking game for me. UGA’s 52-0 record against teams not named Alabama came crumbling down. It is the first time I have watched UGA lose to a non-Alabama team. I realize I am a spoiled fan. I appreciate your support during this trying time.

Love him or hate him, Donald Trump is now our President Elect for a second time in a historic election that has cemented him as a pillar of American politics. While campaigning, Trump said a lot of words about tariffs. So let’s talk about them.

Purpose of tariffs:

Tariffs are taxes on imported goods. The purpose of tariffs is to support domestic production of goods. It does this by increasing the total cost of imported goods, leveling the playing field for domestic producers who typically have higher variable and fixed costs. Without tariffs, domestic producers typically cannot compete with a factory in developing nations where labor is cheaper and government regulations are less costly.

Tariffs are inherently anti-capitalist as they prevent market forces from controlling the price of goods by imposing artificial costs. However, the aggressive Trump tariffs are far from the first thing to pop the capitalist bubble Republicans claim to support with the absurd amount of government subsidies on everything from electric cars to fossil fuels (ironically enough). 

How do US tariffs compare?

In the post WWII era, the United States consistently lowered tariffs and signed trade agreements to lower tariffs even more for specific industries and nations.

One of the more talked about tariff imbalances is with the EU and cars. 

The EU imposes a 10% tariff on all imported cars, four times as high as the US at 2.5%. This is one of the many reasons why you see few Fords, Chevys, and GMC trucks roaming the 1500 year old streets of Paris. Another reason might be Europeans’ desire for smaller cars, walkable cities, and better gas mileage - excuse me, I mean their hatred of the freedom to drive a RAM 3500 to work every day never hauling anything more than a 30-rack of Busch Light. 

I am getting off topic.

Who pays the tariffs:

Trump has said: “I am going to put tariffs on other countries coming into our country and that has nothing to do with taxes to us. That’s a tax on another country.”

In a literal sense, Trump is completely incorrect. The entity actually paying the tax is the domestic company importing the goods. When declaring goods, the importer pays Customs and Border Protection the tariff percentage based on the value of goods being imported. When companies, like Toyota (sticking with cars), import goods, they create a US based company to import and distribute their vehicles like Southeast Toyota Distributors, LLC. So, no. It is not a tax on another country. 

In a less literal sense, Trump is completely incorrect. At the end of the day, a tax is any time the government takes a portion of your sale, salary, income, whatever. If Trump puts a 10% tariff on Toyota vehicles, the Camry you could have bought for $25,000 will now cost you $27,500, and that additional $2,500 paid by you goes to the government through the importer. Tariffs are taxes on US consumers choosing to purchase anything with imported materials.

If you don’t think 100% of the cost of the tariff will be placed on the consumer, then you are not living in reality or evidence. Profit margins have a massive effect on the share price of publicly traded companies, so if they can pass these costs off to the consumer to protect their margins, they will.

So, let’s say you don’t buy the Camry because the cost is too great. You purchase a Ford Fusion for $27,000 and ‘save’ $500 dollars. You support domestic production but had to pay more for an equivalent item because of the tariff. 

In an even more broad sense, Trump is saying that by putting tariffs on imported goods, the exporting nation will make less money as Americans choose to purchase domestically. Even in this explanation though, it is not a tax on another country but an economic dampener lowering their exports.

Could tariffs replace income tax? 

No. 

On Joe Rogan’s podcast, Trump said “Yeah, sure, but why not?” when Joe asked if he was serious about replacing income tax with tariffs. So, I will tell you why not.

In fiscal year 2024, the US government spent $6,751,551,633,812 (I almost passed out typing that). 

In 2023, the US imported $3,826,900,000,000. That is a $2.9 TRILLION dollar difference. So Trump would need to impose a 175% tariff on all imported goods to prevent a deficit. 

But let’s not forget about the purpose of tariffs. A tariff promotes and protects domestic producers by increasing the cost of imported goods. So, if the tariffs are working, we would import fewer goods and rely more on domestic production, therefore lowering the dollar amount collected by the tariffs increasing the deficit. 

I am not saying anything about whether or not tariffs are an effective tool to increase domestic production and negotiate with other nations. I am saying they are an anti-capitalist tax on US consumers that couldn’t replace income tax. Trump is wrong.

What We’re Watching:

The Diplomat Season 2 just dropped on Netflix. If you haven’t watched Season 1, please do. I rarely like non-sitcom shows. This is a winner.

Debrief on Deck

Next week, we are going to talk about the rich paying their “fair share.” Unlike tariffs, this topic is a bit more subjective, but there are some concrete numbers that we can look at. After this, no more politically motivated questions, don’t worry.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on Instagram.

Until then, stay the course.

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