Gerald V. Krach, CPA
Wealth Advisor & Tax Strategist
According to Wikipedia, “a tariff is a tax on imports or exports between two different countries. It is a form of regulation of foreign trade that taxes foreign products to encourage or safeguard domestic industry.” The original purpose of tariffs was to generate revenue for the government. In the early 1900s, the government collected most of its revenue from tariffs. Nowadays, however, the tariff has the intention of protecting a product that is domestic to our shores.
A tariff on any product increases the overall cost of the product to the manufacturer, the middleman selling the product, or to the end consumer. The purpose of a tariff upon any product is to adjust the price of the product upward to control the decision-making of the consumer. When items are taxed coming into this country, people are less likely to buy them as they become more expensive. All political reasons aside, the purpose of the tariff is to protect a domestic product made in the United States by making it a less costly option when compared to a foreign, imported product.
I have personally heard President Trump quoted as saying “the country is collecting millions of dollars of tax based upon the tariffs placed upon Chinese goods.” My question is who is actually paying the tax that is this “tariff“?
To a certain extent, the manufacturer of the product may try to lower its internal costs to offset the tariff, thereby maintaining the sale price of its product at a pre-tariff price. This step by the manufacturer can only go so far. A 25% tariff placed on a product cannot be completely offset by cost reductions of the manufacturer. Even if the manufacturer was able to reduce the cost of the product by 25%, it can only do so for a short period of time. At some point, the manufacturer will be forced to let the cost of the product increase or simply stop making the product. The Trump Administration would like to see the manufacturer of the product actually bring the production back to the United States, thereby creating jobs to make the product.
The alternative to the manufacturer bearing the burden of the tariff tax is that the end consumer bears the burden of the tax. How much do you really like your widget made in China versus your widget made in the United States? If the tariff on the widget made in China increases its price by 25%, would you still be willing to purchase the product? If so, then you are paying the tax. If you only bought the China made widget before because it was less costly to do so, then you may be more inclined to purchase the domestic made widget. So, if you decide to purchase the domestic widget, who really paid the tariff tax on the imported widget? The answer is the manufacturer paid the tax at the border but then passed the tax cost along to the middleman selling the product.
The answer to the question “who pays the tariff tax?” is summarized in this way: You, the consumer, pay the tax on the imported product; the middleman pays the tax via a pass through higher cost from the manufacturer; or the manufacturer bears the burden when the middleman returns the unsold product.
Regardless of who pays the tax, there are usually no winners in a trade war. Tariffs often result in unwanted side effects, such as higher consumer prices and increased tension between countries. Governments impose tariffs to raise revenue, protect domestic industries, or exert political leverage over another country. Tariffs have a long and contentious history; and the debate over whether they represent good or bad policy rages on to this day.
Please contact our office if you have any questions or would like to discuss this further.