Moneybox

Trump’s Tariffs Are a Pretty Huge Tax Hike

Trump puffing his chest for a photo, seated in the Oval Office.
U.S. President Donald Trump listens to a question from the media during a meeting with Hungarian Prime Minister Viktor Orbán in the Oval Office on May 13 in Washington.
Mark Wilson/Getty Images

Let us all pause to appreciate the significant tax hike that Donald Trump, Republican president of the United States, has managed to impose on American businesses and shoppers thanks to his trade war with China.

That’s what his tariffs are, after all: tax increases on imports. Trump knows this. He likes to brag about how much money the Treasury is collecting thanks to the levies he’s placed on everything from car parts to furniture to toilet paper shipped over from the People’s Republic. The problem is that he thinks the cash is coming out of China’s pocket. It’s not. Tariffs are legally paid by importers, and economically speaking, the cost tends to fall on domestic companies and consumers who buy goods from abroad. Recent research has suggested that, in 2018, just about 100 percent of Trump’s tariffs were passed on to Americans. You and I are paying the bill.

And the bill isn’t paltry. So far, Trump has imposed 25 percent duties on $250 billion of Chinese goods. Do the arithmetic and that’s a roughly $62.5 billion annual tax hike. Of course, the number could go down a bit if Americans buy less stuff from China and start importing more from, say, Thailand. But as Gary Clyde Hufbauer of the Peterson Institute for International Economics argued to me, the tariffs will likely lead exporters in other countries, as well as U.S. producers, to raise their prices too. Once you factor in those effects, he believes Trump’s tariffs on China will cost Americans closer to $125 billion. He calls that a “conservative” estimate.

But let’s be even more conservative and go with the lower figure: $62.5 billion in direct costs to families and businesses. This tax will hit factories in Ohio as well as Walmart shoppers in Florida, amounting to about $530 per U.S. household. It’s a reasonably large amount of money, as far as tax hikes go. Multiply it over 10 years and you get $625 billion, about one-third the budget cost of the tax cut Republicans passed in 2017.

Of course, Trump’s China tariffs probably aren’t going to last for a decade, and if they did, U.S. supply chains would almost certainly adjust to wring out some of that expense. But that math gives you a sense of the magnitude of the tax increase we’re talking about, and the degree to which Trump is shooting himself in the foot in his haphazard duel with Beijing. One important reason that growth has been strong over the past two years is that, between their tax bill and increased spending, Republicans passed a significant economic stimulus. Trump’s tariffs/tax hikes will undo some of that work by acting as an unnecessary dose of austerity. It probably won’t be enough to do serious damage to the economy, and some of the cash will likely be cycled back into a bailout for farmers hurt by China’s retaliatory tariffs (Trump, the tax-and-spend liberal!), but it will certainly muffle our deficit-fueled growth spurt.

The tax pain could become more severe if Trump goes ahead with his plans to raise tariffs on the remaining $300 billion of exports China sends to the U.S. Using the same back-of-the-envelope math, that would be another $75 billion in direct costs for importers, for a grand total of $137.5 billion.

One thing to keep in mind is that, while the Republican tax cut was disproportionately targeted at high earners, Trump’s tariffs will probably be felt more acutely by poor and middle-class Americans who tend to spend a greater share of their income. It’s a regressive twist on tax policy. And the rest of the GOP, which would ordinarily find tax hikes totally anathema, isn’t doing a thing to stop it.

All of this short-term pain might be worth the long-term gain if Trump had some sort of reasonable strategy for getting China to make serious changes to how it approaches trade. But the administration’s approach has been ad hoc and ill-considered; it’s based on the flimsy idea that the U.S. can use tariffs to bludgeon Beijing into submission in a one-on-one showdown. Maybe they’ll be proven right (you never know). But for now, it seems like Americans are paying higher taxes for nothing.