Trump’s Tariffs Are An Appallingly Inefficient Method Of Raising Tax Revenue

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President Donald Trump is hailing the money pouring into the Treasury from those import tariffs that have been imposed upon those things we all like to buy from foreigners. Confident claims that this will pay off the national debt and all that. There are three problems with this sort of claim.

The first is that the people paying the tariffs are American consumers, the price of things they buy has risen as a result of the taxes.

The second is that the sums under consideration are immaterial as far as the national debt is concerned, don’t even make a notable dent in the budget deficit. We’d not even consider the revenue a rounding error as concerns the first.

The third is that they’re, whatever we might think of the above, an appallingly inefficient method of gaining tax revenue. The costs to the people are vastly higher than the revenues received which is not a marker of good taxation policy.

President Donald Trump likes to talk about the money Washington is making from the spate of tariffs his administration has imposed on global trading partners. The catch? Most of it is probably coming from American pocketbooks.

At a postelection news conference on Wednesday, Trump misleadingly claimed that billions of dollars would “soon be pouring into our Treasury from taxes that China is paying for us.”

He got the first part right. Federal revenue from tariffs in the third quarter increased by more than 33% from the same quarter last year, Treasury Department data shows. And in October — the first full month in which all tariffs announced to date were in effect — the monthly collection appears to have doubled from the 2017 level to about $6 billion, according to estimates from daily receipts.

Revenues are up, Trump’s right, it’s Americans paying, not Chinese, so Trump’s wrong. The details of the revenue collected can be pulled out of this statistical release.

However, it’s the efficiency of the exercise that matters to us here. And that’s dire, truly awful.

So, think of why the tariffs are imposed? Those dastardly foreigners can make stuff we want to buy cheaper than Good Honest Americans can. So, we add a tax, a tariff, to what we want to buy from those foreigners. We gain revenue from that smaller amount of those foreign made goods that are bought.

But obviously enough that’s not the only effect here. Removing that low cost competition raises the price of all of those goods made by those Good, Honest, Americans. That rise in price is as much a tax upon consumers as a rise in the price of the import is. It still more money flowing out of household budgets for the same items. And that effect is larger the “more successful” the tariffs are.

Imagine a perfectly successful tariff, one that switched everyone from buying import to buying domestic. No one at all bought, say, an Aston Martin (made in UK) and everyone who would have done buys a Cadillac (made in USA). Our revenue from tariffs is zero, the cost to consumers is how much Cadillac prices have gone up in the absence of the Aston Martin competition. OK, not much in this example, they’re not really substitutes for each other. Now play the same game with Chinese pipe steel and US pipe steel. If no one buys Chinese now, as a result of the 25% tariff, there’s no revenue. But all US pipe steel has risen in price, that’s still a tax upon consumers of pipe steel. And note that we imposed the tariff so that the people who made American pipe steel could make a profit.

Sure, it never is perfectly effective at entirely easing imports, a tariff. But the very fact that we’re getting revenue shows that there’s a cost to consumers. And the domestic price rise enabled by the tariff is also going to be a cost. It’s all just a terribly inefficient method of gaining tax revenue. As always, if you actually want tax revenue you’re better off taxing people directly, not fiddling with intermediate stages of the economy.