By Kevin Price, Editor at Large, TDB.
President Donald Trump is frequently asked about the status of trade talks with China and he often seems ambivalent. At times he says he would like to see the US and China become better trade partners, but also loves the “billions” of dollars in revenue that is coming in from China due to the tariffs. It is his own version of “good cop, bad cop,” with himself in both roles. However, the truth is, the Chinese are not paying a penny when it comes to those tariffs. They are coming from US consumers who are buying Chinese goods at a higher price.
A new report by some major institutions — The Federal Reserve Bank of New York, Princeton University, and Columbia University found “that tariffs imposed last year by Trump on products ranging from washing machines and steel to some $250 billion in Chinese imports were costing U.S. companies and consumers $3 billion a month in additional tax costs and companies a further $1.4 billion in deadweight losses. They also were causing the diversion of $165 billion a year in trade leading to significant costs for companies having to reorganize supply chains.”
Some of the most prominent authorities in the economics of trade were behind the report, but it could have just as been provided by “Captain Obvious” or in the development of a simple high school research paper. There is nothing profound in this study. It is simply common sense.
The economics of business taxes (or tariffs) works like this:
- A government entity taxes (or sets tariffs on) a business.
- The business does all it can to mitigate the cost by pursuing tax deductions and other efforts to lower the burden (in order to stay competitive).
- Whatever is left after those efforts become a fixed cost of doing business. Like the salaries paid to employees, the vendors necessary to bring consumers products and services, etc., it is passed on to those who buy from them. In other words, businesses don’t pay taxes, they are mere tax or tariff collectors.
Therefore, Chinese businesses are the tariff (tax) collector of the United States on US consumers. The fact we have to have a major study produced by some of the biggest names in academia to explain this shows the poor state of economic education today.
It is interesting to see that these “alarming reports” are finding “some of the world’s leading trade economists declared Trump’s tariffs to be the most consequential trade experiment seen since the 1930 Smoot-Hawley tariffs blamed for worsening the Great Depression. They also found the initial cost of Trump’s duties to the U.S. economy was in the billions and being borne largely by American consumers.” Again, very obvious. Yet these journalists and their reports fail to see the larger principle from their research. What is true about tariffs is true about all taxes on businesses — corporations do not pay taxes, they are only tax collectors. It would be helpful if journalist were critical of all taxes on businesses and exposed them for the shell game they are, which is one in which consumers have to pay for them in their purchases.
So why do businesses care about business taxes and try to mitigate them, if they do not actually pay them? This is fairly obvious and simple too — they want to be competitive. Taxes on business are a tax on competitiveness. If a company is paying more taxes in a country, the price of their product has to go up in order to cover it, which is why so many companies left the US before Trump’s tax cuts in search of better tax environments. The reason the US economy exploded after the tax cuts wasn’t because of a temporary pumping of revenue into a business, but because of a restructuring of a tax code that made the US more attractive for business. Unfortunately, the tariffs are undermining progress that was coming from tax cuts.
It is astonishing the President, on almost a daily basis, perpetuates to the American people this lie about the revenue the US is “getting from China” from these tariffs. It is an indictment against US economic education that it required a major report to expose it and few are likely to understand it. Finally, it is a tragedy that the media will not report the truth of this situation in all areas and not merely when it is beneficial to their obvious political agenda.
Kevin Price is host of the nationally syndicated Price of Business radio show and is a syndicated columnist. He is also a multi-award winning journalist and author.