Official Announcement
This week, the President-elect officially said on “X-formerly known as Twitter” (legally recognized as an “official source”) that on his first day in office, he will put a 25% tariff on America’s neighbors and allies, Mexico and Canada. He claims that neither country is controlling migrants coming from them to the United States, and that Mexico is a source of fentanyl as well.
So let’s try to keep this simple (the KISS principle, Keep It Simple, Stupid). A tariff is a tax on imported goods. When a bottle of Mexican tequila comes to the border at a cost of, say $20, a 25% tariff would require that $5 more be paid to the US Government. Tariffs are normally about trade, not illegal migration or personal animosity. But tariffs do “raise money” for the US Government, and, in fact, were the major source of income for the government in the early years of the Republic.
Drunken Math
Here’s the deal though. The Mexican tequila Agaveros (the guys who actually make tequila) charge $20 for their product. When the US taxes that, the seller simply adds that cost onto the price of the bottle. So, what Americans bought for $20, now costs $25. The tariff, the tax, comes out of the consumer’s pocket, not the producer’s.
Of course there could be an impact on the producer. Maybe fewer people buy their tequila, because it costs more. And if there is enough producer “pain and loss”, perhaps the Mexican government will accede to the demands of the “taxer”, the US Government. But the immediate “pain” of a tariff is on the consumer, the buyer; not the Agaveros in Mexico.
Sure, tequila drinkers in the US could stop drinking it. Since tequila is exclusively a Mexican product, they could switch to Tennessee Whiskey, or even Irish Whiskey, since there isn’t a tariff on Ireland, yet. But if they want tequila, they have to pay the Agaveros, and Uncle Sam.
Bored Feet
The same is true for Canadian products. Some “simple” numbers: the US produces 70% of its construction lumber, and imports 30%. Of that 30%, 85% comes from Canada. A little bit of mathematical wizardry, and; 25% of American construction lumber comes from Canada. Trump’s tariff would add 25% to the cost of that lumber (12.7 billion board feet). So to keep it simple (KISS), construction costs go up all over the United States. Who pays for that? The folks who are paying for construction; that new house, or school, or rebuilding the deck that finally started to rot away. US consumers pay the price, not the West Fraser Lumber Company in British Columbia.
Your Pocket
It’s a tax on us (us, you and me, and US the United States). It’s not a tax on them (Mexico, Canada, China and the rest). Even if you didn’t vote for Harris for President, she certainly had one valid point. If the Trump Administration actually goes through with their tariff policy, Americans will pay a huge additional tax, on average, $4000 more per family a year.
So why use tariffs? In American history, tariffs originally produced revenue for a national government that couldn’t directly levy taxes (until the 16th Amendment was passed, allowing for an income tax). But today, tariffs only raise about 2% of the total government revenue. 51% comes from personal income tax, that’s $2.18 trillion. 37% comes from social security and Medicare tax, and only 4% from corporate taxes.
Thanks Trump
How much would the Trump tariff policy raise? Estimates puts it at $2.8 trillion over the next ten years ($280 billion a year). That is about 13% of the money raised by personal income tax. So if there was a 13% cut in income taxes, American consumers might, maybe, break even. But here’s the thing; tariffs aren’t a “graduated tax”, where the people who make more pay a greater percentage. Tariffs are strictly, you but it, you pay it. So, just like other forms of sales tax, tariffs impact lower income folks greater than upper income folks. It called a regressive tax because the “burden of taxation” isn’t evenly shared.
Let’s get simple (KISS) one more time. A huge increase in tariffs, would result in higher prices for everyone. It’s inflation, this time directly caused by the government taking the money in tax. What the government does with that money isn’t really the point – the simple point is, tariffs will cost consumers more out of their pockets then they are paying now.
And instead of the “Brandon” inflation slogan of 2022, “Thanks Joe Biden”; we will be able to say “Thanks Trump” for it all.
