President Donald J. Trump has proudly referred to himself as a “tariff man,” and his actions have largely borne out that moniker. The Trump Administration has imposed more import taxes, or tariffs, than any other in recent years.
Reasons for those taxes vary.
Import taxes on steel and aluminum stem from the administration’s ruling that imports pose a threat to U.S. national security. Increased taxes on automobile imports are also under consideration for what the administration calls national security concerns.
Imported washing machines and solar panels face high taxes aimed at countering unfairly low prices that harm U.S. producers.
A substantial portion of Chinese exports now faces a 10 percent tax when entering the country. An even larger share of exports will be hit by a 25 percent tax in March, unless China agrees to certain U.S. demands for improved access to China’s market and for an end to Chinese theft of U.S. technology and know-how.
The issue of tariffs is also bound up in the current political debate over a wall at America’s southern border. President Trump has said that taxes on imports from Mexico will pay for the wall.
Leaving aside the question — a big one — of whether some of America’s import taxes violate commitments to our trading partners, other relevant questions are: Who pays import taxes; where does the revenue go; and how may that revenue be used?
You may be surprised to learn that it is American importers, not foreign exporters or governments, who pay taxes on imports into this country. Let’s use a fictitious American automaker as an example.
America’s Best Motor Company (ABMC) produces automobiles in Heartland, America, using copious amounts of steel for each car’s parts, chassis and body. ABMC purchases much of its steel from American producers, but certain specialty types are only available from foreign producers.
Let’s say ABMC imports $10 million in specialty steel from Canada, subject to a 25 percent tax when it crosses the border into the United States.
ABMC, or more likely a broker representing the company, pays $2.5 million to the U.S. Customs and Border Protection Service at a U.S. port of entry. Upon payment, Customs releases the shipment of steel into ABMC’s possession, and it is transported to ABMC’s plant in Heartland.
ABMC then faces a choice. Does it absorb the increased cost, thereby reducing profits and potentially the company’s attractiveness to investors; or does it pass the cost on to consumers, knowing that higher prices might dent sales?
Either way, it’s ABMC who pays the import tax, not the Canadian, Chinese, or Mexican government or even those countries’ exporters.
Where does the import tax go after it’s paid? And can the president use that money to pay for a border wall or other project?
Import taxes paid by American firms or brokers to the U.S. Customs and Border Protection Service flow into our nation’s general revenues, just as personal and corporate income taxes do.
Under the U.S. Constitution (Article I, Section 9), only Congress can direct how federal revenues may be spent. So regardless of the source of the income, Congress is in the driver’s seat for the appropriation of our tax dollars.
How much additional money have higher tariffs brought in to our nation’s coffers? Not as much as you might think.
First of all, import taxes overall account for a very small proportion of our total revenue — a bit over 1 percent. And while you might think that a 25 percent import tax would increase revenue from the imports in question by 25 percent, that’s almost never the case.
When faced with a 25 percent cost increase, American producers and importers look for alternatives, sometimes from other countries, sometimes from here at home. Or they substitute other materials or inputs. We as consumers do the same thing, resulting in reduced demand for the higher cost products or raw materials.
As a negotiating tactic, tariffs certainly can get the attention of other countries. But they also impose costs on American firms and consumers and don’t really bolster our nation’s revenues.
Import taxes are just one policy area in which things often aren’t as simple as they may seem.