A new analysis details the regressive nature of tariffs.
By Dwyer Gunn
(Photo: Timothy A. Clary/AFP/Getty Images)
Last week, Donald Trump threatened (via Twitter) Japanese carmaker Toyota with a big border tax in the event that the company follows through with plans to build a plant in Mexico. This is nothing new: Since winning the election, President-elect Trump has threatened to place large tariffs on products manufactured by companies that move factories offshore. (Though, in this case, the browbeat was misplaced: The plant in Mexico is not expected to result in job losses in the United States.)
The president-elect argues that these tariffs (or at least the threat of them) are meant to protect average Americans, but evidence suggests tariffs may do more harm than good. This morning, Jason Furman (the outgoing chairman of President Barack Obama’s council of economic advisors), Katheryn Russ, and Jay Shambaugh released an analysis detailing exactly who bears the brunt of protectionist tariffs—and it’s not the mega-wealthy.
Economists have long argued that reducing trade barriers benefits low- and middle-income households in the form of lower prices on consumer goods, to which low-income households devote a larger proportion of their income. Looking specifically at tariffs, the new analysis finds “evidence that low- and middle-income households do, indeed, spend a higher fraction of their income and non-housing expenditure on tariffs.”
The figure below, from the article, illustrates the percentage of income that households in different income brackets currently pay in tariffs:
These effects are not, in context, small. Here’s what Furman and his co-authors had to say on the topic:
Removing the tariff burden would have a considerably larger impact on poor households than the 2001 and 2003 tax cuts, which were estimated to reduce taxes for the bottom quintile of households by $28 to $87 dollars per year. If tariffs were raised by 10 percentage points across the board, the cost of households’ 2014 consumption bundles (all else equal, including exchange rates) would have risen by $301 and $307 for the lowest two income deciles, $611 and $716 for the fifth and sixth income deciles, and $1,462 for the households in the highest income decile, assuming the full tariffs are passed through to consumers and have no additional impact on domestic prices.
Trump is using the threat of tariffs as a bargaining chip to discourage companies from moving jobs offshore. To the extent that his strategy is successful, a small number of low- and middle-income Americans may benefit from the jobs saved. But this analysis serves as an important, and very timely, reminder that tariffs have consequences, and they fall disproportionately on those who can least afford them.