I don’t think your example is the negative to tariffs that you’re implying that it is.
A 25% tariff that only results in a 7%-9% price increase, and where a quarter of the burden does in fact fall on the foreign producer, doesn’t sound as bad as “a 25% tariff”, which the average person would reasonably think might increase prices by as much as 25%. And the somewhat thoughtful person might think they would increase 3/4ths of 25%.
In other words, the fact that there are multiple distribution layers here clearly mutes the percentage impact on end consumer price paid. Presumably those products sold “direct to the consumer”, or say on Amazon, would see even higher percentage price increases from the same sized tariff.
In other words, I’d prefer lower taxes overall, but a tariff that replaces higher cap gains tax rates or corporate income tax rates or higher marginal income tax rates seems like it might be a good idea, and your example only contributes to that sentiment, rather than the opposite.
Thanks for the thoughtful reply. You’re right that the percentage increase at the register looks modest, but that’s exactly the point of the piece. The paper shows that even with low percent pass-through, consumers end up paying more in dollars than the government collects because each stage of the supply chain layers markups on the tariffed cost. So rather than being muted, the burden is actually amplified, just hidden by the way percentages mask dollar effects. In that sense, tariffs are an unusually inefficient tax: they distort prices and raise household costs by more than they raise revenue.
“So rather than being muted, the burden is actually amplified, just hidden by the way percentages mask dollar effects. In that sense, tariffs are an unusually inefficient tax: they distort prices and raise household costs by more than they raise revenue.”
But *some* of the burden - as you show - is borne by foreigners who would otherwise not pay American taxes, which is actually a unique advantage.
And even with the inefficiency you cite, they are less inefficient, and less anti- growth than corporate income taxes. And if not too high, they are far less anti- growth than capital gains taxes. And so in that very important sense tariffs done properly can be more efficient than those other taxes.
IMO all you really show on the negative side with your analysis here of a forced multi-level distribution system is that intermediate good taxes are indeed worse than end user consumption taxes. I.e. tariffing inputs in the supply chain I do agree is a particularly bad, anti-growth tax. Your multi- level distribution of an otherwise end user good (wine) demonstrates this well.
Interesting data.
I’m a free trader myself, but that said…
I don’t think your example is the negative to tariffs that you’re implying that it is.
A 25% tariff that only results in a 7%-9% price increase, and where a quarter of the burden does in fact fall on the foreign producer, doesn’t sound as bad as “a 25% tariff”, which the average person would reasonably think might increase prices by as much as 25%. And the somewhat thoughtful person might think they would increase 3/4ths of 25%.
In other words, the fact that there are multiple distribution layers here clearly mutes the percentage impact on end consumer price paid. Presumably those products sold “direct to the consumer”, or say on Amazon, would see even higher percentage price increases from the same sized tariff.
In other words, I’d prefer lower taxes overall, but a tariff that replaces higher cap gains tax rates or corporate income tax rates or higher marginal income tax rates seems like it might be a good idea, and your example only contributes to that sentiment, rather than the opposite.
Thanks for the thoughtful reply. You’re right that the percentage increase at the register looks modest, but that’s exactly the point of the piece. The paper shows that even with low percent pass-through, consumers end up paying more in dollars than the government collects because each stage of the supply chain layers markups on the tariffed cost. So rather than being muted, the burden is actually amplified, just hidden by the way percentages mask dollar effects. In that sense, tariffs are an unusually inefficient tax: they distort prices and raise household costs by more than they raise revenue.
“So rather than being muted, the burden is actually amplified, just hidden by the way percentages mask dollar effects. In that sense, tariffs are an unusually inefficient tax: they distort prices and raise household costs by more than they raise revenue.”
But *some* of the burden - as you show - is borne by foreigners who would otherwise not pay American taxes, which is actually a unique advantage.
And even with the inefficiency you cite, they are less inefficient, and less anti- growth than corporate income taxes. And if not too high, they are far less anti- growth than capital gains taxes. And so in that very important sense tariffs done properly can be more efficient than those other taxes.
IMO all you really show on the negative side with your analysis here of a forced multi-level distribution system is that intermediate good taxes are indeed worse than end user consumption taxes. I.e. tariffing inputs in the supply chain I do agree is a particularly bad, anti-growth tax. Your multi- level distribution of an otherwise end user good (wine) demonstrates this well.
Good job breaking down and summarizing the NBER paper.