The voices of Tax Policy Center's researchers and staff
President Trump’s increases in tariffs on imported goods from China and elsewhere are effectively reversing a big chunk of the 2017 Tax Cuts and Jobs Act. For many low- and middle-income consumers, Trump is eliminating most or all of the benefits of TCJA. How? Because the tariffs could increase the price of consumer goods by as much or more than the TCJA cut taxes.
When the president tweeted on Saturday that he “loves to collect BIG TARIFFS,” he left an important fact unsaid: He is collecting those tariffs primarily from US businesses and consumers and, by doing so, is undermining the 2017 tax cuts that were his signature legislative achievement.
Here are the numbers: The Tax Policy Center estimated that the TCJA cut individual income taxes by an average of about $1,300 in 2018. Middle-income households paid about $800 less on average and low-income households got a tax cut averaging about $40. The tax cuts won’t change much for 2019 and 2020.
The total bill that US consumers will pay for Trump’s tariffs remains uncertain, in part because the President keeps ratcheting up the levies, and his threats of future tariffs.
But one firm, Oxford economics, estimates the per-household cost, in form of tariff-driven price increases, will range between about $500 and $1,000—depending on how the tit-for-tat trade war between the US and China plays out. The mid-point of its projection is roughly equal to the average TCJA tax cut for a middle-income household. And it is nearly twenty times the average tax cut for a low-income household.
Who pays tariffs?
Despite Trump’s frequent claims that China, or other exporting countries, pay tariffs to the US, those customs fees are effectively paid either by US businesses or, more likely, by consumers. Tariffs are paid at the border by US importers that generally add them to the price of goods they sell in the US.
But tariffs boost prices of more than imported goods. In many cases, competing domestic producers respond to those price hikes by opportunistically raising their own prices. If competition or declining demand prevents firms from raising post-tariff prices, their shareholders and workers bear the burden of those higher import taxes.
Oxford estimated the effects of prior 10 percent Trump tariffs on China, the recently announced 25 percent import taxes on some Chinese goods, and that nation’s retaliation against the US. For the outer bound of its forecast, it assumed that Trump eventually would impose his 25 percent tariffs on all Chinese imports, including those now subject to the 10 percent levy. And that China would retaliate in kind.
Reducing economic output
It projected the total tariff-related reduction in US economic output in 2020 would range between $62 billion and about $100 billion, or between 0.3 percent and 0.5 percent of projected Gross Domestic Product (GDP). At the high end, it would wipe out nearly all the $115 billion in growth TPC projected the TCJA would create.
Similarly, the conservative American Action Forum estimates the tariffs imposed so far will boost consumer prices alone by $66 billion annually.
Despite the president’s claims, US tariffs are taxes borne by US consumers and businesses. And if initial estimates are correct, Trump’s may wipe out the tax benefits of the TCJA for many middle-income families and destroy much of the short-term macroeconomic benefits for all of us.
Funny thing: Public opinion surveys showed most Americans thought they got no benefit from the TCJA’s tax cuts. Turns out, they may have been right—at least when those tax cuts are paired with the Administration’s trade policy.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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Ted S. Warren/AP Photo