Taxes and Tariffs

So over the last few months, I have heard that the “Trump” corporate tax cuts were bad and the “Trump” tariffs were bad. So lowering taxes was bad and raising taxes was bad. Huh? Sounds fishy and political…

So I have given this subject a lot of thought and read a lot on the subjects of corporate taxes and tariffs; theory and practice. I have concluded our media is “cheating” us. Rather than helping us learn and understand the trade-offs between corporate income taxes and tariffs, they often take positions on the issue based on their politics.

This is wrong and they are failing in their job to inform and educate, one of the most important jobs (which is why Freedom of the Press is so important and protected) that the media should perform so our democracy can function well. How can democracy work when our media is trying to influence and not educate the public?

Getting back to tariffs and corporate income taxes, this is what I have observed and learned. When you implement tariffs against a single country or several but not all, you raise the cost of products imported from those countries, but not necessarily the price to US consumers. How can this be? Simple, it is called competition.

If other countries not subject to the tariff produce the same or similar goods at a price similar to the pre tariff price, then the producer of the product must “eat” the tariff cost rather than pass it on to consumers or they will simply switch to the same or similar products from other countries. In other cases, the targeted country’s producer may have had a slight cost advantage and been selling for less than other producers. In that case some of the tariff, might be added on to the selling price and passed on to consumers, but not all. In a few cases, the total tariff can be passed on to consumers.

So to recap, when our country imposes tariffs on one or several countries but not all, some goods will cost consumers more, some will cost consumers the same. In addition, the government will benefit by collecting the tariffs. And in limited cases, American workers will benefit as the tariff will cause, US produced products to become competitive with those produced overseas.

Of course, retaliatory tariffs work the same way. In some cases, US producers will simple sell to other markets without the tariffs. In some cases, the country imposing the retaliatory tariffs needs the US products so much its consumers will pay the higher cost. In some instances, US workers will lose jobs. In some cases, companies will “eat” the tariff to continue exporting their products and remain competitive. So tariffs are a two way street, that impact tax revenues, jobs, and consumers and depending on the circumstances can be beneficial for a country or not depending on how the total result is realized by the country’s economy, consumers, and work force.

But how is that different than corporate income tax rates? In many ways, corporate income tax rates work just like tariffs on producers with one big exception. It is like imposing tariffs on your own country’s producers, all of them including service providers.

Higher taxes cause companies to make one of several decisions. First, they may attempt to pass them on to consumers through higher prices (in the case of services where foreign competition is minimal, this is almost always the case). Second, they may have to “eat” them because foreign companies do not pay the income taxes on goods produced overseas and margins are enough to absorb the higher income taxes. Third, the company may “eat” some of the taxes and pass on some of them through higher prices, if overseas competitors follow them and raise prices also. Fourth, companies may opt to shift production overseas to avoid US income taxes. Fifth, the company may opt to discontinue the product because they are no longer competitive with overseas producers. Sixth, the company may seek to cut costs elsewhere to offset the higher income taxes and keep prices down.

Compared to tariffs, almost all the outcomes are bad for US consumers or workers. In almost all cases, either US consumers pay more or the company uses fewer workers and in some cases the result is disastrous, like when the company simply closes and both jobs are lost and foreign companies can raise prices for US consumers as there is less competition. So higher corporate income taxes may raise some government revenue, but most of it comes from costs passed on to the consumers and so the cost to consumers and workers is very negative compared to tariffs.

When you look at the range of outcomes, higher corporate taxes has limited upside to workers and consumers, except in those few instances where the US company chooses to simply absorb the taxes as an additional cost and not pass those costs on to consumers. In those instances, the costs are born by shareholders.

So why do Americans demand higher corporate taxes? What’s in it for them? Arguably, in cases where the US companies export products, then some marginal tax revenues can be realized by higher corporate taxes, when US companies are still able to compete with foreign companies, but that marginal revenue is mostly offset by lost tax revenue on exported products no longer competitive.

In the past, when very logistics made international competition a minor factor, higher corporate tax rates where an invisible way to tax citizens since higher corporate taxes were simply buried in the cost of products consumers bought (much like tariffs when they are passed on to consumers). So politicians could claim they were taxing US corporations and not citizens (largely a lie), but the consequences of this faulty narrative are far more destructive to our economy as a whole.

It is time for Americans to wake up and the media to do their jobs educating American citizens about the reality of global trade and corporate income taxes versus tariffs. Tariffs are often better than corporate income taxes, since they are generally better overall for US workers (as they represent barriers to trade that give American workers wage negotiation leverage and/or increase the competitiveness of producing goods domestically). In addition, the impact on consumers is often less than corporate income taxes which are much more prevalent and impact the cost of services and not just goods.

So where does that leave us? Is free trade dead? First of all, I think free trade is a myth; practiced more in the breach than reality. Nevertheless, to the extent “free trade” results in nations specializing in producing goods and services where they have special expertise and natural cost advantages and trade is relatively balanced between nations, then “free and balanced” trade can work to raise standards of living globally with everyone benefiting from workers to consumers.

But this is rarely the case, and so I think to some extent Trump has made America aware (even as the media misrepresents the impact of his policies in many cases), that a nation must have competitive corporate income taxes if it wants job creation and domestic production. He has also shown that tariffs used selectively can not only help raise revenue for government with limited negative effects on consumers and workers, but also as a tool to push for “no tariffs” in exchange for balanced trade. Both these results are good for US citizens and consumers. This is not the same as saying Trump has used these tools to best effect, but simply that he has revealed hopefully to most Americans the impact of corporate income taxes and tariffs on domestic GDP growth, jobs, consumer prices and wages and that the impact is a far cry from what many Americans understood before or even have been told through the media.