Tariffs and Taxes

Article excerpt

Nearly four years ago, Mickey Kantor, then a Clinton-Gore campaign factotum, attacked George Bush as a man who raised a broad range of taxes. Mr. Kantor not only detailed the increased income levies brought about by the ill-fated budget deal of 1990, he included every tariff that Mr. Bush had touched. It was a fair cop. "Tariff" is just a fancy name for a tax on foreign goods. The Clinton campaign effectively bashed Mr. Bush in 1992 by calling his tariffs what they were - tax hikes. Should the Republican nominee this year be unwise enough to advocate a new regime of tariffs, punitive or otherwise, Democrats will once again have the opportunity to fairly characterize the GOP as the party promising tax increases.

Consider a $10,000 automobile from Japan or South Korea, slapped with a 10 percent tariff. That 10 percent tariff is, in other words, a $1,000 tax. The question is whether that tax will be borne by the foreign manufacturer or the domestic consumer. The proponents of protectionist tariffs like to give the impression that tariffs are paid by foreigners. Not surprisingly, this sounds good to certain domestic audiences: Why not protect U.S. jobs if you can stick Hirohito - sorry, that's Hashimoto - with the bill? But tariffs only work to protect domestic markets if their cost is not absorbed by the foreign competition. The only tariff worth its protectionist salt is one that works as a direct tax on consumers.

Imagine that Toyota eats the $1,000 tariff on a Tercel in order to maintain its market share. As long as Toyota absorbs the cost of the tariff and the prices of its vehicles are unchanged in the U.S., the profitability of Toyota may be crimped, but there will be no gain for domestic auto workers. That is, if foreign car prices don't go up because of the tariff, there is no reason for U.S. consumers to abandon their taste for Toyotas. It is only if the cost of a Tercel jumps to $11,000 that some would-be Toyota buyers will start kicking tires at the Ford dealership in earnest. In other words, only if the tariff winds up affecting the consumer as a massive tax increase will it have its advertised affect on trade. …