Automobile Tariffs Would Offset Half the TCJA Gains for Low-income Households
June 4, 2018
The Trump administration is reportedly considering new tariffs of as much as 25 percent on automobile imports, potentially including cars, trucks, and automotive parts. On May 23, U.S. Secretary of Commerce Wilbur Ross began a national security investigation under Section 232 of U.S. trade law into the import of automobiles and automotive tariffs. We estimate that increasing tariffs on automobile imports would reduce the gain in after-tax income for households in 2018 derived from the Tax Cuts and Jobs Act while making the tax code less progressive.
In 2017, the United States imported nearly $293 billion worth of vehicles for consumption, while paying about $3.4 billion in duties on those imports. If we assume that import levels will remain the same and that the proposed tariff would apply to all goods in the Harmonized Tariff Schedule under the vehicle chapter (Chapter 87), in addition to the tariffs that are already levied, the new tariff would amount to a $73 billion tax increase. It is likely that some vehicles or parts in Chapter 87 could be excluded from the tariff, while parts that may be listed in other chapters could be included, so the exact amount of the tax increase could be different.
Using the assumptions mentioned above, we estimate that the new tariffs on automobiles would reduce after-tax incomes for all taxpayers by 0.47 percent in 2018 while making the distribution of the tax burden less progressive. These tariffs would fall harder on those taxpayers in the bottom 80 percent, reducing their after-tax income by 0.49 percent, and by 0.45 percent for the top 20 percent. The top 1 percent of taxpayers would see the smallest reduction in after-tax income, at 0.39 percent.
|Source: Tax Foundation Taxes and Growth Model, June 2018, and Tax Foundation calculations|
|Percentage Change in After-Tax Income, 2018|
|Income Group||TCJA||Tariffs||Net||Change in Impact|
|0% to 20%||1.00%||-0.49%||0.51%||-49%|
|20% to 40%||1.70%||-0.49%||1.21%||-29%|
|40% to 60%||1.70%||-0.49%||1.21%||-29%|
|60% to 80%||1.70%||-0.49%||1.21%||-29%|
|80% to 100%||3.90%||-0.45%||3.45%||-12%|
|80% to 90%||1.90%||-0.47%||1.43%||-25%|
|90% to 95%||2.10%||-0.49%||1.61%||-23%|
|95% to 99%||3.80%||-0.47%||3.33%||-12%|
|99% to 100%||7.00%||-0.39%||6.61%||-6%|
Table 1 compares the 2018 distributional impact of the automobile tariffs to the 2018 distributional impact of the Tax Cuts and Jobs Act, and shows that these tariffs would reduce the increase in after-tax income anticipated by households, especially lower- and middle-income households.
We estimate, for example, that households in the 20 to 40 percent income group would see a 1.7 percent increase in after-tax income in 2018 because of the Tax Cuts and Jobs Act. However, automobile tariffs would have an offsetting effect, reducing after-tax income by 0.49 percent for these households. This means that automobile tariffs would decrease the expected increase in after-tax income for households in this group by 29 percent.
The tariffs would fall hardest on households in the 0 to 20 percent income group, reducing their expected increase in after-tax income by 49 percent—if the average increase in income for this group were $100, they would receive just $51 if the tariffs took effect as assumed. For comparison, the tariffs would reduce the estimated increase in after-tax income for households in the top 1 percent by about 6 percent.
Economists generally agree that free trade increases the level of economic output and income, and conversely, that trade barriers like tariffs reduce economic output and income. While it may be quite some time until the conclusion of the automobile import investigation, we should expect the effects of any resulting tariffs would be to reduce economic output and incomes. If imposed, these automobile tariffs would fall more on middle- and lower-income taxpayers, reducing the increase in income these households would see because of the Tax Cuts and Jobs Act, and making the distribution of the tax burden less progressive.
The Tax Foundation models the impact of tariffs with the Taxes and Growth model. In the Tax Foundation’s model, tariffs are treated as a targeted excise tax on the tradeable sector, which ultimately fall on U.S. labor or capital and result in lower output. To model the distributional impact, we pass the tax backwards as reductions in factor income, which reduces the returns to both labor and capital income. In modeling tariffs, we do not account for the potential reaction of foreign countries, nor the additional losses in welfare from having taxes with uneven impacts across sectors. To calculate the amount of the tax increase, we applied a 25 percent tariff rate to all goods covered by Chapter 87 of the Harmonized Tariff Schedule using 2017 import levels.