Today, June 17, is the 83rd anniversary of one of America’s most infamous tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. s: the Smoot-Hawley Tariff, or Tariff Act of 1930. This act, despite being widely opposed by 1,028 prominent economists, some business executives, and much of the public, was signed into law by President Herbert Hoover. Historians generally believe the tariff was responsible for a two-thirds decline in international trade and for transforming a bad recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. into a global depression. For much of America’s history, tariffs were the key public policy issue; one particular Tariff of 1828 was nicknamed the “Tariff of Abominations.” Protective tariffs gave way to free trade after World War II, although sadly, protectionism and taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. favoritism in trade policy seem increasingly bipartisan today.
Usually at the Tax Foundation, we focus simply on domestic taxes: like property, income, and sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es. However, in an increasingly globalized world, international taxes matter more and more. We’ve written extensively about the corporate tax rate and territorial tax policy, noting how much American companies pay in international taxes, the terrible uniqueness of the United States’ current corporate tax policy, and much, much more.
As far as consumers are concerned, tariffs are essentially just extra sales taxes on certain products: so, provided they are equally-applied across goods, they shouldn’t be distortive. However, this is easier said than done. Some countries make different things that the US no longer makes, so there is no “equally-applied tax.” Furthermore, a tax on imports will favor some industries over others: rail and automotive over shipbuilding, for example, or truckers over longshoremen. Of course, in general, the US’ tariffs are very low: on average only 1.6% according to the World Bank.
The same problems of non-neutrality that bedevil other taxes, however, apply to taxes on trade. Subtle and distortionary import taxes, like the recently-expired tariff on imported Chinese tires, are on the rise. These taxes distort purchasing and investment decisions by American citizens and businesses, and raise concerns about the power of industry- and union-lobby groups in trade policy. Carve-outs in the tax code, whether domestically or internationally, whether in tax breaks or tax penalties on competitors, are bad for the economy and for the American people.
Read more about international taxes here.
Read more about the history of tariffs in the US here.Share