Imagine that a presidential candidate promised to raise taxes on everyone. Under the new proposal, both the wealthy and middle classes would pay more. But as a percentage of a person’s income, the tax increase would disproportionately affect the poor and working class.
Now imagine that when many blue collar and working poor hear about this tax proposal they have a strange reaction: they cheer and consider it one of the primary reasons to support the candidate. They believe this deeply regressive tax that takes a large portion of their weekly paycheck is just what the American economy needs.
While this scenario may seem too absurd even for the bizarre 2016 election, it is actually happening. In fact, such a proposal has been made by both Bernie Sander and Donald Trump.
Both Sanders and Trump propose increasing tariffs on goods imported from other countries — and increase them significantly.* This isn’t that surprising for Sanders, a socialist who, on the issue of economics, is one of the most ill-informed candidates in modern history. But Trump should (and probably does) understand the detrimental impact tariffs have on the poor. And yet he has proposed an economy-crippling, poverty-increasing tariff.
In 2012, Trump proposed a tariff on China of 25 percent. In 2016 he bumped it up to 45 percent. (He later tried to lie and say he never proposed the 45 percent increase, but there is audio of him making the proposal.) A tariff is simply a tax on imports or exports, so Trump is proposing to raise taxes on imported goods by 25 to 45 percent. (To keep this point in mind, I’ll hereafter refer to tariffs as “taxes.”)
You might be thinking, “ So what? That’s a tax the Chinese have to pay.” But that’s not the way tariffs works. China doesn’t pay the tax — you do. If a tariff on Chinese goods is increased by 25 to 45 percent then you pay 25 to 45 percent more for those goods.
Here’s a way to think about it. Imagine there are two hamburger stands in town. One is owned by the mayor’s wife, Veronica, and one is owned by a woman who lives in the next town over, Betty.
Of the two, Betty makes the tastier burger. She is also able to charge $1 a burger since she is able to buy her supplies in her own hometown for much cheaper. Veronica’s burgers aren’t quite as good and cost more to make. She has to charge $1.30 per burger.
The mayor decides to implement a new tax of 45 percent on producers (like Betty) who don’t live in the city limits. Since Betty’s profit margin is already low, she has to pass the bulk of the 45-cent tax on to her customers. Instead of $1 she now has to charge $1.35.
So who is better off in this scenario? The only winner is Veronica. Since her burgers are now cheaper, she is likely to sell more. And who is worse off? The customers who now have to pay 30 to 35 cents more for every burger. That is money they could have used to buy other products or services. Now they have to spend additional money on this new tax.
The same principle applies to taxes on goods and services imported from other countries. Customers simply have to pay more for goods and services they used to get much cheaper.
To understand how Trump’s tax increase would affect consumers, take a trip to Target or Wal-Mart and add 45 percent to almost all the prices. That’s money that comes directly out of your pocket into the hands of the federal government — all to punish you for buying goods that are cheaper to make in China.
Free trade advocates have pointed out for centuries that taxes on imports are evil and destructive. But over the past few decades even liberal economists have come to recognize taxes on imports are a bad deal, especially for the poor. Edward Gresser of the Progressive Policy Institute explains why,
[I]magine a group of workers at a hotel. The hotel vice president, an unmarried recent MBA, makes a salary of $110,000 per year. Her secretary is a young, single mother, earning $25,000. And the maid cleaning their hallway, also a single mom, left the welfare system two years ago to begin a minimum wage job.
Each of these women pays four major federal taxes: income taxes, payroll taxes, excise taxes, and tariffs. The largest of these, the income and payroll taxes, raise $1 trillion and $700 billion respectively, and make up the bulk of taxation on the vice president. The tariff system, bringing in less than $20 billion a year, is the smallest tax, but places a hidden and surprisingly heavy charge on the secretary and the maid.
Gresser notes that the secretary loses three days’ pay to tariffs — twice as much as the vice president — and the maid likely loses a full week’s pay. The reason: Tariffs are highest on the goods important to the poor.
Keep in mind that Gresser is referring to taxes that were already on imports in 2002. The poor would pay these taxes plus the increase proposed by Sanders and Trump. Since most of the poor and working class do not pay any federal tax, increasing the tax on imports is one of the biggest taxes they’ll ever have.
Why, then, do so many of low-income workers support this anti-poor policy that’s been presented by Sanders and Trump? There are several reasons.
First, many believe it is necessary to “bring jobs back to America.” The reasons why this isn’t even remotely plausible are complicated, so I’ll dedicate a separate post to that issue.
Second, many people can’t seem to grasp that “taxes on producers” are taxes passed on to consumers. Companies sell products to make money. If the government adds a tax that artificially increases the cost of selling the product to a consumer, the tax will be paid by the consumer. Taxes on imports are similar to a pre-paid “sales tax.” Rather than collecting the tax at checkout, the tax is added into the price of the product. The tax may initially be paid by the foreign country, but you reimburse them when you purchase the product.
Third, most people don’t see the tax. Many people believe all price increases are caused by two phenomena: greed and inflation. If prices increases they assume it’s because a company wants to make more profit (hence, the company is being “greedy”) or that the price has been affected by inflation (a general rise is prices). They don’t even think about the taxes paid on imported goods. It never occurs to them that the reason they are paying more is because the government is forcing them to pay more for a product they could (and should) get much cheaper.
Fourth, politicians take advantage of the misperceptions and misunderstandings the American people have about economics. The vast majority of voters not only do not know much about economics, they do not want to be educated. They don’t want a politician (or journalists like me) explaining to them why a particular policy is destructive and makes them worse off. They merely want a politician to tell them what they want to hear and confirm what they already believe. If they think that China is the reason they can’t find a job, then they want a politician to tell them how they are going to punish China.
Fifth, the average consumer in the U.S. simply has no understanding of how taxes on imports affects them. This is especially true of the poor and working class, for the reasons cited above. Many of them therefore trust that a “successful businessman” like Trump must know what he’s talking about. After all, he wouldn’t support the policy if it hurt the poor, would he?
The answer, of course, is that politicians will champion any proposal that will help get them elected. Trump and Sanders are no different. Whether they actually believe that increasing the price of imports will help the American economy is unimportant. What matters is whether their potential voters believe it is true.
Once they are in office they don’t actually have to keep their word and implement the bad policy. And if they do, what does it matter if the poor have to suffer? The presidency is an attractive prize and worth whatever cost the poor and working class have to pay to help them get to the Oval Office.
*Two of the other major candidates, Ted Cruz and Marco Rubio, prefer to decrease or eliminate tariffs. It’s hard to tell where Hillary Clinton stands. She has flip-flopped on the issue of free trade so often that it’s difficult to know where she has landed at any particular time.