sanderstrumpImagine 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.

Economics in Christian Perspective: Theory, Policy and Life Choices

Economics in Christian Perspective: Theory, Policy and Life Choices

There is considerable debate in the public square these days about a number of issues that have significant economic components. Globalization, environmental protection, and aiding the poor are just a few. Decisions we make in our personal lives are influenced by our assumptions about economic realities as well. So how might mainstream economics connect with Christian values and principles?

  • John Brinkley

    What new tariffs has Bernie Sanders proposed?

  • Dan Gonzalez

    Terrible article, fit for a middle-high school classroom.
    1. “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” Nonsense, that’s not how prices are formed, a 45% tariff does not become a 45% increase in the price of every item. The producer could choose to lower its margins, new local competition could provide goods that are only 10% costlier (import substitution), etc.

    2. “Second, many people can’t seem to grasp that “taxes on producers” are taxes passed on to consumers.” Not necessarily, it depends on the elasticity of demand,taxes on unelastic goods (gasoline/milk) are mostly passed off to the consumer, taxes on products with a highly elastic demand (Blu ray players made in China) are mostly absorbed by producers.

    3.”politicians take advantage of the misperceptions and misunderstandings the American people have about economics.” People aren’t idiots,they see the free trade disaster every day, they see their towns dying, their companies relocating to MEX where pseudoslaves get paid the mexican 4 USD/day minimum wage, and those americans are getting laid-off by the thousands.

    4. “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.” The USA has a 500 billion USD trade deficit with the rest of the world every year (some 350 billion with CHN alone), do you really think that won’t have an effect in the unemployment rate in the US? or closed factories? or on the wages of manufacturing workers that have to compete with chinese/mexican/vietnamese slave labor?

    5. “Fifth, the average consumer in the U.S. simply has no understanding of how taxes on imports affects them” Maybe the average US citizen has a better innate understanding on how a Leontieff input-output matrix works, and they know that imports lower the demand for their labor and their income much more than imports lower the prices for what they consume, so their real wages are lower. I’ll trust the people in PA, Michigan and the rest of the rust belt to know better about their own economic woes than some guys at think tanks in DC and NYC.

    Pat Buchanan used to be a Friedmanite free trader in the 1970’s but evolved and became an economic nationalist in 1987, there’s hope for you guys :D

    • Marc Vander Maas

      “Terrible article, fit for a middle-high school classroom.”

      FYI, the average American reads at a 9th grade level. So that might make this an awesome article.

    • Roger McKinney

      No, this is standard college level economics and very accurate.
      #1. Yes, a 45% tariff will for the most part become a 45% price increase. You assume that producers have huge profit margins that they can play with, but in reality all manufacturers operate on very low profits per unit and have little room for price reductions. And so what if someone in the US could produce the same thing for 10% less? That means consumers are still paying 35% more than they would with free trade. Consumers would have to find that extra 35% somewhere, meaning they would have to give up a lot of other things, such as meals at restaurants, to pay for it. Tariffs not only hurt the producer of the good taxed, but the many producers in the US who would lose business as they lost customers trying to pay the higher prices.

      #2. I think you have the two backwards. Consumers are highly price sensitive (elastic) to necessities such as gasoline and milk. They are less price sensitive concerning about luxury goods. But they’re sensitive enough to prices that even with blue ray players the consumer pays most of the tax. Again, producers have thin margins and can’t reduce prices by much.

      #3. They see a few people harmed by free trade, which is always the case, because the ignorant media show them nothing else. What they don’t see is the vastly greater number of people free trade benefits. Economics has centuries of data to prove it, but journalist are too lazy to do the research.

      #4. Again, yes free trade hurts a small number of people directly, but it benefits the entire nation by a vastly greater amount.

      #5. The American people are unbelievably ignorant of the mass of data that shows free trade benefits them vastly more than it hurts a few people. They’re ignorant because our educational system and media feed them nothing but socialist propaganda.

  • Kevin Rahe

    I generally support free trade, but there are different ways of looking at this matter, and some important exceptions as well.

    For one, I agree with a tariff in situations where there is evidence of dumping – i.e. a government subsidizing an industry to the point that it can offer goods at prices that are unrealistic relative to its actual costs to produce them.

    Second, there is another alternative to the poor paying 45% more for Chinese goods, for example, to cover the cost of a tariff, which is to purchase 45% fewer goods. I honestly think that a good number of us would be no worse off without 45% of the junk we consume. In fact, we might even be BETTER off for it.

    • Roger McKinney

      Why would we care if say China subsidized our purchase of their goods, say iphones? They would be paying us to buy their products. That would make Americans wealthier so that they could buy more of other goods made in the US. Besides, China’s sales of stuff to us gives them the money to buy things we make, such as Caterpillars, wheat, cattle, jetliners, etc.

      Trade is a complex thing with many interactions and extended effects. The mistake most people make is fixating solely on the immediate and short term effects.

      Most of the things coming from China make life better and cheaper for the poor, such as cheaper clothes and phones. Putting a tax on those would hurt the poor without hurting anyone else. And with less money to spend, Americans would have to cut back on a lot of things they buy that are made in the US, such as restaurant meals.

      Besides, who gave you the right to declare what some people value to be “junk” or that people would be better off without any of it? Seems to me that only God has the knowledge and wisdom to do that. Other than God, people should be allowed to make that decision for themselves don’t you think?

      • Kevin Rahe

        They wouldn’t do that with iPhones, because we don’t make them here. If we did make them here and they did that, I would support a tariff because it would be a purely predatory move on their part, intended to do nothing but eliminate competition so they would have more power over pricing in the future. (Which of course is not “fixating solely on the immediate and short term effects” on my part.)

        • Roger McKinney

          If paying us to buy their products is predatory, then please prey on us all they want! Americans should not care where products get made. And no, they would have no pricing power in the future if they managed to destroy all current competition because as soon as they raised prices competitors would come out of the wood work.

          Yes, without a doubt, you are fixating on the short term, immediate effect of a few people losing jobs in the short term which you give more priority than the greater welfare of millions in the long run.

          I am concerned about manufacturing in the US shrinking. But it has nothing to do with China. The states and federal government are intent on destroying all manufacturing through high taxes and onerous expensive regulations. And they’re doing a good job!

          • Kevin Rahe

            Whether competitors would “come out of the wood work” depends on what’s involved in ramping up production of a good. In the case of something like oil production, I agree that an industry can rise from ashes rather quickly, which makes OPEC’s apparent strategy of trying to bankrupt the U.S. oil industry rather bizarre, and is the reason I wouldn’t favor putting tariffs on oil. But in an industry that requires large investments of capital or catching up with ever-advancing technology, I don’t think it’s so easy. Besides, you haven’t really identified a long-term negative effect of paying a fair price for a product vs. a price that is – at least in the near term – impossibly low. Adhering to dogma can be virtuous when it might determine whether you go to smoking or non-smoking when you die, but it’s rather more dubious when it merely involves the likely thickness of your pocketbook.

            I’m with you as far as the taxes and regulations being far too much, though.

          • Roger McKinney

            It’s not dogma. It’s the best economics available to mankind with centuries of empirical evidence. Calling science dogma is typical of people who don’t know and refuse to learn science.

            The harmful effect of charging a “fair” price for an imported good is that the “fair” price would obviously be higher than the market price and that would make people who buy it poorer.

            But you write as if you know for a fact what a “fair” price is. You don’t. The government doesn’t. No one does except the people who decide if they want to pay the price.

            The Church scholars of Salamanca determined in the 16th century, after centuries of debate, that the only fair, or as they called it, just price is one determined in a free market without coercion or fraud. And there is no single price that is just alone, but there exists a range of just prices depending on the buyers and sellers involved.

            Of course, I’m sure you think that’s just dogma, so let us hear your great wisdom about how you would determine what is a fair price.

          • Kevin Rahe

            “Absolutely no tariffs” is indeed a dogma, whether you want to think of it as such or not.

            >the only fair, or as they called it, just price is one
            >determined in a free market without coercion or fraud

            Now we’re getting somewhere. So, my question to you is, if a country subsidizes a particular industry to the degree that the selling price of a good that it produces is below the cost of the commodity/raw material that it – and everyone who competes with them – starts with, is that not in a sense fraud? And if so, is a tariff to counteract that fraud not then justified?