Patterico's Pontifications


Trump Tweets, Boasts of Benefits of Huge Tax Increases

Filed under: General — Patterico @ 7:58 am


“I am very happy with a tax increase on American consumers and manufacturers.”

Who pays that tax increase? Americans, not China:

Economists have long know[n] that trade wars can be good for some countries (at the expense of their trading partners) if a country can apply a tariff that induces exporters to substantially reduce their export prices in order to maintain their market access. For example, if the reaction of foreign solar panel makers to the new 30 percent US tariff were to drop their prices by 30 percent, the US could gain because the foreign producers of solar panels would absorb the full cost of the import tax thus leaving the landed prices of solar panels unaffected and filling the coffers of the treasury with the tariff revenues. If foreign exporters do not drop their prices, however, then purchasers of solar panel prices will bear the full cost of the higher import taxes and also incur welfare losses as some choose less efficient means to generate electricity.

Thus, whether these tariffs are beneficial or not is an empirical question that we can now answer. In a recent paper, Mary Amiti of the Federal Reserve Bank of New York, Stephen Redding of Princeton and I analyzed the impact of the 2018 tariffs on the prices and import quantities of millions of import flows. The results clearly show that the costs of the import tariffs have landed entirely on US citizens. As a result, imports in targeted sectors have fallen precipitously as double-digit tariffs have been levied on our imports.

Through November 2018, US importers and consumers experienced $12.3 billion in added tax costs and another $6.9 billion from unrecoverable reductions in welfare arising from the tariffs forcing consumers to cut back on import purchases. Since many of these tariffs were only applied in October, the costs are mounting rapidly. By November 2018, purchasers of imports were paying $3 billion per month in import taxes and suffering another $1.4 billion per month in unrecoverable welfare costs. To put this into perspective, if we were to think that a successful outcome from the trade war would be the creation of 35,400 manufacturing jobs—the number of steel and aluminum jobs lost in the last ten years—then the welfare loss per job saved is $195,000, which is almost four times more than annual wage of a steel worker: $52,500.

Tariffs are similar to blockading our harbors (or closing our borders to the legal flow of commerce). Functionally, it’s the same: it prevents our citizens from enjoying the benefits of the division of labor. We blockade other countries’ harbors in wartime, knowing it will hurt them — but we functionally blockade our own in peacetime by imposing tariffs, brainwashed by ignorant populist propaganda into thinking that such a self-destructive act hurts the enemy.

[Cross-posted at The Jury Talks Back.]

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