Render Unto Caesar

You need not look any further than the family bible on your bookshelf to learn that taxes have been around for thousands of years.  Our country was income tax-free for most of our early history; mostly as a consequence of the absence of a federal government to establish such a tax.

Nevertheless, the early colonists were subject to real estate and head taxes imposed by their British overlords.  Additionally, the Sugar Act (1764) levied duties on imported goods such as textiles, wine, coffee and sugar.  The Currency Act  (1764) caused a precipitous decline in the value of colonial paper currency and the Quartering Act (1765) required colonists to billet and supply British troops in response to the costs of defending the empire following the French and Indian War.  

As school children we learned about the infamous Tea Tax that led to the Boston Tea Party.  It was the cumulative resentment over taxation without representation that was the largest contributing factor leading up to the revolution and break with British rule.

Following the Revolutionary War the Constitution gave Congress the authority to impose taxes and other levies on the general public.  The federal government was funded largely by excise taxes and tariffs imposed on specific goods or services such as alcohol and tobacco and other imported goods.

For a brief period during the Civil War an income tax was levied as a supplement to funding the war effort while almost every commodity possible was subject to an excise tax. Congress repealed this income tax in 1872.

Time passed, and with the rise of the Progressive Movement eventually led to the establishment of the 16th Amendment to the Constitution authorizing Congress to impose a federal income tax. Effective in 1913 rates started at 1% and with a large personal exemption the tax initially applied to only 1% of the population.  In a few short years the new income tax was a principle contributor to funding the costs of the first World War.

Yet I digress.  That's more of an intro than I initially bargained-for; perhaps one day we can take a deeper dive into our country's history of taxation.

Inasmuch as another Trump Trade War begins today between our friendly neighbors to the north and south - Canada and Mexico - the tax subject of the moment is tariffs.  A 25% tariff on imports from our two largest trading partners goes into effect today. 

China is subject to a smaller 10% tariff.

What is a tariff?  A tariff is a tax on imported goods. In his first term the President frequently reminded us that; China is paying us billions of dollar in tariffs.  Despite what the President says this tax on imports is almost always paid by the importer (a domestic company) and never by the exporting country.  

If the US imposes a tariff on a Chinese appliance the duty is paid to the US Customs and Border Protection Service at the border by the broker representing a US importer - take your pick of any Big Box store who retails appliances

China pays nothing; just like the US government pays no tax to France when exporting Kentucky bourbon whiskey.  The French importer pays the relevant duty; ironically a legacy of the unpleasantness of Trump trade wars during his first term of office.

Are you with me so far?

The importer remits the tariff to the relevant nation's customs service but who ultimately pays it depends.  If possible the business will pass the cost on to consumers.  In the instance of the Kentucky bourbon a French consumer is basically stuck with the increase in price as there is no other global competitor for Kentucky bourbon.

In the instance of the Chinese appliance the price may rise rapidly.  But there many other countries (here and abroad) that will sell a lower cost appliance.  In some instances the tax is absorbed by shareholders in the form of reduced profits or by workers in the form of lower wages.   If it is a domestic firm nobody pays a tariff.  Nevertheless, the tax on imports won't go to zero immediately; the government will collect some revenue until markets adjust.

Tariffs have been around for as long as there has been trade between nation states and what is a reliable constant is that initial higher prices will reduce consumption.  Over longer periods of time reduced competition can result in domestic companies becoming inefficient.  In the absence of competition this can lead to higher prices; not just for goods subject to tariffs but those of domestic origin too.  I've blogged about this before, an unintended consequence is not only will the price of Chinese appliances rise, but so will the price of domestically-manufactured appliances.  

What we learned from Trump's first term in office is that with the imposition of tariffs US prices will rise and demand will fall.  Chinese exports to the US will fall and will likely be replaced by imports from competing nations.

Today, the latest chapter to the story is that new tariffs will result in a windfall in federal revenue.

Nope. In the context of $4.4 trillion of federal revenues import taxes are insignificant; the equivalent of loose change in the federal sofa cushions.  Furthermore, this revenue is fleeting and unreliable. Importers will naturally find suppliers not subject to tariffs.  The higher prices imposed on consumers are likely to persist.

Again, the Law of Unintended Consequences suggests that a large decline in Chinese exports to the US will drive down the value of the Chinese currency; offsetting  some of the rise in price.  Consequently, a reduction in sales can result in a reduction of purchases of our Treasury securities by China.  Which may push interest rates up.

The bottom line is that the interplay of tariffs on trade can be complex stuff and can result in unintended outcomes; thanks for staying with me.  It's early in the game for the second coming of Donald Trump so I'm staying out of trouble and not making any predictions.  

The least complex takeaway is that China won't be paying us billions of dollars in tariffs anymore than we are paying France to import Kentucky whisky.  If you believe anybody that tells you otherwise I gotta bridge I want to sell to you.  

To the extent tariffs are the new sanctions regime to negotiate for better terms on an unrelated matter we'll just have to see how that plays-out.

Stay tuned and have a terrifically taxed weekend....