Twisted Tariffs

Between now and November, we can count on the major party candidates to make more proposals to better the economy than there are votes in the electoral college. But here’s one that no office-seeker is going to put forward: ‘Let’s tax consumers in inverse proportion to their ability to pay.  We’ll slap the lowest rates on the luxury goods purchased by the highest income households.”  No office-seeker needs to cam­paign for the introduction of such a plan— because it’s already the law of the land.

Without setting out to do so, the U.S. has instituted a tariff system that drains a higher proportion of income from low earners than it does from high earners. Turning on its head the justification for luxury taxes, the present setup imposes heavier duties on imported goods de­signed for the masses than it does on items targeted to the affluent.

A tariff not only acts and looks like a tax, it effectively is one.  After all, a tariff acts as a trade barrier that makes domestic goods more expensive than they would lie in its absence.

It might seem natural to assume that the federal government follows the princi­ple of progression in levying these taxes, setting higher rates for higher earners. Even if the majority of voters objected to such an arrangement as socialistic clap­trap, we would at least expect the rates to lit proportional—that is, equivalent per­centages for all income levels.

In fact, though, tariffs on consumer goods are regressive; the lowest earners pay the highest rates, in percentage terms.  For example, ordinary knit shirts made of synthetic fiber are hit with a 32% duty.  By contrast, customs officials collect a piddling 0.9% tariff on silk shirts favored by men with more disposable cash.  The rate for drinking glasses valued at less than $0.30 apiece is a hefty 28.5%. For consumer who can afford lead crys­tal glasses valued at more than $5.00 apiece, on the other hand, the tariff is only 3%.  The fork tariff is 15.5% on the stainless-steel variety valued at less than $0.25 each, while gold- or silver-plated forks have no tariff at all. 

How significant are the high-percent­age tariffs, which, after all, are imposed on comparatively low-dollar-priced items?  To people of modest means, the cost can he significant Edward Gresser of the Pro­gressive Policy Institute calculates that the average single-parent household, with annual income of around $27,000, spends about $1,900 a year on clothes and shoes. As much as one-fifth of that outlay, by Grasser’s estimate, represents bloating of prices through tariffs.

No politician ever advocated high tar­iffs on low-income people’s essential pur­chases and low tariffs on almost everything else.  It just worked out that way in general. American manufacturers of indus­trial items want to keep foreign markets open to their own products.  They accept low tariffs on foreigners’ goods as a neces­sary quid pro quo.  U.S. producers’ top-of-the-line consumer goods compete largely on brand name and prestige. Rather than price.  With little to gain from tacking a bit more onto overseas competitors’ prices, they don’t lobby for high tariffs.

The most determined seekers of tariff protection are manufacturers of small-ticket consumer goods, for which price competition is intense.  By accident the, rather than by design, the United States has developed a two-tiered tariff system.  Low-end consumer products get socked with an average rate of 10.5%. The rate on all other imported goods is 0.8%.

This might all make sense, at least to dyed-in-the-wool protectionists; namely, high tariffs on small-ticket consumer goods were preserving American jobs.  In fact, tough, the Progressive Policy Institute’s Greaser reports that employment in the high-tariff industries has plummeted by half since 1990.  Since 1992, the job loss in manufacturing of women’s shoes has exceeded 90%, even though no shoe tariff has been reduced since the l97Os.

A 2002 study by the International Trade Commission found that with employment already so low in the high-tariff industries, completely eliminating U.S. trade barriers would produce a net gain of 35.000 jobs.  That is, removing the tax burden of tariffs would create more disposable income and raise the economy’s output.  The new jobs generated would more than replace the few that would be lost in manufacturing of low-value-aided consumer goods.

Granted, total abolition at trade barriers is another proposal that no candidate is going to make this election season. Bu once the votes are in, the victors can then render the public a tremendous service by directing U.S. trade negotiators to pursue cuts in consumer-goods tariffs through multilateral agreements.  America’s regressive tariff system is an accident c history and political expediency, but that is no excuse for failing to rectify the error by conscious effort.