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May 13, 2019

With New Tariffs, Trump Hikes Taxes on American Small Business Owners — Again

Since I don't exactly live in the world's most crime-free neighborhood, I recently had to replace my house's 30-year old steel doors. They weren't cheap, but as I spoke with the salesman, he noted I had lucked out because their prices would be going up significantly in the near future due to new steel tariffs.

The company was unsure how just much this would impact sales and staff, but higher prices would naturally have a negative impact on revenue and hiring.

This, of course, is the expected result of a tax increase on American businesses — which is all the Trump tariffs are.

Now, thanks to the President — and the Congress which ceded its taxing authority to the White House — the tax burden on all Americans is going up even more.

Due to Trump's insistence that taxes go up as part of his so-called "art of the deal," consumers and businesses will now pay more for steel, bicycles, toys, luggage, and more.
Companies that use any of these products in producing a good or service will naturally be hurt — as will retailers whose main business is delivering retail items directly to consumers.
For example, as Reuters reported:
Sherrill Mosee, owner of Philadelphia-based MinkeeBlue, which sells work and travel tote bags for women on websites like Amazon.com Inc, said her company cannot absorb the new 25 percent tariff on top of the 10 percent tariff hike last year, which itself added to the existing 17.6 percent tariff on synthetic leather used to make her bags.
Mosee, who put in a new order for 1,500 bags from China just days before Trump announced plans to increase the tariff rate to 25 percent, said she plans to raise the price “a little” on the new bags, which are scheduled to arrive by early July.

Taxes are Not Simply "Passed On to Consumers"

It's important to keep in mind that taxes (i.e., tariffs) on goods are not simply something paid by consumers.

There is a common misconception that business owners can just "pass on to consumers" higher costs. In fact, while consumers certainly bear some of the brunt of higher costs imposed by governments (or other factors) it is rare that any business facing competition will simply jack up prices in an amount equal to the rise in the cost of doing business.

Mosee, the luggage merchant mentioned above, will only dare to raise prices "a little" because she knows every price hike on consumers will mean a loss of market share. Neither Mosee nor her competitors want to increase prices relative to the competition, so each business will attempt to absorb at least some of the extra cost themselves. Yes, some of the higher cost will be paid by the consumers, but much of it will also be paid by business owners who will scramble to economize in order to keep selling the same goods at a low price. This means the business owners and their families must accept a lower wage for themselves, or the business can but back on staff or cut benefits for employees. Otherwise, the business facing declining sales, which may end up leading to layoffs in any case.

Thus, when PBS reports, "U.S. retailers [must] decide between three options: absorb the cost of the tax, pass it along to consumers, or search for an alternative supplier from a country other than China," they're only sort of right. Yes, business could pass the cost along to consumers, but that if usually a prescription for lost revenue.

It's true that businesses can attempt to replace Chinese-made goods with imports "from a country other than China," but if those other places provided goods as economically as China does, merchants would already be buying those other goods.

By imposing new taxes, business owners must completely re-arrange their supply chains to deal with a completely unnecessary tax imposed by the US government.

This, of course, means little to the wage-workers who think tariffs are just a way to stick it to the bad guys (whether they be evil American corporations or the "Red Chinese"). Wage-workers, who make up 90 percent of the population, are usually quite unaware of what it takes to run a business and get goods from producers to consumers.

The "Seen vs. the "Unseen"

Trump supporters apparently continue to imagine that high taxes "create jobs" so long as those taxes are called "tariffs." This is only true so long as we don't consider "net job creation." Naturally, a tax on foreign steel, for example, will create some steel jobs.

That's the "seen." But what is "unseen" are all the jobs that were either lost or not created as a result of declining spending in other sectors. This is the result of every tax, including tariffs.

In fact, as Fox News reported,
For each new steel job created, the average U.S. consumer pays a staggering $900,000, said Gary Hufbauer, a senior fellow at the Peterson Institute; at best, that could create 8,700 jobs across six to eight steel firms.
In other words, consumers have less money to spend in the non-steel sector, and that means less job creation overall, and a declining standard of living for the overwhelming majority of consumers.
But even this won't convince those who insist on supporting tax hikes in the name of "winning" against allegedly unfair foreign tariffs.

The narrative they employ is one in which the administration's tax increase are only temporary, and the new taxes will be removed just as soon as all other countries buckle under US demands and remove all their own tariffs imposed on US goods. And they're all so sure this will happen so very soon.

But just how far away is "soon"? One year? Five years? From the point of view of a small business, a year is a very long time when it comes to making payroll, paying the rent, and planning for the future. The blasé and arrogant attitude of the administration and its supporters toward business owners in this regard is shocking indeed. It is essentially this: "you business owners should just accept declining income and shrinking sales for years so long as its in the service of Trump's grand plan.
And never mind the stagnant wages and lack of hiring that small business must impose on their workers in order to cope with the tax hikes.

In the real world, though, people can't stop paying their rent for six months or a year while the Trump administration works out its tariff strategy.

The fact that American tariffs are also unpleasant for Chinese firms is, I suppose, swell for nationalists who are more committed to hurting the Chinese than to helping the Americans. But the fact remains the nationalists are cutting off their noses to spite their faces, and the empirical evidence shows it.

In this recent study from by Mary Amiti, Stephen J. Redding and David Weinstein on the 2018 trade war, the researchers found "the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018."

And the picture is even more grim when retaliatory tariffs are considered, with this NBER report finding:
Annual consumer and producer losses from higher costs of imports were $68.8 billion (0.37% of GDP). After accounting for higher tariff revenue and gains to domestic producers from higher prices, the aggregate welfare loss was $7.8 billion (0.04% of GDP). U.S. tariffs favored sectors located in politically competitive counties, but retaliatory tariffs offset the benefits to these counties.
Meanwhile, the Trump administration has already admitted defeat in rural America where the administration approved new subsidies to make up for the fact far revenues are down as a result of the administration's trade war.

It's unlikely that any of this will hurt Trump politically with his base, though. Terribly economics often make great politics, and the fantasy that high taxes will make "America great again" is apparently very attractive to many.

Courtesy of Ryan McMaken vis Mises Institute
 
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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