Question

Are the welfare effects the only concern when imposing a tariff? Are U.S. tariffs regressive?

Answer 1

Tariff impacts on the consumers of the importing country. As a result of the tariff, buyers of the commodity in the importing country are experiencing a decline in well-being. The rising in domestic prices of imported goods as well as domestic replacements reduces the amount of consumer surplus on the market. Tariff effects on producers of the importing country. As a result of the tariff, producers in the exporting country experience a rise in well-being. The rise in the domestic market price of their commodity raises the industry's producer surplus. The price increases can lead to an increase in the production of existing companies; an increase in revenue, compensation, or both to fixed costs.

The tariff effects on the government of the importing state. As a consequence of the tariff, the government receives tariff revenue. What gains from tax depends on how it is invested by the government. The tax is usually generally included as part of the general funds that the government collects from different sources. It is impossible to identify exactly who benefits in this case. These funds, however, help support many government spending programs that presumably help either most of the country's people, as is the case with public goods, or some worthy groups. Therefore, the likely recipient of these benefits is someone within the country.

Furthermore, it is also important to note that when there is a rise in national welfare, not everyone's welfare is that. Then, revenue is shared. Product producers and government expenditure recipients will benefit, but consumers will lose. Therefore, an improvement in social welfare means that the amount of the benefits exceeds the sum of the losses in the economy among all individuals. Economists generally argue that compensation from winners to losers in this situation could theoretically alleviate the problem of redistribution.

Through levying tariffs on thousands of products, the Trump administration has levied $42 billion in new taxes on Americans. Outstanding threats of introducing new tariffs could result in additional tax increases of up to $129 billion for Americans. Tariffs are regressive, with lower-income households having a higher burden. It is projected that the $42 billion of tariffs imposed so far will decrease after-tax income by an average of 0.30 percent. For households in the middle and lowest quintiles, this negative effect is more pronounced, reducing their after-tax income by 0.33%. It reflects a drop of $146 in after-tax income for taxpayers in the middle quintile.

A tariff's distributional effects (the economic burden on households across income levels) tend to be regressive, burdening households with lower incomes more than households with higher incomes. Tariffs are taken out of business income before they are allocated to variable resources (workers and capital) as payment. This creates a gap between what workers and capital produce and how much they receive; in other words, a gap between the price of the consumer and the price of the producer. Tariffs ultimately fall on production factors and lower taxpayers ' labor and profits from resources. It occurs either by raising prices or by lowering wages and profits from capital. Tariffs tend to be regressive because for lower-income taxpayers, the average shares of sources of income burdened by tariffs are higher.