Wednesday, April 05, 2017

If Trump Imposes a 15% Tariff, What You Pay in Taxes for an Import Will Be More Than 15%: Here's Why

Stuart K. Hayashi

If Donald Trump imposes a 15 percent tariff on items imported from China and Mexico, you will actually pay more than 15 percent in import taxes on each item.

The reason for this is that the tariff is not a tax that the customer, at the retail level, pays directly to the government. Rather, a vendor on the supply chain is the party that pays the tax directly to the government. In turn, that vendor passes the cost of that tax onto the customer. When the customer pays the tax indirectly, through the intermediary of a vendor, what the customer pays in taxes is in excess of the stated tax rate.

The difference can be explained by the difference between sales taxes and Hawaii’s general excise tax. A sales tax is charged only at the retail level, and the customer -- not the vendor -- pays it directly. Suppose you go to the store and pay for a one-dollar item, and the sales tax is 15 percent. You, as the customer, give $1.15 to the store. The store owner takes $1 for herself and then logs the 15-cent tax in a separate book.

Hawaii is different from most states in that instead of a sales tax, it has a general excise tax (GET). This is charged not merely at the retail level but on every level of the supply chain. However, even if the GET were charged only at the retail level, a 15 percent General Excise Tax would still cost the customer more money than would a 15 percent sales tax. This is precisely because the GET is paid directly by the vendor instead of the customer, and therefore the customer pays it indirectly.

Suppose I am a store owner and I want to obtain $1 for an item that you purchase from me. If I charge you only $1 for it, I will be taxed 15 cents on it and be left only with $0.85 for it. I want to obtain all of the $1. Therefore, I charge you what is called the rollover rate. When you want to purchase a $1 item from me, I charge you $1.18 for it. When I pay a 15-percent tax on that $1.18 I obtained from you, I pay 18 cents in taxes and keep the $1.

Thus, we see the following: if you as a customer are charged directly a 15 percent sales tax, you pay 15 cents in tax for a $1 item. If the vendor is charged directly a 15 percent tax, you pay 18 cents to account for the tax on a $1 item.

Because it is a vendor on the supply chain who pays the 15 percent tariff -- as opposed to the customer at the end of the supply chain paying it -- the customer will end up paying more than 15 cents on each dollar for the import.