Early Wednesday morning, major news networks reported that Donald Trump would win the 2024 presidential election. Now that the dust has settled, we can start to envision how the next four years might unfold.
Scioto Analysis usually focuses on state and local policy decisions. However, one significant national topic that will have an impact on pocketbooks across the country is President-Elect Trump’s proposal to raise tariffs.
Trump has called “tariff” the “most beautiful word in the dictionary,” while Vice President Harris has referred to his plan as the “Trump sales tax.” This discrepancy makes it easy to understand why many people are unclear about what this potential policy might mean.
A tariff is a tax on imported goods. Much of the debate in the media has focused on who ultimately pays this tax—whether it’s foreign nations or domestic importers (technically, importers pay the U.S. government). However, who writes the check is less important than who bears the actual increased cost.
In economics, we look at the tax burden to understand who ends up paying a tax. Even if importers pay the government directly, they can often raise prices to offset their costs. Fundamentally, a tax on producers and a tax on consumers are identical.
The actual cost to either party is based on how willing and able they are to substitute their spending into other categories. Classical economic theory tells us that the degree to which a tax is passed to consumers depends on the elasticity of supply and demand. The elasticity of a good tells us how much supply and demand respond to changes in prices. Essentially, whichever side is less dependent on the taxed good or service bears less of the burden of the tax.
Consider President George H.W. Bush’s ill-fated yacht tax in the early 1990s. This tax on luxury yachts aimed to raise revenue from wealthy Americans. However, yacht buyers—who don’t “need” yachts—easily redirected their spending to other luxury items when prices rose. Yacht producers, however, had a harder time pivoting, so the tax burden fell heavily on luxury shipbuilders instead.
When evaluating new tariffs, we shouldn’t focus solely on who sends money to the Department of Treasury but rather on which goods are taxed. Ultimately, American consumers are likely to face higher prices on items that rely on foreign imports. But this doesn’t mean tariffs are always a poor policy choice.
Since tariffs increase the price of imported goods, they can make domestically-produced goods relatively cheaper, potentially boosting domestic industries and creating jobs locally. If producing something domestically has positive side effects (like reducing pollution or increasing wages), a tariff might be sound policy. These benefits could be offset, though, by lower spending domestically due to higher prices caused by tariffs.
A tariff is just another type of tax. Taxes generally create distortions for the economy, but they raise revenue that can fund important public services. If, for instance, tariff revenue were used to fund an expanded Child Tax Credit, the benefits might outweigh the added costs.
At this point, all we know is that President-Elect Trump intends to raise tariffs. Exactly what these tariffs will look like and how the revenue will be used will be crucial in determining their real impact on the American people.