I understand that at the end of the day consumers pay for tariffs, but where does the money from those tariffs go?
In: Economics
A tariff is a tax by the government on the goods that are imported. Like any tax, it goes into the government’s treasury.
The companies who import the goods pay the tax. Since these people are usually importing goods for resale, they are likely to pass the cost of the tariffs along to consumers in the form of higher prices (instead of letting it eat into the company’s profits).
The idea behind tariffs is to discourage domestic companies from importing products and parts from foreign countries by making it more expensive to do so. The hope is that those companies will buy those products and parts domestically.
The problem with that theory is the world doesn’t really work that way anymore.
For example, a 100 years ago you could only get tomatoes during the summer because that’s the season they grew in. You were limited to what grew locally and in season. Shipping & refrigeration technology didn’t allow you to move tomatoes hundreds or thousands of miles. Today you have dozens of varieties of tomatoes year round because even when it’s not tomato season in the US, it is somewhere else in the world and you can get your tomatoes imported.
Adding tariffs to imports, though, doesn’t change that. Tomatoes won’t suddenly grown in the winter because of tariffs. So you’ll either pay more for your year-round tomatoes or not have them at all, because the domestic options *cannot* meet the demand.
The same is true for non-agricultural industries. The US imports 3-4 times the amount of steel that it produces. Even if the domestic steel industry *wanted* to, they don’t currently have the capacity to provide for the demand and (assuming the necessary raw ore deposits aren’t tapped out or prohibitively expensive to mine) it would takes us years to ramp domestic steel production up to levels to meet US demand. Meanwhile, prices go up because of tariffs.
The world is too interconnected for trade isolationism to be an effective diplomatic cudgel in the 21st century.
They go to the government. The government could earmark those funds for specific purposes if they wanted to, but in general they just go into the government’s general fund.
When you think of earning and spending money, you think of dollar bills going in and out of your wallet. This is how people, families, companies, states, and foreign countries deal with money – they can only spend money they earn, or borrow someone else’s money to spend. If you have $100 and you can borrow $100, you can’t spend $1,000,000.
The federal government doesn’t follow the same rules. Remember, the government prints money! They’re allowed to manufacture money and spend it or lend it to someone. Every single dollar on Earth started out this way – the Treasury printed the dollar and gave it to someone to spend. At any time, the government could print $1,000,000 and spend it.
That said, printing money causes problems. The more money there is, the more money companies can charge for things. If the government prints too much money, it causes inflation – prices rise so far that people can’t afford to buy anything!
So, the government is allowed to destroy money. This is exactly what happens when you pay taxes to the IRS or pay tariffs. That money goes straight into a furnace and gets obliterated.
But, destroying money allows the government to print that much money, and spend it however it likes, without causing inflation. If the government collects a trillion dollars in tarriffs and taxes, it can spend a trillion dollars repairing roads, arming the military, funding art and science, issuing loans to companies and allied countries, or whatever, without causing inflation.
So, the short answer is that the tariffs go straight into the shredder. The goal isn’t to collect money to spend somewhere. Tariffs make imported products more expensive, to encourage citizens to buy domestic products instead.
Tariffs are often linked with increased spending on national infrastructure and enterprise grants. Hopefully, the extra resources that the tariffs allow the government to spend help make domestic products cheaper and better.
But don’t forget, the government doesn’t need to collect the tariffs to give out those grants. They could raise the money through taxes, reduce spending in another area, or simply allow some inflation. They also don’t need to spend more – they could leave that money destroyed to deflate the dollar and increase its buying power.
Another important note: A consumer only pays the tariff if they buy a product directly from a foreign country and import it themselves. If an importer, distributor, or manufacturer imports the product, they pay the duties and it’s up to them whether or not to pass the cost on to the customer. They’ll often just eat the extra cost – it’s so ridiculously cheap to import some products that the operation is still profitable.
An important addendum to all of this is that even though the government spends the tariff revenue on things, perhaps even things you really like, this does not erase some of the ways that consumers (and producers) “pay” for tariffs. Inserting the tariff/tax “wedge” into the market causes some trades not to happen. Let’s say I was willing to buy a widget from you for $10, and you were willing to sell a widget to me for $10. We could both walk away from that trade better off than we started. If the government imposes a tariff on our trade, it might mean that we can no longer find a mutually agreeable price, so the trade does not happen, and neither of us gets the benefit.
This is kind of an unavoidable feature of taxation, and getting any money into the hands of the government is going to entail destroying some trade like this. All in all, it’s probably best to think of it as two separate problems: (1) What government spending is important enough to distort markets for and (2) Which markets are best to distort. Tariff policy is mostly about (2).
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