I understand that at the end of the day consumers pay for tariffs, but where does the money from those tariffs go?

Question

I understand that at the end of the day consumers pay for tariffs, but where does the money from those tariffs go?

In: Economics

Answer 1

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).