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