Introduction

Tariffs are the smallest, most opaque, and probably least understood part of America's tax system. The public has little opportunity to see their cost in daily life -- tariffs on consumer goods, while often very high, never appear on department store receipts. The government publishes few statistics on tariff collection. And scholars and journalists have shown little interest in the subject. Writers on trade view tariff policy as old-fashioned drudgery, tax analysts consider it a trivial source of revenue, and social policy analysts have ignored it completely.

But the tariff system is well worth a look. Examined closely, it is remarkable -- a tax that hits poor families hardest, fails to protect jobs in light industry, and can be reformed at little cost with large benefit to the poor.

To see why, one can imagine a group of workers at a hotel. The hotel vice president, an unmarried recent MBA, makes a salary of $110,000 per year. Her secretary is a young, single mother, earning $25,000. And the maid cleaning their hallway, also a single mom, left the welfare system two years ago to begin a minimum wage job.

Each of these women pays four major federal taxes: income taxes, payroll taxes, excise taxes, and tariffs. The largest of these, the income and payroll taxes, raise $1 trillion and $700 billion respectively, and make up the bulk of taxation on the vice president. The tariff system, bringing in less than $20 billion a year, is the smallest tax, but places a hidden and surprisingly heavy charge on the secretary and the maid.

Table 1 (available in the full text of this report) estimates the annual tariff expenses for each of these three workers and a typical two-parent family. Using a selection of high-tariff consumer goods -- shoes, kitchenware, household linen, cutlery, jewelry, cars, and a few other items -- the table combines the cost of goods for high-income families, typical two-parent families, and single-parent families from the Bureau of Labor Statistics' (BLS) Consumer Expenditure Survey, with the data on tariff rates applied to these goods from the International Trade Commission to approximate the total tariff bill for these families. Expenses for welfare leavers, not available from the BLS, are estimated based on a formula assuming a constant rate of decline in spending on the selected goods and falling family incomes.

The data shows that each year the secretary loses three days' pay to tariffs -- twice as much as the vice president. The maid likely loses a full week's pay.

The reason is simple: Tariffs are highest on the goods important to the poor. The trade agreements and bills of the past 25 years have sharply cut tariffs on luxury products and industrial inputs. But domestic industrial lobbies have fought hard and usually successfully to keep tariffs on cheap consumer goods high. The result of these bills is that as a percentage of total revenue, tariffs are now lower than at any time since at least the 1950s and perhaps ever; but on a few products, most of all shoes and clothes, the tariff system has changed little since the 1960s.

Therefore, shoes and clothes make up only one-fifteenth of America's merchandise imports, but bring in almost half of America's annual tariff revenue. In comparison to other major expenses -- education, transport, entertainment, and so on -- these goods are relatively small expenses for middle-class and wealthy families, but very large expenses for poor families with children.

This is why tariffs now hit maids and secretaries harder than company vice presidents -- the more the tariff system raises money from shoes and clothes, therefore, the more it becomes something like a large excise tax on necessities especially important to the poor. Its regressive nature is especially striking in comparison to other federal taxes. As Table 2 shows, tariffs appear at least on average to be the only major tax in which effective rates rise as incomes fall. (See Table 2 in the full text of this report.)

Overall, therefore, income taxes are fairly progressive; payroll taxes and excise taxes are more regressive, but the creation of the Earned Income Tax Credit gives poor families a way to offset at least part of the payroll tax. The effective tariff tax rate, in contrast to all other taxes, escalates rapidly for poorer families and has no offsetting credit comparable to the EITC.