Will the TPP require a tax hike on Americans?

June 02, 2016

by Michael Stumo

The latest rigged trade deal, the Trans-Pacific Partnership, will cut import taxes (tariffs) on imported goods. The recent US International Trade Commission report on the TPP (released 5/18/16) says that this will be $5.8 billion in lost tax revenue. Will this require a tax hike on US taxpayers? Or cuts in government? Or both?

Tariffs are taxes on imports. Michael Froman, the US Trade Ambassador, has bragged that the TPP will cut 18,000 tariffs.

On one hand... who cares? Most of those tariffs are on products we don't sell or don't sell much of. And we know that tariff cuts in the last 40 years have not helped us become a successful trading nation. Because we have bigger trade deficits and lost jobs.

But on the other hand... maybe we do care.  Import tariffs are paid by foreign sellers or importers. Not ordinary tax payers.  Losing that tax revenue means we have to make up for it or must cut government services.

In the 1800's the US had no income tax. We relied heavily upon import tariffs to fund the government.  In the 1900's we proceeded to cut tariffs throughout the entire century. Indeed, the dreaded Smoot-Hawley tariffs were less than our tariff earlier in the century. That tax revenue had to be made up, and it was made up by income taxes.

Ivory tower economists dusting off utopian free market behavior theories will argue that we get savings from tariff cuts when we buy imported products.  But importers and retailers generally do not pass on any savings to the consumer.  There may be a few highly competitive product markets where price is everything and there is perfect competition, but most markets do not have perfect competition so retail prices are set according to what the market will bear.

The upshot is this. If the TPP passes, there will be $5.8 billion less in US tax revenue which is currently coming from (relatively low) tariffs on TPP country products.  To put the number in perspective, this is about 2% of the $242 billion in corporate tax revenue collected in 2012.  So the TPP tariff cuts are equivalent to foregoing one out of 50 corporate tax collection dollars.

Will you and I have to make up the difference in tax revenue? Will we just increase the budget deficit?

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