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Trade protection is a tax on consumers

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • Trade protection is a tax on consumers. Whether it is a tariff or a border tax, consumers pay the price for protection.
  • Who pays? Consumer taxes are rarely distributed equally. Different people have different consumption patterns; that means that a consumption tax will hurt some consumers more than others, depending on how it is structured. By looking at what is imported and how consumers spend their money it is possible to identify who will be most affected by a US protection tax.
  • A US protection tax on food hurts low income Americans more than high income Americans. A US protection tax on new cars hurts high income Americans more than low income Americans. Lower income groups spend more on goods and less on services than higher income groups, and are more vulnerable to trade protectionism taxes in almost any sector except new cars.
  • The same method shows a US protection tax against China hurts the American consumer more than a protection tax against Europe, and a protection tax against Europe hurts the American consumer more than a protection tax against Mexico. All consumers lose in any scenario – but it is generally lower income consumers who pay most for trade protection.