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    Home»Economy»Are tariffs a regressive tax?
    Economy

    Are tariffs a regressive tax?

    Press RoomBy Press RoomJuly 19, 2025No Comments2 Mins Read
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    I hear all the time that they are, but is that true?:

    There are two sides to this. First, we need to figure out how consumption differs by income. Here it’s pretty clear that lower-income people consume more goods which are traded, and the goods which they consume have a lower elasticity of substitution (Fajgelbaum and Khandelwal, 2016). Put concretely, this is because the poor consume fewer luxuries which can’t be exchanged for other goods. In practice, the distributional effects in the United States are particularly large, because even within relatively narrow categories of goods lower quality goods face higher tax rates. (Acosta and Cox (2025) attribute this to a peculiarity of trade negotiations. The within category rates were shaped by negotiations in the 1930s, after which we no longer negotiated individual items but instead shifted all items within a category by a fixed percentage).

    However, we need to take into account the effect of who gets more jobs. If it reallocates production to low-skill industries primarily employing the poor, then it may redistribute from top to bottom. Borusyak and Jaravel (2023) compare the two, and show that almost all of the redistribution is occurring within income deciles. Tariffs are costly to the consumer, and are indeed disproportionately costly to lower income consumers, but it does so by reallocating jobs to primarily lower income workers. Taking into account both effects, the distributional consequences of tariffs and trade are approximately nil.

    Here is more from Nicholas Decker.  These are the kinds of results that easily could be overturned by subsequent research (see the further remarks at the link), nonetheless at this time we probably should not be pushing regressive tariffs as established science or a firm conclusion.  I’ll say it again: the best (and very good) argument against the tariffs is simply that they set the government on the trail of a previously dormant revenue source.  That rarely ends well, though it is hard for non-libertarians to pick up this argument and run with it.

    The post Are tariffs a regressive tax? appeared first on Marginal REVOLUTION.



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