Today, we’re diving into a hot topic that’s been a major part of recent economic and political discussions: Donald Trump and his approach to tariffs.

During his presidency, Trump took a bold stance on trade agreements, implementing significant tariffs on various imported goods, while particularly targeting countries like China.

These tariffs were part of his broader strategy to address trade imbalances and protect American industries from foreign competition.

But what did these tariffs really mean for the economy and for everyday Americans? In this article, we’ll explore their pros and cons. So, if you’re curious about the effects of politics and trade policies, stick around as we unpack the complexities of these issues.

Now, let’s get started!

UNDERSTANDING TARIFFS

First, let’s understand what tariffs are. Tariffs are charges imposed on imported goods and they affect nearly everything we buy from abroad.

For example, current tariffs on imported steel and aluminum yield $79 billion in revenue that supports and helps pay for our government. Trump’s idea was to potentially eliminate personal income tax and replace it with tariffs, which are essentially a tax on consumers regardless of their income.

This means that everyone, including retirees and non-income earners, would be taxed on almost everything they buy. Since the U.S. is the largest importer in the world, this could have significant implications.

To illustrate this point further, imagine you buy a car costing $50,000 with a 10% tariff, which would be the federal tax on this item. That would be an additional $5,000.

Then, we add state sales tax; here in Florida, where I am, it’s 6.5% and that comes out to an additional $3,250, but if the sales tax is on the car with the tariff added on, that would be an additional $3,575.

Between the tariff and state taxes, that brings the car’s total to $58,575. An increase of $8,575.

Under this proposal, you’d pay no income tax, but you’d be taxed on nearly all purchases.

BROAD TARIFFS

If you are in a state that pays no income tax, the following example will give you an idea of what this proposed legislation would do.

Next, imagine you earn $35,000 a year. Under the current income tax rate, you would pay the federal government $2,099 in federal income tax. But what happens when, we pay this a tariff instead of federal income tax.

Assume you spend $30,000 on goods that are imported:

– Clothing and accessories: $10,000
– Food and supplies: $10,000
– Household goods: $10,000

If you lived in a state with a 10% income tax rate, you would pay another $3,000.

With a 10% tariff, you’d be paying $3,000 in federal tariff tax and this is a replacement of federal income tax. Now if you add the state sales tax of $1,950, and possibly the state income tax, it starts to add up.

Now assume you make half a million dollars a year. As a single person, you will pay roughly $153,000 a year in income tax. Under the new tariff on imported goods, if you spent $300,000 in goods and services with a 10% tariff, that is $30,000, representing your new income tax. Imagine that you are that person making half a million dollars. Which tax would you prefer?

By highlighting the cumulative effect of layered taxation on the everyday consumer here, you can see how these combined taxes can strain budgets, making it even more challenging to afford essential goods and services. And as a certified accountant, I can stand to see people living under this kind of stress. I see it all the time.

When tariffs are applied broadly, they increase the cost of all imported goods, meaning consumers will pay more for a wide range of products.

To get an idea of what industries and products could be most impacted by tariffs. Here’s a list of the top five U.S. imports:

#1 – Electrical Machinery
#2 – Vehicles
#3 – Crude Oil
#4 – Pharmaceuticals
#5 – Plastics

LITTLE KNOWN FACT

Here’s a little-known fact. Did you know that 40% of U.S. households did not make enough money to have to pay any income tax last year.

And when it comes to broadly applied tariffs, these tariffs could be especially challenging for lower-income families or individuals struggling to make ends meet. Increased costs through tariffs can limit their access to vital products and services.

THE TOP 5 PROS OF TARIFFS

Now that we have covered some of the negatives of tariffs, let’s look at the flip side.
Here are the top 5 pros of trade tariffs:

#1 – Protecting Local Jobs and Industries. By imposing tariffs on imported goods, governments can make these products more expensive, encouraging consumers to buy domestically produced items instead.

#2 – Reducing Trade Deficits. Eliminating deficits can create a stronger U.S. dollar, which can be leveraged when buying goods and services.

#3 – Generating Government Revenue. Additionally, tariffs can generate significant revenue for the government, which can be used to fund public services and infrastructure projects.

#4 – Creating Trade Equality. Tariffs also provide leverage in trade negotiations, allowing a country to address unfair trade practices and negotiate better terms with trading partners.

#5 – Establishing Self-Sufficiency. Overall, when strategically implemented, tariffs can support economic self-sufficiency and enhance a nation’s financial health. In today’s unstable world, coupled with the supply chain lessons we learned from the Covid-19 pandemic, there’s some things we just don’t want to exclusively rely on other countries for.

This wraps up the top 5 pros for tariffs. Now, let’s get back to the cons.

THE BURDEN OF THE STATE

Have you considered the burden of the state, assuming the state will be handling the tariff portion of the sales? If tariffs, replace personal income taxes, states would need to adapt by collecting these tariffs as part of sales tax and remitting them to the federal government.

This shift would require significant changes to state tax collection systems, which traditionally handle only state and local sales taxes.

States would need to implement new processes to accurately track and distinguish tariff-related revenues from their own sales taxes, ensuring proper allocation and compliance.

This added responsibility could strain state resources, necessitating investments in technology and administrative capacities.

Furthermore, the complexity of managing these funds may lead to challenges in timely paying the government, impacting the overall efficiency of tariff tax collection and federal revenue.

TARIFF WARS

Lastly, and this is a big one, setting up tariffs can escalate into a tariff wars, where affected countries retaliate by imposing their own tariffs on imports from the initiating country.

This cycle of retaliatory tariffs can strain international trade relations and disrupt global supply chains, leading to higher prices for consumers and businesses on both sides.

Such trade conflicts can reduce export opportunities for domestic industries, hurting sectors reliant on foreign markets.

Moreover, the uncertainty and volatility caused by tariff wars can undermine investor confidence, leading to economic slowdowns.

As countries continue to escalate tariffs in response to each other, the global economy can suffer from reduced trade volumes, inefficiencies, and increased costs, ultimately harming economic growth and stability.

PRESIDENTIAL ELECTION

As for the election, candidates have varying views on trade policies. Some might propose increasing tariffs to protect local industries, which could further drive up inflation. Others might push for reducing tariffs to lower prices and ease inflation.

So, depending on the election outcome, we could see changes in trade policies that affect inflation rates and the overall economy.
With broadly applied tariffs, most items would likely increase in price. Given the current inflation, these additional tariffs could be burdensome.

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If you don’t already know me, my name is Sonia Narvaez. I’m a licensed CPA in Orlando, FL and wealth building strategist with over 25 years experience.

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