Gary’s Economics: The week Trump nearly crashed the world economy
Tariffs are a form of regressive taxation.
- Tariffs are a tax on consumption. These are VAT in Europe and “sales tax” in the USA.
- Marginal propensity to consume: the richest people spend a smaller proportion of their income, poorer people spend a higher proportion of their income. Therefore, if we tax people on their spending, the richest people will get taxed at a lower rate.
- Since marginal propensity to consume decreases as one’s income increases, taxes on consumption (tariffs, VAT / sales tax) tax a smaller proportion of one’s income the greater their income. In other words, consumption taxes disproportionately affect poorer people.
- The greater financial burden of tariffs will be seen in higher prices of goods— aka inflation.
Trump’s admin applied the highest tariff rates on the poorest countries because they applied the highest rates to the countries with the largest trade surpluses with the USA.
- This was applied to poor countries like Cambodia, in a theoretical attempt to move some of the harshest jobs in the world (e.g. sweatshops) back to the USA. It doesn’t really make sense, and would harm the people eking out an existence by selling to the USA.
There is some logic to tariffs. For example, one could make the case for applying tariffs to Japan to bring some of those jobs back to the USA. However, their indiscriminate application of tariffs points more to incompetence.
People were concerned the USA wasn’t going to pay the debt back. So, people started selling their US bonds. “If I had US bonds, I would have sold them. I wouldn’t want to be owed by the US government now.”
- If this had got out of control, this could have led to the bankruptcy of the USA, which would have made 2008 a walk in the park.
Most of the time, your best off not listening to Trump, because he’s intentionally trying to destabilize you and make you panic.
It looks like rich Americans are trying to squeeze out rich foreigners, at the expense of both poor Americans and poor foreigners.
Rich people bought a lot of stocks last week during Trump’s tariff fiasco.