Tax Day: The biggest tax rise in decades isn't in the tax code

The Yale Budget Lab estimates that the administration's tariffs have raised the effective national tax rate by about 22 per cent. That makes them the biggest increase in federal revenue in modern history, and the House Ways and Means Committee never voted on it. Tax Day was a good moment for companies and households to notice. The tariffs work like a large and regressive national sales tax.

The figure measures the average duty on everything America imports, after the latest round of changes. At the start of the year that rate was below 3 per cent. The increase comes from a stack of measures introduced in barely three months: a 10 per cent baseline tariff on almost all partners, 145 per cent on most Chinese goods, and 25 per cent on steel, aluminium and cars, with many car parts to follow in May. Some of these are paused, exempted or under negotiation, so the rate could move sharply in either direction.

How Congress lost the pen

The Constitution gives Congress, not the president, the power to lay duties. For most of the country's first century and a quarter, tariffs were the main source of federal revenue, until the income tax arrived with the Sixteenth Amendment in 1913. Over the twentieth century Congress delegated much of its authority over trade to the executive, first to negotiate tariff cuts and later to act in emergencies or on national-security grounds.

The current tariffs rest on those delegations. The duties on steel, aluminium and cars use Section 232 of the Trade Expansion Act of 1962, which allows tariffs to protect national security. The reciprocal tariffs and the duties on China, Canada and Mexico invoke the International Emergency Economic Powers Act of 1977, a law never before used to impose tariffs. Legal challenges to that use have been filed, and their outcome will decide whether the largest part of the new tax survives.

A sales tax paid at the port

Income tax rates have not changed on paper. Import duties, though, are an indirect tax on consumption, collected at the port of entry. A tax on corporate profits rises and falls with how much a company earns. A border tax has to be paid whether or not the business is making money. Lower- and middle-income households spend a much larger share of their income on imported goods, appliances and clothing, so the burden lands hardest on those least able to carry it.

The regressive effect follows from how households use their money. Richer families save a larger share of their income and spend more of what they consume on services, such as travel, restaurants, education and financial advice, which tariffs do not touch. Poorer families spend most of their income, and much of it on goods such as food, clothing, furniture and electronics. A tax on imported goods therefore takes a bigger bite, as a share of income, from a household at the bottom than from one at the top, much as state sales taxes do.

Importers pay before they sell

For companies, tariffs take cash out of working capital straight away. Importers must pay the duty to US Customs and Border Protection within ten days of a ship's arrival, well before the goods are processed, shipped out and invoiced.

That timing hurts smaller businesses most. A large retailer can finance the duty from its own cash or cheap credit lines and spread the cost across thousands of products. A small importer may have to borrow at high rates, cut orders or raise prices immediately. Because the tariff becomes part of the cost of goods sold, it reduces taxable profits and so the corporate income tax that companies pay, which means the net revenue gain to the Treasury is somewhat smaller than gross customs receipts suggest.

A budget built on duties

The fiscal politics matter. Congress has just adopted a budget framework intended to extend the individual tax cuts passed in 2017, which are due to expire at the end of this year. The administration argues that tariff revenue can help pay for them. If it does, the overall effect is a shift in the tax system: lower income taxes, which mostly benefit higher earners, financed in part by a consumption tax that falls more heavily on lower earners.

That shift has no clear precedent in modern American fiscal policy. Other rich countries raise large sums from consumption through value-added taxes, but those apply to domestic and imported goods alike and are paired with welfare systems designed to offset their regressive effects. A tariff applies only to imports, which also shields domestic producers from competition and lets them raise their own prices without any of the extra money reaching the Treasury.

The case for the tariff

The strongest counterargument is that foreign exporters, not American buyers, will absorb much of the cost by cutting their prices or accepting a weaker currency. The evidence from 2018 and 2019 does not support that: studies found that American importers and consumers bore almost all of the cost. The dollar has also weakened this year rather than strengthened, which makes imports more expensive, not less. If the tariffs are negotiated down during the 90-day pause, the tax rise will shrink, though the uncertainty itself has costs.

Watch the monthly Treasury statement for customs receipts, goods prices in the consumer price index, the court challenges to the emergency-powers tariffs, and whether Congress writes any tariff revenue into its budget arithmetic. A ruling against the use of emergency powers would strip out the reciprocal duties and most of those on China at a stroke, leaving the Section 232 tariffs, which rest on firmer legal ground, and raising the awkward question of whether importers could reclaim what they have already paid.

Washington has imposed a 22 per cent consumption tax without passing a law, moving money from households and company treasuries to the federal government, and lower-income shoppers will probably feel it most as the year goes on. The first clear signs will be higher goods prices in the inflation figures by early summer and rising customs receipts in the Treasury's accounts, while the courts, not Congress, decide how long the tax lasts.