You're tariffing me apart, Lisa

Raising revenues in the government isn’t easy. You have to sell the public on the idea they’ll pay for most of it, if not all. Finding avenues outside these means would be preferable, but reality makes suggestion otherwise an exercise in wishful thinking. More often than not, Paul is getting a break because Peter paid the bill. I show how these tradeoffs work, and who ultimately pays the prices along the way.

States have a mix of income, sales, school, and property taxes to offer incentives one way or another, but collectively, most are in the same ballpark.

The range below shows collective tax burden as a % by state. The average is 8%, where most stay in orbit within a % or two as covered by WalletHub. This says nothing of the services distributed in return, but competition keeps most states within the same neighborhood.

This plays just as well on a global scale, and especially when it comes to trade. A tariff is a tax doled by a government on another country or trade group versus it’s own citizens. A global sales tax, if you will. In either situation, the house(hold) pays ultimately. The distribution may be different, but the way prices travel reaches us ultimately because we are all the ultimate buyers.

The way that helped me understand this was to model it. I took the case of a U.S. produced car and your choice of foreign car. This is simplified for how prices are made and paid. The U.S. base cost is likely higher, but it doesn’t have prior duties and international logistics to contend with. Many brands sell at home and abroad, so they face a mix of settlements.

In all, once the car is off the line or RoRo vessel, other rounds of taxation and domestic distribution margin pile up to a sticker price. In every case, the invoice will grow by adding a tariff. When a tariff is applied to inputs, imports, and country-of-origin collectively all three invoices will rise initially. The U.S. producer won’t face the full force, but costs are costs and you can’t cut when the tide’s rising. The latest S&P Flash PMI shows this happening at input and output levels in the report out last Friday. Not at the same pace, but both go up in anticipation.

The others will absorb the tariff on the logistical end -adding to the invoice cost. This is where U.S. buyer 1 enters. They are a domestic dealer or distributor, and they usually buy in bulk. New inventory comes from the line or abroad into dealer lots. This work warrants a spread over the invoice, atop any taxes and admin costs doled out to the county or state where Buyer 2 eventually drives off the lot. DDP is where a foreign seller does it all and pays up to the initial invoice before going to the ultimate buyer.

If both domestic and foreign cars have higher invoices to start, the dealer can’t hold to the old prices. The choice is then to cut margin or pass this on as well. Too many jump to call this greedy while walking into a job with its own targets and incentives that do not align with overall preferences all the time. If they take the deal for moral reasons that’s all well and good until the business becomes insolvent on 1% gross margin or else spam every customer with extras.

If a U.S. dealer is spared this dilemma because it was assembled here, and local competitor’s prices rise, the gap will also close by competitive forces from other U.S. sourced dealers. Many foreign brands also assemble here, so although their operations may try to make more cars here at first, any drags to these companies sales will affect their ability to invest further.

Foreign plants sloughing off workers costs U.S. jobs even if the goal is to have more homegrown autos. To any extent the U.S. automaker can gain domestically, their sales abroad will suffer by any retaliation or stronger currency.

Buyer 2, you and me, have been left aside until now because we’re ultimately downstream these decisions and their affects. Sticker shock nonetheless arrives on a couple fronts. First, any invoice that goes up will have a higher nominal tax charge. $1,000 at 10% is $100 while $1,100 at the very same 10% is now $110. It would be equivalent to a 1% lift in the tax rate. Peter and Paul again.

The dealer can and may offset their margin % to not have the prices go but so high, but there’s a band of resistance against dipping too low to hurt the business also. The end result is a higher price paid by Buyer 2 than would otherwise, with inflators along the way.