Political junkies had scarcely erased their sleep deficits from the 2002 election before people began to suggest policy agendas for the new Republican majority.
Most observers predict that cutting federal taxes will be high on the list. That would include abolishing the estate tax, eliminating double taxation of corporate profits paid out as dividends and making earlier Bush administration tax cuts “permanent” — whatever that means in a country where we elect a new Congress every two years.
I personally don’t see these tax changes as particularly important in improving either the efficiency or justice of the U.S. economy, though I agree that taxing dividends does create economically perverse motivations for businesses. Nor do I see the Republican victory in 2002 as evidence of a deep popular mandate for tax overhaul.
But the voters have spoken, and Republicans will have majorities in all branches of the federal government come January. All I can do right now is suggest one addition to the various tax cuts.
The new Republican majority could act to counter Democratic claims that their tax cuts overwhelmingly benefit the richest 10 percent of all households by cutting import tariffs on clothing and other consumer items.
These taxes are the most regressive ones levied. While they no longer raise significant revenue for the federal government — consider that all import tariffs amount to a paltry 1.6 percent of total Treasury revenue — they are a significant burden for poor households.
Import tariffs brought in $18.6 billion in 2001 — about what we would spend each year on agricultural subsidies under the new farm bill; nearly half of that revenue came from taxes on shoes and clothing, even though these account for less than 7 percent of the value of all imports.
The lopsided economic impacts of U.S. tariffs on consumer goods are beautifully presented in an article titled “Toughest on the Poor,” in the November/December issue of Foreign Affairs.
Author Edward Gresser notes that import tariffs are regressive not only in the way that state sales taxes are –- because the poor spend a higher proportion of their income on taxable purchases than do the rich — but also because the kinds of products used by poor people face higher tariffs than those used by the wealthy.
For example, silk women’s underwear pays a tariff of 1.1 percent while otherwise identical synthetic garments pay 16 percent.
Inexpensive drinking glasses face a 30 percent tariff while expensive leaded crystal is taxed at only 3 percent.
Men’s knitted shirts are subject to a 1.9 percent tax if they are silk but 20 percent if cotton and 32.5 percent if they contain some synthetic.
In 2001, we imported 16 million pairs of shoes that cost less than $3 per pair. Virtually all were inexpensive sneakers for small children. The tariff rate was 48 percent. For fancy men’s leather shoes from Italy, the charge would be 5 percent.
The upshot is that half of all tariff revenue is charged on shoes and clothing bought by lower-income people at stores like Kmart or Pamida, and not on items sold at Nordstrom or Marshall Field.
Gresser estimates that these high taxes on inexpensive clothing and shoes cost a single parent with a $25,000 income some $400 per year.
Households with much higher incomes pay a fraction of that amount. No other tax in the United States is as regressive as this largely unknown tax on clothing.
Such import tariffs on inexpensive apparel also have a perverse effect on which exporting nations face high tariffs. Wealthy countries such as France, Italy and Ireland export goods to the United States that are subject to very low tariffs. Low-price clothing comes from poor countries such as Nepal, Bangladesh, Cambodia and Malaysia.
As a result, the United States charged $331 million in customs taxes on $2.35 billion in exports — mostly clothing — from Bangladesh. France exported 14 times as much, more than $30 billion, but total customs duties on French goods were $1 million less than those on Bangladeshi shipments.
Per capita gross domestic product in Bangladesh is $370 per year, and we charge an average of 14.1 percent on their exports. In France, the comparable figures are $22,600 per year in GDP and 1.1 percent on their exports.
Nepal and Ireland make an even more extreme comparison. Nepal exported $200 million in goods to the United States in 2001. Ireland shipped $18.6 billion, or 93 times as much. But both were charged about the same total in customs duties — $25 million for Nepal and $29 million for Ireland.
It is hard to avoid using theological terms like “iniquitous” to describe a system that imposes sharply higher taxes on goods produced by the poor and used by the poor than on those produced by the rich and used by the rich.
Our tariffs on consumer goods flunk the economic efficiency test and they flunk the fairness test just as badly. Democrats should join the majority Republicans in getting rid of them.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.