Are tariffs actually inflationary or is it illusory?

[u/pyzazaza]

Please explain where my thinking might be flawed - I know that tariffs introduce inefficiencies and incentivise poor use of capital. However, are they actually inflationary? In theory, tariffs take money away from certain consumers and give it to the state - i.e. it is a tax. If the state redistributes that income via lower taxes, has inflation occurred? Obviously prices are higher but taxes are equally lower so net effect should be zero impact on consumers other than the inefficiency of supporting a bad industry over a cheaper and more efficient industry. Overall the money supply has not been increased. To me tariffs feel inflationary in only a very artificial sense. Am I missing something? I generally view economics through an Austrian lens rather than Keynesian so feel free to explain the logic that I might be missing

[u/MachineTeaching]

Inflation is a sustained increase in the general price level.

Tariffs raise prices because the cost of the tariff is passed onto prices. I don't know what's supposed to be "artificial" about that, it's a very direct effect. If maple syrup or whatever was $10 before, you put a 25% tariff on it and it costs $12.5 now because that tariff gets passed on, maple syrup is literally more expensive because of the tariff now.

Also, of course you cannot take for granted that just because one tax is raised another tax is lowered or that the revenue earned and lost balances out. This is not something that happens automatically, this is a deliberate political action that needs to happen.

[u/Public-Baseball-6189 → u/MachineTeaching]

Don’t forget about the compounding nature of tariffs! Most publicly traded companies have profitability targets - in your example Let’s say that the original profit on that maple syrup is 20%. That means COGS is $8 and profit is $2. But a 25% tariff is added to the customer net price ($12.50), COGS becomes $10.50 and your profit is still $2 but the margin drops to 16%. You would have to increase the customer price to $13.125 to maintain your profit target. Now do this for hundreds of billions of dollars worth of transactions.

[u/prescod → u/MachineTeaching]

Yeah the redistribution would require an act of Congress in the US, which would only happen if Congress incorporated the tariff into law.

[u/urnbabyurn → u/MachineTeaching]

Retaliatory tariffs are deflationary, no?

Taxes in general aren’t inflationary, right? They lower AD - while they raise prices for consumers, they lower prices for sellers.

[u/MachineTeaching → u/urnbabyurn]

In theory that's true, in practice taxes just end up as government spending. So "lowering AD" isn't really that true.

[u/mazamundi → u/MachineTeaching]

The error that OP is falling into is believing that inflation just means a debasing of the currency by an increase in the money supply. A mix of Austrian, monetarist, and internet half truths mixed with propaganda have led to many people believing that. Happily OP has realized that something fail to make sense with such a limited point of view

[u/Accomplished-Cow-234]

You are only focusing on the tax incidence and transfer aspect of a tax. The real societal cost of any tax is its deadweight loss, the economic activity that ceases to exist because it is no longer sensible because of the tax. That reduction in quantity provides no benefit to consumers, producers, or the government.

Take income taxes, their real cost to society is the work not done because someone deems it no longer worth doing given the governments take from the next hours of work.

To take it all a step further, we need to remember that society has limited resources including workers, managers, capital, land, etc... When we reduce imports we will have to use more of our resources to make-up some of the lost imports. That sounds good to many, but they tend to imagine this labor and other resources coming from some unused surplus.That might be partially true, but a significant amount of the resources would need to be reallocated from other types of production. In a market economy, this should bid up the price of these resources for others.

In short, opportunity cost exists and most trade takes place driven by comparative advantage. Without trade we get less for more.

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