As a rule, President Donald Trump does a thorough job of claiming every conceivable extravagant achievement for his policies and then some.
But he’s failed so far (I think) to boast of the amazing educational outcomes of his trade wars.
Trump’s imposition of punishing tariffs (aka taxes) on foreign goods exported to the U.S., notably from China, has abruptly opened the eyes of progressive America to an essential truth about the way taxes work — particularly taxes on businesses — that liberals formerly seemed to have occasional difficulty grasping.
To wit: A New York Times news story reprinted in the Star Tribune last week described how Larry Kudlow, Trump’s “chief economic adviser,” had admitted “that U.S. consumers will bear a burden from the escalating trade war with China, contradicting Trump’s claim that his tariffs are a multibillion-dollar, one-way payment by China to the U.S. Treasury …
“ ‘In fact, both sides will pay,’ Kudlow said in an interview on Fox News. ‘Both sides will pay in these things.’ ”
But of course, the Times added, “Kudlow’s acknowledgment was merely a recognition of Economics 101.”
Ah, yes — Economics 101. What could be more elementary to deep economic thinkers than the reality that taxes imposed on the makers and/or sellers of goods are not merely paid by the enterprises themselves (Chinese export operations, say, and U.S. importers) but are passed on to, among others, “consumers” in the form higher prices?
Funny thing is, doesn’t it seem we often hear proposals to finance expensive public programs with taxes on “mega-rich” corporations — and persistent complaints about businesses not paying “their fair share” in taxes — all without anyone invoking basic insights from Economics 101 to explain that those business taxes would in reality be passed on to consumers and workers?
Such insights seem to come to mind mainly when it’s Donald Trump raising the taxes.
To take a local example, in early April, the Star Tribune reported that “Democrats in the Minnesota House released a tax plan Monday that would give relief to most Minnesota families but raise money overall, especially on the foreign income of Minnesota corporations.”
A Republican critic, the story added, questioned the feasibility of this magic act — tax relief for “most families,” but higher tax revenue “overall.” He “argued that tax increases on corporations would be passed on to Minnesotans in the form of lower wages or higher costs.”
Yet the story did not, in that case, pause to offer a knowing aside that of course the Republican’s critique was “merely a recognition of Economics 101.” The question was left open for debate.
Anyway, as impressive as Trump’s unintended tutorial achievements are, he has not been the only one driving home this particular lesson about business taxes this spring.
Last month a considerable stir was created when Gov. Tim Walz’s own Revenue Department released what’s called a “tax incidence” analysis on who would bear the heaviest burdens as a result of the governor’s various proposed tax increases. It turned out that, overall, lower-income Minnesotans would be expected to pay more than the rich as a percentage of their incomes.
It was politically potent news that has helped shape the budget showdown coming to a climax in St. Paul this weekend.
It surprised few that Walz’s proposed hike in the state’s gas tax would be “regressive” — hitting the poor relatively harder than the rich. The gas tax is a flat-rate, per-gallon levy that takes no account of a motorist’s income. But the new analysis also reported that the business taxes Walz had proposed — increases in income and property taxes companies pay, and restoration of the 2% “provider tax” on health care services — likewise are regressive.
And that’s only the case because, in the end, where business taxes are concerned, “some of the burden would be borne in higher prices, some in lower wages, and some in lower returns to business owners,” according to the agency.
The report estimates that two-thirds or more of the business taxes would ultimately be borne by consumers and workers.
There is nothing new about this analysis. The Revenue Department’s excellent biennial tax incidence studies have for many years heroically tried to enlighten Minnesotans, and state policymakers, about who really pays business taxes.
“Business taxes are regressive,” says the 2019 Tax Incidence Study, as have many previous installments. It explains: “While the initial impact of these taxes is on business, they are partially shifted forward to consumers in higher prices or backward to labor in lower wages.”
The lesson of Economics 101 is that businesses do not pay taxes because businesses, after all, are not people, and only people pay taxes. To be sure, business owners — whether corporate stockholders or sole proprietors — technically are human beings, and they do pay taxes, in the form of smaller profits. But they don’t pay more than they have to. To whatever extent the competitive situation in their industries and markets allow, business owners and managers pass tax costs along to consumers and workers.
None of this means that businesses should not be assessed any taxes. Business operations place demands of many kinds on public services, and the costs of those services should be recovered from the activities and choices that create them.
But the popularity of business taxes is misplaced to the considerable extent that politicians are fond of business taxes precisely because they are confident that few voters (and not all that many journalists) actually remember their Economics 101 — and as a result many can be convinced that business taxes are actually paid by loathsome corporations themselves or at least mainly by the rich.
Here’s a memory trick many modern Americans might find useful: Whenever you hear of a proposal to raise some tax on the makers and sellers of products or services, imagine that it is Donald Trump proposing the very same thing.
A sudden rush of economic theory may make the problem with the plan more clear.
D.J. Tice is at Doug.Tice@startribune.com.