Poor Americans likely to be hit hardest by new U.S. tariffs

PHOENIX — The biggest victims of President Donald Trump’s tariffs won’t necessarily be Mexicans or Chinese or young urbanites who will have to pay more for avocado toast.

The people likely to pay the steepest price for Trump’s attempts to bend Mexico and China to his will are poor Americans, who already live close to the financial edge and could have to pay more for everyday purchases.

For many low-income households, tariffs “are a tax on their consumption, and by raising the cost of their consumption, they will likely have to cut back,” said Jay Shambaugh, a senior fellow at the Brookings Institution.

The president last week announced plans to impose a 5% tax on Mexican imports unless that country halts all unauthorized border crossings into the United States. The tariffs would rachet up to 25% in the coming months if Mexico fails to stop the flow of immigrants and asylum-seekers.

The threat of higher tariffs follows a decision in May to hike tariffs to 25% from 10% on Chinese imports, a move designed to increase pressure on China to agree to more favourable trading terms with the United States.

But rather than force concessions from China and Mexico, the tariffs could boomerang on U.S. consumers and companies. The taxes could raise the price of fruits and vegetables and disrupt the supply chain for auto parts in ways that could hurt vehicle sales.

That would be hard on people like Walter Rogers, a 65-year-old retiree living in Phoenix on a Social Security check he says is about $700 a month.

“We just got a cost-of-living raise. Now they’re going to raise prices?” Rogers said as he walked to Walmart. “Hardly anybody can afford this.”

Executives at Walmart and dollar-store chains, which import much of their merchandise and serve many low-income customers, have warned that tariffs could lead to higher prices.

A 2017 research paper co-authored by Shambaugh found that tariffs would eat up a greater proportion of the incomes of the bottom 10% of households. The burden would be much lighter for those higher up on the financial ladder.

The findings — which are backed by most economists — stand in sharp contrast to Trump’s misleading claim that foreign countries are paying the tariffs. In reality, the taxes are passed along to consumers and companies in the form of higher prices and reduced economic activity that can stifle overall growth.

There are two major reasons why the poor face an outsized burden, Shambaugh said.

First, poorer Americans tend to spend all of their income, while wealthier Americans have enough income left over to save and invest. That leaves the poor more exposed to higher prices from import taxes.

Second, the wealthy are more likely to splurge on services such as farm-to-table restaurant meals or gym memberships that are not subject to tariffs at all. But poorer Americans spend a higher percentage of their income on basics such as clothing and groceries that are more likely to be imported and subject to tariffs.

Marlene Grimes has noticed higher prices for dairy goods and vitamins at the drugstore near her Phoenix apartment. If prices go even higher, she said, she would have to visit the local food pantry more often.

“I’m on a fixed income,” said Grimes, a 74-year-old retiree. “If it goes up on what you buy, you just don’t buy it.”

During a period of widening income inequality, Trump’s plan to levy tariffs will complicate the legacy of this 2017 income tax overhaul, his signature policy achievement.

Administration officials repeatedly pledged that the middle class and poor would benefit from lower tax rates, but the chief beneficiaries of the overhaul so far have been the wealthy and corporations. Any tax savings realized by the poor could be eaten up by higher prices from tariffs, according to an analysis being released this week by the Tax Foundation, a right-of-centrethink-tank in Washington.

Assuming a 25% tax on both Chinese and Mexican imports, the bottom fifth of households would probably be worse off under Trump than they were during Barack Obama’s presidency, said Kyle Pomerleau, chief economist at the Tax Foundation. Wealthier households would likely be insulated from the tariffs and could keep most of their savings from lower income taxes.

“You’re looking at an administration that may have raised taxes on the bottom 20% and cut taxes for the top 1%,” Pomerleau said.

Tariffs on Mexico would be especially tough on Arizona, which imported $9 billion worth of goods from its southern neighbour last year, nearly three times as much as from its next closest trading partner, China. The historically Republican state voted narrowly for Trump in 2016, but in last year’s midterm elections Democrats picked up offices they had not won in decades. Arizona is expected to be a battleground in the 2020 presidential election and will have a crucial Senate contest.

Republican Gov. Doug Ducey generally opposes tariffs but has avoided criticizing Trump’s threat, saying national security is more important than commerce.

“Our economy is doing terrific. Our economy is going to continue to do terrific,” Ducey told reporters Monday.

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