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April 24, 2018

No, Mr. President, You Have That Backwards

 

The Wall Street Journal quotes President Trump as saying, “Japan sends us millions and millions of cars, and we tax them virtually not at all.” 

You have that completely backwards, Mr. President! 

The U.S. already imposes a tariff: 2.5 percent on cars and 25 percent on light trucks—the truck tariff is known as the “chicken tax” that goes back to 1963. However, previous trade agreements and some creative efforts on the part of automakers have allowed some imports to escape the tariffs. 

More troubling, President Trump apparently continues to believe that a U.S.-imposed tariff would tax the Japanese. In fact, when a country imposes a tariff on imports, it is the people in the country imposing the tariff that pay the tax.  

Fortunately, it’s very difficult for politicians in one country to tax foreign citizens living in another country—and it should be. Great Britain did that to its American colonies, which led to the revolutionary cry, “No taxation without representation.”  

The president’s “we tax them virtually not at all” comment was off the mark in another way: We actually do tax Japanese carmakers. It’s called the corporate income tax. Ironically, the president’s corporate income tax cut from 35 percent to 21 percent that passed last December means that Japanese automakers operating in the U.S. will pay lower taxes in the future.  And that’s a good thing because it might encourage more foreign investment in the U.S.  

President Trump has long been bothered by the fact that Japan sells Americans far more cars than America sells to the Japanese. As this article in The Atlantic makes clear, there are several reasons, including regulatory and cultural, why foreign car makers have had trouble selling in Japan. And the New York Times expands on those issues.  

But Japan had agreed to lower regulatory barriers under the Trans-Pacific Partnership, a trade agreement that the president scrapped shortly after entering office—though now he is reportedly having second thoughts about the TPP. 

Trade imbalances are often the result of multiple factors, including cultural, regulatory, quality concerns and local political forces. Imposing tariffs—or in this case, RAISING tariffs—is virtually never the solution to the problem. 


 

  • TaxBytes-New

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