Taxes Supplanted Most Tariffs for Good Reason

The idea of substituting tariffs for taxes operates under the misleading premise that tariffs equate to taxes on foreign countries. Conflating tariffs and taxes glosses over important differences in fairness and equity between them.

Understanding the distinction would have been easier in late 19th and early 20th-century America, when tariffs—duties directly imposed on goods—were a significant source of revenue before Congress enacted a federal income tax in 1913. Anti-tariff sentiment was what made the income tax politically palatable to begin with.

Tariffs’ most obvious shortcoming is their regressivity. An imported widget that costs $100 and is subject to a 10% tariff costs $10 in tariffs for all purchasers. The net result is that tariffs cost proportionately more for lower- and middle-income consumers than for higher-income consumers.

Taxes became an attractive alternative to tariffs because they could be tailored to an individual’s ability to pay. This allows for more equitable distribution of the tax burden, with those making more paying more.

Rather than being taxes on foreign nations, tariffs are passed on to consumers as hidden costs, reflected only in higher prices of goods. Individual consumers wouldn’t necessarily know that a good’s price includes a tariff—the item would just suddenly cost more on the shelf. While the exporting country may see reduced market share due to its goods’ increased prices compared with domestic products, it wouldn’t bear a direct cost.

As we navigate modern tax and tariff policies, we must remember the historic distinctions that shaped our economy and understand the inequities that a return to tariffs could bring.

—Andrew Leahey

Welcome to the Week in Insights for Bloomberg Tax’s latest analysis and news commentary. This week, experts analyzed intercompany agreements, brokerage audit deficiencies, the OECD’s two-pillar solution, and more.

The Exchange—It’s where great ideas on tax and accounting intersect.

—Curated by Daniel Xu

Insights

Vanderbilt Law’s Beverly Moran discusses the OECD’s two-pillar solution, noting that global implementation has faced roadblocks across nations.

Hofstra University’s Jack Castonguay examines the 70% rate of broker-dealer audit deficiencies, saying it shows the accounting industry’s need for more staff, training, and updated audit standards.

Mayer Brown’s Sonal Majmudar and Anthony Pastore analyze intercompany agreements, saying that getting outside advice and deciding on how much detail to include are key to drafting them.

BDO’s Abbie Everist says business owners in response to Connelly v. United States should review buy-sell agreements and consider options for restructuring their succession plans.

StoneTurn’s Brad Wilson explains how training, student outreach, and technology are key to resolving the accounting industry’s talent shortage.

Jones Day’s Niv Tadmore and Alexandra Fraser say additional disclosure brings risk and benefit, noting that the Australian government should review the eventual law a year or two after it becomes effective.

Columnist Corner

Technically Speaking design by Jonathan Hurtarte/Bloomberg Tax

Implementing a Spanish-style wealth tax in the US could raise several hundred billion dollars annually, bolstering public services and reducing the national debt, Andrew Leahey argues in his latest Technically Speaking column.

To overcome legal and political obstacles, such a tax “would require a compelling policy story that clearly demonstrates how and who the increased tax revenue would benefit,” Andrew says. Read More

News Roundup

Opportunity Zones Face Skepticism Over Who Benefits the Most

New data on an expiring federal economic development program aimed at encouraging investment in distressed communities is renewing questions about its efficacy. Read More

Chevron’s End Doesn’t Warrant Revisiting Partnership Tax Ruling

The US Tax Court doesn’t think the demise of Chevron deference is enough to rethink its ruling against a foreign partnership. Read More

Crypto Industry Asks for Guidance as Tax Cliff Talks Rev Up

The cryptocurrency industry is ramping up lobbying Congress members, seeking a host of policy asks as lawmakers prepare for a major tax policy debate. Read More

EY Shrinks Roster of Audit Clients in Bid to Improve Performance

Barnes & Noble Education Inc. and the Children’s Place Inc. are among the audit clients EY has dropped in recent months as the firm looks to trim its portfolio. Read More

Tax Management International Journal

A business must consider the transfer pricing implications for a successful business restructuring, KPMG Nigeria’s Ayokunmi Ogunnaike says.

The US Tax Court’s Ryckman ruling applied a “great weight” deference standard to accept the IRS’s tax treaty interpretation, but the Supreme Court should weigh in after Loper overturned Chevron, Gunster’s Alan Lederman notes.

Career Moves

Amy Drais joined Day Pitney as a tax partner in Stamford, Conn.

Philip Cooke and Noah Mullin joined Greenberg Traurig as shareholders.

Brian Charbonnier and Chris White joined Alvarez & Marsal Tax as managing directors in its portfolio tax services group.

If you’re changing jobs or being promoted, send your submission to [email protected] for consideration.