The Chaos Tax
Some people think taxation is theft. Others see it as the price of living in a society. But in either case, we’d all prefer to minimize the burden.
The taxes we pay with money are only part of the cost. When the government orders you to do something you otherwise wouldn’t, that’s a kind of tax, too. Jury duty is a good example. Or all that time spent filling out income tax forms.
Businesses have it even worse. Aside from tax preparation, they face other regulations, inspections, and so on. This is why business owners like it when politicians talk about “deregulation.”
When President Trump started imposing new tariffs this year, there was debate about who would pay – consumers, businesses or foreign exporters. But the money isn’t necessarily the biggest part. The process of collecting the tariffs is a giant regulatory burden in itself.
American businesses, especially small ones, are suddenly dealing with red tape they’ve never seen before. Consider this, via Bloomberg:
“Take the administration’s widening of steel and aluminum duties to include hundreds of categories of consumer items and manufacturing inputs, from motorcycles to baby gear. Importers must be able to document not just the value of metals contained in the goods, but also where the steel was poured and the aluminum smelted, according to customs broker Pete Mento.
“Even when a product like deodorant sprays or shampoo doesn’t contain any listed metals, importers can be required to submit documents that prove it.
“In the case of aluminum, if importers can’t prove the origin, customs officials will assume it’s from Russia – which has the highest rate — and charge 200%. Russia is likely the ultimate source of metal used in many products that arrive via third countries, but some suppliers don’t want to share the information, or perhaps even have it in the first place.
“’It’s death by a thousand papercuts,’ said Shannon Bryant, president of trade compliance advisory service Trade-IQ.
“Every goods entry under the requirement takes ‘at least one to three hours of work on the low end,’ while more complex cases – like figuring out the metal content in a shipment of motorbike parts – could take 10 hours or more, according to Hugo Pakula, chief executive of Tru Identity, an AI automation platform for global trade.”
Worse, as we’ve seen, the rules keep changing. Adapting is impossible when policies evolve every few weeks or months.
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Unfortunately, this instability is the new reality.
I wrote back in May Every Trump Trade Deal is Temporary. That is still the case, and people are starting to grapple with the implications. This is from a Gavekal analysis last month:
“There is still plenty of uncertainty around specific tariff rates for various countries and sectors. This is a feature, not a bug: for Trump, tariffs are an all-purpose negotiating tool and they go up and down according to the needs of the moment.
“At a deeper level though, there is no uncertainty at all: the essential features of Trump’s new trade order are clear and mostly in place. They are as follows:
- “Imports from most countries will bear a basic tariff of between 10-25%; China will almost certainly wind up with a significantly higher rate. (But this will not matter that much as Chinese exporters have figured out how to transship via countries with lower tariffs.) US exports, meanwhile, will face universally low tariff barriers.
- “Countries that do things Trump does not like will face much higher punitive tariffs, although these punitive tariffs are likely to be temporary or riddled with exceptions. The key examples now are Brazil (extra 40% for prosecuting former president Jair Bolsonaro, with exceptions for many major products) and India (extra 25% for buying Russian oil).
- “Sectoral tariffs—already imposed on cars, steel and aluminum, next up on semiconductors and pharmaceuticals—will be frequently applied, and will probably raise the US effective tariff rate from the current 19% into the low 20s.
- “Tariff rates on individual countries and sectors will be dialed up and down whenever Trump wants to dole out rewards, impose punishment, or gain negotiating leverage, on any subject whatsoever. This is not the ‘escalate to de-escalate’ strategy once promised by Bessent, but rather ‘escalate to punish, de-escalate to reward.’”
On the plus side, tariffs are starting to produce significant revenue – about $30 billion in August alone. The president has said tariffs may eliminate the income tax for many Americans.
That might be nice but it certainly won’t happen any time soon. SO, in the here and now, we have a burdensome income tax system, and a new, even more burdensome tariff tax system layered on top of it.
That’s a problem no matter how high or low the amount is. The effort that goes into compliance is a tax, even if your rate ends up being 0%.
This isn’t good for jobs, inflation or economic growth. But it’s what we have. Get used to it.
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See you at the top,
Patrick Watson
@PatrickW
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