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Comment by Cerium | Hacker News Reader

It is a passthrough cost because of the business models. In this example the importer (Nike) is paying the cost, and then retailers are buying the product from them at a price that includes the tariff. The retailers don't care why the shoe is $75 or $50. A retailer is concerned that there are customers willing to pay a price which enables them to make a profit. For most retail businesses that price needs to be about 2x cost of goods.

Until you get to extremely high-end goods this multiplier system works fairly well to accommodate the various costs the business has. It is an assumption that there are many business costs that scale linearly with sale price. In reality not all do, but there are many: insurance, return costs, loss, and customer service expectations all scale with dollar values.

Edit: if we switched from an import tariff to a foreign goods sales tax we could avoid this particular problem.

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> if we switched from an import tariff to a foreign goods sales tax we could avoid this particular problem.

How are these materially different in terms of what the end consumer pays?

Because tariffs are calculated based on the value of the good at the time of import, while sales-taxes would be calculated at the end.

The article explains the tariff scenario. In the tax scenario, Nike can operate like in the pre-tariff world, while the retailer would have to charge the tax.

But the consumer is still the one who can either afford the shoe or not. He doesn't care who is collecting the tax or where in the pipeline it is assessed.

When in the supply-chain you are creating the "taxation" matters to the final cost, assuming 1) the gross margins remain the same and 2) the costs scale linearly.

Consider a fictional supply-chain with three players A, B, C. Assume that B and C have 50% gross margins.

In a no-tax world, if A sells the product to B for 10$, then B to C for 20$, C will sell it retail for 40$. (A:10$ -> B:20$ -> C:40$)

Now imagine a 100% tariff scenario for the transaction between A and B. Now, A sells the product to B for 20$ (10$ + 100% tariff), then B to C for 40$, C will sell it retail for 80$. (A:20$ -> B:40$ -> C:80$). This nets the government 10$

In a third scenario, imagine a world where this 10$ is not charged as a tariff but as a sales tax. A sells to B for 10$, B to C for 20$, and C to the customers at 50$ (40$ + 10$ freedom tax).

By changing where in the supply chain the tax is levied, we arrive at a lower retail price for the same tax income. This is a natural consequence of the above two assumptions, especially the idea that costs scale linearly. If maximum income from the taxation of imported goods is your goal, this is the way to go. Whether this would have the desired effect of discouraging imports is another matter.

I think in your scenario that B and C would drop their margin percentage because the tax does not represent anything that will increase their costs in handling the product. E.g. B would sell to C for $30 and C would sell retail for $50, making the same profit in dollar terms. If they don't, a competitor will, because a consumer will prefer the $50 price to the $80 price.

You're suggesting businesses B and C would just absorb the tariff cost by reducing their margin percentage to keep the same dollar profit. However, as Cerium noted earlier, many business costs do tend to scale with the price of goods, making this difficult without impacting profitability.

For financial costs, higher inventory value due to tariffs increases the cost of capital (interest on loans/tied-up funds), insurance premiums, and potentially transaction fees.

For operations costs (handling and labor), increases due to indirect effects: As the price of the average consumer basket increases due to tariffs, the average citizen either demands and receives higher wages or has to reduce spending; this means that the per-item variable cost of processing goes up, either because the wages of those employees increased (higher wages) or because the sales volume decreases (reduced spending).

Of course this does not mean that every business will have exactly this outcome. And absolute size of these effects is also dependent on the actual demand elasticity.

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