Most people making a payment to the Revenue Commissioners think that they are the people paying the tax. In the first instance, that is clearly the case. However, economists have long known that those who really bear the brunt of a tax may not be those who sign the cheque.
Retailers may pass all VAT payments on to consumers. Alternatively, retailers may take some or all of the hit in a reduced profit margin. They may even may pass some of the cost of the VAT back to suppliers through lower wholesale prices.
It remains to be seen how much of the reduction in VAT on hospitality, taking place midyear, will be passed on to consumers, and how much will be taken in higher margins in restaurants and hotels.
Like taxes, subsidies may sometimes help consumers or they may be fully or partly captured by suppliers who are able to charge higher prices. Many have argued that the Help to Buy scheme, while nominally assisting first-time buyers, has resulted in higher prices for new-build homes.
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The difficulty in determining who ultimately pays a tax is relevant to what happens in the US in the wake of the recent US supreme court decision that struck down Trump’s Liberation Day tariffs as illegal.
[ We can’t wean ourselves off US multinationals’ taxes, even if we wantedOpens in new window ]
While aimed as punitive measures on “unfair” countries, a series of economic studies has shown that most of the burden of these tariffs landed on the US. Exporters to the US chose to keep the price of goods they were selling to the US unchanged, rather than cutting their margins.
US importers who paid over the tariffs mostly passed on this extra cost to their customers, such as supermarkets and other businesses.
It’s not surprising that importers passed on the tariffs, as their margins are generally narrow, with little capacity to absorb the extra charge. In turn, supermarkets and other shops raised their prices by some or all the tariffs. As a result, US consumers have paid for most of the tariff spree.
As the burden of the tariffs was spread over many businesses, and across all US consumers, it’s impossible to quantify what proportion of the tariffs was shouldered indirectly by individual retailers, or by US individual consumers.
While the tariffs were illegal, repayment would be a minefield, given the uncertainty about who actually lost out. Supreme court justice Brett Kavanaugh’s dissenting opinion made this point, arguing that repayment would be a “mess”.
If the tariffs were repaid to those who remitted the money to the US government, it could be a bonanza for US importers. While the importers passed on the cost of the tariffs to consumers, there would be no obligation on them to pass on a once-off repayment to those who actually lost out. Thus, much of the repayment of the illegal tariffs would go to firms that did not really suffer from their imposition. In anticipation of just such a payout, financial vultures may offer to buy the right to such a refund from the importers, at a large discount.
As the sums involved are potentially very large, between 0.5 per cent and 1 per cent of US GDP, the transfer of US taxpayers’ money to a small number of importers could be very unpopular.
While Democrats have used the research findings that US consumers effectively carried the cost to argue that the illegally collected billions should be returned to consumers, that’s hardly feasible.
In the light of this fiasco, maybe the best answer is that the US government, already running a huge deficit, should use its illegally gotten gains to reduce its soaring deficit. Better to reduce the liabilities facing US citizens than to benefit a small number of companies that suffered little or no loss.
[ Trump’s new tariffs: What do we know now?Opens in new window ]
It is congress, not the president, that is responsible for tariffs. Bypassing congress opened up a legal can of worms for Trump. Continuing to use untried legal ruses to try to maintain an arbitrary tariff policy runs the risk of future successful legal challenges.
For other countries looking on, this saga emphasises how the current US administration is utterly unreliable as a partner in economic affairs.
Any “agreement” with the US is open to sudden termination, either at the whim of the president, or in response to legal challenge.
Business needs certainty, particularly where international supply chains are concerned and when investing. With such a capricious US administration, the best strategy for other countries is to maintain and grow trade with the rest of the world, a world that a future US administration might want to return to.
