Who really pays a tariff?

Officially, the importer: a tariff is an import tax paid by the importer, the firm that brings the goods across the border. But who is actually poorer afterwards can be someone else entirely. Economists separate the "nominal incidence", the person the tax is collected from, from the "real incidence", the person who ultimately bears the burden. If a 10% tax on butter sellers raises the market price by 8%, for example, then 80% of the tax falls on buyers, not sellers.

The rule is that the burden does not depend on where the revenue is collected but on how easily each side can walk away, which economists call price elasticity of demand and of supply. Tax incidence falls mostly on the group that responds least to price. A tax on a good people cannot do without lands on buyers. A tax on a good that shoppers can easily replace lands more on sellers: a tariff on imported cars might fall largely on the car producers, because buyers can switch to a domestic car.

The same logic explains a famous puzzle about payroll taxes. In the United States they are nominally paid half by the employee and half by the employer, yet economists generally find that workers bear most of the burden, because employers pass it on in the form of lower wages. The label on the bill is not where the cost stops.

For tariffs, the economic burden falls on the importer, the exporter, and the consumer, in shares that depend on those elasticities. Tariffs are designed to raise the price of imported goods so that citizens buy local products instead, and in the standard textbook model the losses to domestic consumers are greater than the combined benefits to domestic producers and the government.