Recently there was a story in the news about a company that was fighting with the government over whether its product should be classified as a doll or a toy. It was important for the company to have the product classified as a toy rather than a doll because of the tariffs involved. If the product was a doll, then the tariff on it would be 12 percent. If it was classified as a toy, then the tariff would be 6 percent.
It is interesting that the tax on goods coming into the country from foreign lands is lower than the income tax on individuals who live here. Why is that so interesting? It is interesting because of the impact taxes have on the cost of products.
Let’s consider a product that is made in America, which has a high income tax, versus a product that is made in a nation which has no income tax. Now let’s assume that half of the cost of the product is attributable to labor. If the effective tax rate of the workers who make the product is 20 percent, then the cost of the product will increase by 10 percent.
Let me explain further. The income tax on the workers increases the cost of the product because it increases the cost of labor. If not for the tax, the worker could accept a lower salary. This is true because, in a no income tax world, the worker would “take home” the same amount even if his base pay were lower. In our example, the worker would accept 20 percent less. Since half of the final cost of the product is attributable to workers’ salaries, the cost of the product would then be 10 percent less.