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Trade & Global Markets
U.S. Trade Policy

DLC | Commentary | December 13, 2010
Shoe Tariffs: America's Worst Tax
By Ed Gresser

To understand a poor woman's life, as the proverb says, walk a mile in her shoes. If you want to make her life a bit easier, help her buy a new pair. In the weeks remaining to Congress (and in a holiday season) Sen. Maria Cantwell (D-WA) and Rep. Joe Crowley (D-NY), in partnership with Sen. John Ensign (R-NV) and Rep. Kevin Brady (R-TX), are trying their best by abolishing shoe tariffs through the Affordable Footwear Act.

How would that help? Shoe tariffs are among the highest taxes imposed on any good sold in American stores, the equivalent of sales taxes ranging from 8.5 percent to 48 percent. The highest rates are on the cheapest and simplest shoes most often bought by low-income families with children, and apply to goods not made in the United States for decades. Scrapping cheap-sneaker tariffs, as the Affordable Footwear Act does, would give low-income moms a break of about $3 per pair of sneakers, at trivial cost to the government.

In the Background

Some background: America has a very successful shoe industry, with brands like Nike and Timberland selling around the world and supporting hundreds of thousands of American jobs in research, design, marketing, and retail. But almost all the stitching and gluing for the shopping malls and sports outlets goes on in Asia for cheap shoes and sneakers, or in Italy for leather dress shoes. This evolution of the industry was largely complete by the end of the 1970s -- dropping from 250,000 American jobs in the 1950s to 20,000 by 1980. Domestic shoemaking employment stabilized at 14,000 early in the last decade, mainly for expensive specialized shoes for the military and workers in hazardous industries.

But as the industry has changed, shoe tariffs have remained the same, with no reduction since the 1950s. Most Americans might assume this is irrelevant, as our tariff rates are very low -- and most of the time they'd be right. The average American tariff is about 1.3 percent, and typical examples range from the 2.5 percent tariff on cars, to duty-free treatment for cell phones, and tariffs of 4 percent and 5 percent for TV sets.

The exception is in the home, where hundreds of products get tariff penalties barely changed since the Hoover administration. Tariffs on clothes, shoes, luggage, silverware and plates, and home linens like towels and pillowcases have changed little since the 1950s and average about 12 percent. By now, although they account for only about 5 percent of imports, they raise 60 percent of all tariff money.

Tariffs as the Most Regressive Tax

This is troubling enough, as any tax on home necessities will hit poor people harder than rich people. But as the table below shows, America's tariff system -- in striking and embarrassing contrast to those of Japan, China, Canada, and Europe -- systematically and outrageously taxes the cheap and simple home goods poor people buy more heavily than the luxuries wealthy families can afford.

Table 1: Consumer-Goods Tariffs Are Low on Luxuries, High on Low-End Goods

Product Luxury Medium Low-End
Shoes 8.5% (leather dress) 20.0% (elite running shoe) 48.0% (sneakers under $3/pair)
Sweater 4.0% (cashmere) 17.0% (wool) 32.0% ( acrylic)
Man's shirt 0.9% (silk) 19.7% (cotton) 32.0% ( polyester)
Drinking glass 3.0% (over $5 apiece) 22.5% ($0.30-$3 aiece) 28.5% (under $0.30 apiece)
Brassiere 2.7% (silk) -- none -- 16.9% (polyester)
Handbag 5.3% (snakeskin) 10.0% (leather) 16.0% (canvas)
Pillow case 4.5% (silk) 11.9% (cotton) 14.9% (polyester)
Spoon 3.3% (sterling silver) 4.2% (silver-plated) 14.0% (stainless steel)

This makes our tariff system the most regressive element of our tax system. And shoe tariffs show it at its worst: they are the highest, they are imposed on goods rarely made in the United States, and they are the most steeply tilted against the poor. Italian-made Pradas and Guccis at Sak's face an 8.5 percent tariff. Nikes and Reeboks at Sports Authority get a 20 percent tariff. No-brand sneakers at Payless get 48 percent -- the highest tariff on any manufactured good even though cheap sneakers haven't been made here since the 1970s.

This makes our tariff system a large, hidden presence in the lives of America's poor. Shoe tariffs are passed on from importers to shoppers and magnified twice before they reach the checkout counter. Collected at the border, tariffs are included in the "landed cost" from which retailers calculate their markups, which includes payments to manufacturers and shipping costs as well as tariffs. Once included in this total, the tariff at the border is magnified first by retailer markup and then by state and local sales taxes by the time a shopper gets to the register.

Table 2 illustrates the effect in Seattle. Without the tariff, a pair of sneakers costing $3 at the border, with a 100 percent retail markup, would face an 9.5 percent sales tax and cost a shopper just over $6.50. With the tariff included, the markup and sales tax bring the cost to almost $10. So the tariff costs our unlucky shopper over $3 more per pair. By way of comparison, the combined federal and Washington state taxes on a $3 gallon of gas add only 56 cents.

Table 2: Tariffs on Cheap Sneakers

  Cheap Sneakers With Current Tariff   Cheap Sneakers if Tariff Were Removed
 
$3.00
manufacturing/transport cost  
$3.00
manufacturing/transport cost
x
1.48
(tariff for line 64041150)      

=
$4.44
landed cost =
$3.00
landed cost
x
2
(notional 100% retail markup) x
2
(notional 100% retail markup)

=
$8.88
retail price =
$6.00
retail price
x
1.095
WA/Seattle sales tax (9.5%) x
1.095
WA/Seattle sales tax (9.5%)

=
$9.72
final consumer cost =
$6.57
final consumer cost

A Simple Solution

This gives the shoe tariff a good claim to be America's worst tax: ineffective as a job protector, higher on poor people than on rich people, and toughest of all on poor families with kids.

What can be done? Many policy reforms pose unhappy dilemmas. This one doesn't, as the bill Cantwell, Ensign, Brady, and Crowley have introduced simply scraps tariffs on shoes not made in the United States at all.

So in its waning weeks, and as the Christmas season approaches, the 111th Congress has a chance to do something nice for the poor. It can, and should, debate over estate taxes and top-bracket rates. But as it does so, surely Congress can take a few moments to pass the Affordable Footwear Act. If they do, we may not all be able to manage a mile in a poor woman's shoes -- but at least we won't be taxing her and the kids as they walk.

Ed Gresser is president of the DLC.