I don’t think I have ever seen the word tariff in the news as much as in the past few months. Tariffs seem to be the boogeyman or the savior of the economy depending on who you listen to. So, I wanted to do a deep dive to understand if there are pros and cons to tariffs, as there are with most things. Hope you wanted that too 😊.
First, what is a tariff? Simply put, when a government collects a fee (or a tax) on imported goods as they enter their country, it’s called a tariff. Tariffs can be calculated as a fixed fee per item or a percentage of the value of the item. If you import wine, it could be $10 per bottle of wine or 15% of the value of the wine. Who pays the tariffs? The foreign company importing goods pays the tariff to the government of the country imposing them. This is done by working with an import/export broker. The brokers work with both foreign and domestic companies to import and export goods. The brokers are the ones who actually pay the governments. But the end price of the wine is calculated including all costs and when tariffs are a cost of doing business, the end price of the wine is affected by them. Depending on the company's profit margin, some cost increases might be absorbed by the company but often what happens is the end user pays more.
Are tariffs inflationary? They can be. The argument is that if a government charges a tariff the end user pays it in higher prices of imported goods. But usually, if tariffs are imposed, the change in prices is in the first year, after that, the increase is already priced in. This could cause an increase in inflation in the short term.
So why would a government charge tariffs? There are many reasons, including the desire to protect domestic companies from lower-priced imports, to attempt to counteract unfair trade practices, and to apply political pressure on other countries, among others. Let’s go back to the wine – if China is dumping large quantities of wine on the US market for very low prices, that would affect domestic wineries negatively. If the US imposes a tariff on wine imported from China, it will increase the price of that wine to US consumers, protecting the US wineries. Do the US consumers miss out on cheap Chinese wine? Yes, but the tradeoff is that the US wineries (who employ US workers, pay US property taxes, and US income taxes) are protected from unfair trade practices.
With all this, who wins and who loses? The government collects tariffs which do raise federal revenue, but the projections are that the increase in revenue will be very little in terms of the entire federal budget. Consumers will probably pay higher prices either for more expensive imported goods or they may switch to higher-priced US goods. There is the issue of how all of this affects US relations with its trading partners. And do the overall higher prices reduce demand which could slow down the economy?
One thing to watch is that it seems that all the current talk is most likely a negotiating tactic or at least the market is assuming that. The Trump administration announced that on day one it will impose 25% tariffs on Mexico and Canada and an additional 10% on China. The stock markets of all countries involved did not react as would be expected if it was believed the tariffs were a foregone conclusion. Nor did the currencies. There was a reaction but a muted one that shows the markets are watching but the assumption is that this is not over yet. And there is always the threat of retaliatory tariffs and trade wars.
What Is A Tariff And Who Pays It? | Tax Policy Center Mexico promises retaliation if Trump makes good on tariff threats The Trump tariff dance starts early The Price-Inflation Paradox: How Tariffs Really Affect The Economy
Financial Planning/Investment Strategy Corner:
401(k) – The Good and the Bad of Retirement Savings
I keep getting emails from people in the investment industry bashing the idea of the 401(k) and pre-tax retirement savings in general. The argument for a 401(k) has always been that most people earn more money and are in a higher tax bracket during their working years than they will be in retirement. If you contribute to your 401(k) during those higher earning years, you are getting a tax deduction at the higher tax bracket rates. When you retire, you take distributions, and pay income tax at the lower tax bracket rates since your income is lower. In real dollars, you pay less. But for some with large 401(k) balances and other income (Social Security, pensions, etc.), they are not in a lower tax bracket in retirement. The argument continues with the fact that 401(k)s have required minimum distributions (RMD) that force you to withdraw a percentage of your account annually at age 73 and beyond even if you don’t need the funds. And when the next generation inherits the 401(k), they now have a 10-year window in which they must empty the account paying tax on all the withdrawals.
So, you can see why people are reevaluating the 401(k). A few things that they don’t tout when bashing the 401(k) is the employer match, which is free money and even if you must pay tax on it later, it’s still a great deal. Another thing is more behavioral – it’s much easier to save and more people actually do it, when the funds are taken out of their paycheck. How many people would have less saved for retirement without the 401(k)?
The other benefits of a 401(k) include the ability to borrow from it, the ability to contribute to a Roth 401(k), which does not give you a current tax deduction but is tax-free at withdrawal, and there are new benefits coming out where employers can offer to contribute your match even if you don’t contribute your part if you are paying off student loans.
My take is everyone’s situation is different, and you should talk with your financial advisor about it. Is the 401(k) perfect? No. But the 401(k) is a great way to save and to get a tax deduction, but it should be looked at as a part of your retirement planning, not the totality of it.
The Rules of a 401(k) Retirement Plan New IRS Rules for 401(k) Student Loan Match: What to Know | Kiplinger Is a 401(k) Worth It? Here Are the Pros and Cons | Kiplinger
Quick Hits:
- Ceasefire between Israel and Hezbollah. I hope that this is the first step in helping the Middle East move away from war: Israel-Hezbollah ceasefire
- ANTs - what they are and ways to help counteract them: Automatic Negative Thoughts:
- I had to put this one in – a Maine author, teenagers texting funny things, and financial literacy: 'teenager texts' highlight how little some kids know about money
- And if you want more of Chip Leighton: - About
- Poker as a risk-taking teacher – interesting! poker-helped-me-take-risks-more-women-should-try-it-
- Thanksgiving Leftover Pie! FODMAP Everyday
In This Time of Thanks and Giving: I want to share a new path I find myself on. I have joined the board of a newly formed local non-profit. Making It Home has been created with the mission to offer newly housed individuals and families new and gently used household goods to help restore hope, dignity, and stability to their lives. I joined the board which includes Julie Forsyth (president), Heather Dallas (vice-president), Catherine Hyde (secretary), Andrew Ingalls and Bob Summers. We are collecting, curating, and redistributing household goods in the hopes of helping those in our community who are in need. I will have updates as we progress.
I hope everyone enjoyed Thanksgiving, and I hope you find great Black Friday deals!
Quotes to Consider:
“As we express gratitude, we must never forget that the highest appreciation is not to utter words but to live by them.” John F. Kennedy
Thank you for reading RSWA Financial Advisor Insights! We welcome feedback and please forward this to a friend! Be well, take care, and stay safe!
