Following Trump’s “Liberation Day” announcement on tariff increases, there was an immediate claim that tariffs would increase prices on imported goods. The reason this claim was made is because it is correct. It does not take an economics degree to realize that if a pair of shoes with an import price of $50 from China has a 100% tariff imposed, then the cost to the US retailer increases to $100 which will in turn cause them to raise their price. This is easy to see and understand in several other tax types as well. Gasoline taxes obviously increase the price of gasoline, cigarette taxes increase the price of cigarettes, and sales taxes increase the price of everything they touch.
While it is easy to see and understand how these taxes affect prices, the reality is that ALL taxes increase prices. Like tariffs, the taxes will be built into the cost of every good or service produced, traded or sold. To fully understand the impact of taxes, it is also important to broaden our understanding of the taxes we pay. There are two ways government taxes us:
1) Monetary Tax. This is the percentage of your income spent on government. This can best be defined as the total cost of spending at all levels of government. As Milton Friedman correctly stated: “Keep your eye on one thing and one thing only: how much the government is spending. Because that is the true tax.”
2) Time tax. This is the percentage of your time spent complying with government laws, rules and mandates. This may be time spent filing your taxes, filling out government required paperwork, or standing in line at the DMV. Any time spent doing these things represents time you could have spent performing paid work or an enjoyable activity.
Calculating the financial tax is relatively easy. Total federal, state and local government spending amounts to $12.8 trillion in FY 2025. With a current GDP of $29.2 trillion, this means federal, state and local governments spend about 43.8% of your income.
Calculating the time tax is far more complicated. A federal agency called the Office of Information and Regulatory Affairs (OIRA) tracks compliance time for filing government paperwork. In 2012, the compliance time had already exceeded 10 billion hours per year. With a workforce of 161 million, this means the average worker spends 62 hours per year on government paperwork tracked by OIRA. This estimate almost certainly understates our true time costs. The government estimate does not include all federal rules, nor does it include state or local compliance times. These built-in costs get added to the price of everything we buy. Numerous regulations require time, effort and resources to comply including filing taxes, following anti-trust rules, land use regulations, compliance training programs for regulations, and complying with rules from OSHA, EPA, DOL, DOT, SEC, etc. What is the number one government tip to “easily” comply with business regulations: “Hire a compliance officer.” The cost of the compliance officers must be built into the final cost of goods sold, much like a tariff or other monetary tax.
Failure to understand that the cost of taxes and regulations get passed on to producers results in people thinking they can get things for free from the government by taxing businesses more. It is like renters voting for a property tax increase and wondering why their rents went up. If you want lower prices, reduce taxation and regulations at all levels of government.
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