Let's walk through this bit by bit:
Firm X in a foreign country sells its products here. They charge the retailer $1.
Retailer Y sells you the product. They mark it up to, let's say, $2, which covers their costs and allows for some profit.
Congress passes an import tax of 25%. Now Firm X sells the product for $1 but pays the government $0.25 for the privilege. Their revenue has declined by 25%.
Firm X now has a choice to do some combination of these things:
1. Charge Retailer Y more for the product (to still see $1 of revenue they actually need to charge $1.33, not $1.25, since any price increase is also subject to the tax).
2. Suffer a loss of revenue. They may be able to eat the entire tax out of their profit margin, I don't have the data in this hypothetical. They may have to eat some of it to remain competitive.
3. Stop selling their products here. We aren't the only market in the world. If the quality is competitive- and after all, we were buying it - perhaps they can sell somewhere else for the same profit or more.
It is obvious that option one passes the actual payment of the tax on to either Retailer Y or their customers and that option three results in no tax being paid by anyone. Thus any tax revenue actually coming from the foreign country depends on Firm X's ability and willingness to lose a significant amount of revenue from each sale. It also depends on the rate being low enough to preserve foreign interest in selling here at all (that is, don't kill the golden goose).
In this scenario, if comparable domestic goods wholesale for more than $1.33, X can probably get away with passing the entire cost on to us (the evidence is overwhelming that the market considers price to be the most important variable in a purchasing decision).
Caption this Meme
