A tariff is a tax imposed by a government on imports or exports of goods. Tariffs can be fixed (a constant sum per unit of imported goods or a percentage of the price) or variable (the amount varies according to the price) . The purpose of tariffs is to regulate foreign trade and policy, raise revenue for the government, and protect domestic industries from foreign competition. By taxing imports, people are less likely to buy them as they become more expensive, and the intention is that they buy local products instead, boosting their countrys economy. Tariffs are meant to reduce pressure from foreign competition and reduce the trade deficit. They have historically been justified as a means to protect infant industries and to allow import substitution industrialization. Tariffs may also be used to rectify artificially low prices for certain imported goods, due to 'dumping', export subsidies or currency manipulation.
Tariffs are paid when a good or service is imported into a country, and they increase the cost of goods and services purchased from another country, making them less attractive to domestic consumers. The distributional effects of a tariff tend to be regressive, burdening lower-income households more than higher-income households. Tariffs are taken out of business revenue before it is distributed as compensation to factor inputs (workers and capital), creating a wedge between what workers and capital produce and the amount they receive.
