What are taxes and tariffs?
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This is But Why, a podcast for curious kids from Vermont Public. I'm Jane Lindholm. On this show, we take questions from curious kids just like you, and we find answers.

Sometimes you send us questions about things that are happening out in the world right now. We call those current events. And even if you aren't watching or listening to the news every day on your own or reading all the newspapers and online news sites, you're probably getting information about current events from school, friends, adults talking around you when they think you're not listening. Or maybe because you do pay attention to the news.

So one thing that may have trickled down to you lately is a word that doesn't really come up in normal conversation, but is everywhere lately. Tariffs. Tariffs are in the news a lot right now. There's been talk about the U.S. government imposing new tariffs on two of our neighboring countries, Canada and Mexico, and other places like countries in Europe. And there are already new tariffs on another country that America gets a lot of stuff from, China.

But what is a tariff? We're going to find out today. And we're going to explore the idea of taxes, which are connected to tariffs, and the economy more broadly. And then maybe when you read or see or hear news stories about economic issues in the future, you'll be armed with a little more knowledge about what's being discussed.

Here to help us navigate these choppy economic waters is my friend Stacey Vanek-Smith. She's a business reporter, so she writes and thinks about these topics all the time. I look at all the things that we deal with about money and

and the economy and things that we buy and the prices that we pay and I ask questions about those. I try to understand them myself and then explain them. My name is James. I live in Wilmington, North Carolina. I am seven years old. My question is, what is economics? Economics.

Before we get into tariffs, we need to understand economics. Economics is the study of the economy. So what's the economy?

The economy is basically like this little ecosystem that we all live in of things that are bought and sold around us. So almost everything we do is somehow part of the economy. Like if you eat eggs for breakfast, that's a big part of the economy. Everybody's talking about the price of eggs right now.

Or if your parents drink coffee in the morning, like coffee prices are getting really expensive. That's part of the economy. Or if you go to the store or even if you go to school, if you have a music program you love, that music program is part of the economy. It costs money. If you play an instrument, if you take karate classes, if you take ballet classes, whatever you take,

that is part of the economy because it costs money. And so in a way, it's like the economy is how we do the things we want. It's how we pay for the places we want to go and the things we want to do. It's all part of the economy. An economy is a system for figuring out how resources are used to make goods and services and all the ways those goods and services are bought and sold and used.

So how much houses cost to build or buy, that's part of the economy. The jobs people have are part of the economy. The way we pay for things like roads and bridges, that's part of our economic system. And there are lots of ways to think about the economy. Sometimes you might hear people talk about the global economy. That's thinking about prices and jobs and countries trading with one another all over the world.

Or you could think about your country's economy. And sometimes people even talk about the local economy. That's more like what's happening with your state or your region. You can even shrink it down just to think about what's happening monetarily in your own county or town. And you are part of the economy, too.

A big part of how we feel or understand the economy is by looking at how much things cost. And you've sent us a few questions about what you've observed about the cost of things. My name is Alex. I'm from Denver, Colorado. I'm nine years old. Why do prices of items go up over the years?

My name is Miriam. I'm nine years old. I live in Durham, North Carolina. Why have things gotten more expensive as time passed? I'm cold.

8, and I live in Pennsylvania. Why do prices keep getting higher? Prices tend to rise over time in most economies. Yes. This is something that's called inflation. And you've probably heard this word a lot. Inflation is just a fancy way of saying prices going up. It's complicated, but let's simplify things just so we can give you a sense of what we're talking about.

So let's take the average money people got for their jobs and the average price to buy a candy bar 100 years ago and compare. According to the IRS, which is a government agency that keeps track of earnings and taxes in the U.S., in 1925, the average American income was about $5,500 a year.

Today, the median wage is about $48,000. Median means half the people earn less than that and half the people earn more than that. So it's sort of right in the middle. So from $5,500 a hundred years ago to $48,000 now. A Hershey's candy bar cost five cents in 1925. Amazingly, it actually stayed the same price for many decades before the cost increased in the late 1960s.

Then the company doubled the price, but also doubled the size of the bar at the same time. Today, a Hershey bar costs $1.39. So prices go up, but typically so do wages, the money you earn for a job.

The problem is when the prices of things rise higher and faster than the amount of money people are making in their jobs to be able to pay for those things. Like if we look at the price to buy a home today versus 100 years ago, the amount of money most people earn has not kept pace at the same rate as the amount of money it takes to be able to buy a house. My name is Thomas. I live in Millburn, New Jersey.

and I'm nine years old. What is inflation and like, how does it happen? - We don't totally know. So why this happens is actually such a great question and people are always arguing over this.

Sometimes inflation can be good. It's a sign that the economy is growing. And the way that works is if an economy is growing, it's worth more money every year. More money, more money, more money. That means that the people in the economy, they're getting more money too. The companies in that country are getting more money. The people are getting more money. Everybody's got more money. And that pushes prices up.

And it's one of the most basic things in our economy, in economics, and it's called the law of supply and demand. And here's how it works. So, Jane, let's say you and I are going to the store and let's say we both have a dollar and we want to buy Reese's peanut butter cups. But the Reese's peanut butter cups are $1.50. Well, we can't get the peanut butter cups. It's too bad.

But let's say we go to the store and we have $5 and the Reese's peanut butter cup is $1.50. We're probably both going to get that. We really want the peanut butter cup. But let's say then it's $2. And let's say you maybe like Reese's peanut butter cups a little less than me. And you're like, you know what? This is getting a little expensive. I would definitely still buy it because I really want it. And I have $5, so I have enough money to pay for it.

But then let's say it goes up to $4. You are definitely not buying it, but I will probably still buy it because I really want it. So when people have more money, then they are generally going to end up paying more money because you just have more money to spend. So then prices will go up because companies know that they can probably get people to pay a little more. So that is why prices will go up. My name is Theo and I'm nine years old and I live in the D.C. area.

in the United States of America, is inflation a good thing or a bad thing? This is also such a good question. People disagree on this a lot. What people generally think

is that a little bit of inflation is a good thing. Because even though I would be very excited if my Reese's peanut butter cups went down to 50 cents, that would be a really bad thing for the economy. And Jane, you asked me, what is an economy? It's this whole network around us of stores and shops and businesses. So it's good for me, but it's bad for all of them.

Because if prices start going down, then that means the economy is shrinking. Businesses aren't selling as much. They stop hiring people. More people lose their jobs. When prices go down, everything is getting smaller. Everything is shrinking. So when prices are going up a little bit,

then maybe not enough for you and I to notice. Maybe are Reese's Peanut Butter Cups $1.10. That's okay. The price has gone up a little bit, but it's not too much.

Then that means the store is making a little bit more money. You and I are happy. We're still able to afford our peanut butter cups and everything's growing a little bit. So people want to see prices rising a little bit, but they've been rising a lot lately. And that has been very stressful for people.

Why have prices been rising so much more lately? Why can the rate of inflation change? And sometimes it's too steep and sometimes it's, as you said, just a gradual rising of the prices. It's sort of like an ecosystem, the economy. And so sometimes in an ecosystem, balance is changed, right? Like let's say one year it rains a lot.

And so everything's kind of flooded and there's a lot of water and so the grass really grows and all these weeds really grow. But then the next year it doesn't really rain at all and so it's really dry and all the grass dies off. An economy is a little bit like that. So things are always changing. Inflation's always rising and falling. But sometimes things can get out of balance. So let's say it rains every day for a year. Then we're all underwater.

And that can happen in an economy too. Things can get really out of balance. And this happens for a number of reasons. But one of the things that can happen, so our economy got really out of balance during COVID, during the pandemic.

And what happened was for a long time, everything was shut down. A lot of us were in our homes all the time. That was really difficult for a lot of businesses. Like if you have a pizza restaurant and nobody is coming to your restaurant, that's really hard. So it was a really strange moment. The government sent a lot of money out to people. Then people had extra money, so they started to spend that extra money, and that kind

of pushed prices up, like you and me with our $5 at the candy store. So there was a lot of extra money in the economy, but it was because of COVID, which just messed everything up. It made everything go out of balance. And it was really hard in a lot of ways, but the economy was one of them. It was just a really strange kind of a shock

that happened. And so that is a lot of why prices started to rise so much. And now it's really hard to get them to stop rising because we're in like a little bit of a cycle. It's like we have all this momentum, you know, like if you push a skateboard down a hill, it's a lot harder to stop it than it is to stop it if it's just on a flat surface. So our skateboard's going down the hill right now and everybody's trying to stop it, but it's really hard.

So I bet you're starting to understand that inflation is complicated. It can be kind of good if it's slow and in balance with how much money people have to spend, but kind of bad if it's too slow or really bad if it's too fast and prices are rising higher than people can afford. One thing people keep talking about lately is the price of eggs and how expensive they are.

Eggs are just one teeny tiny piece of the economy. But they're something people eat a lot of, and they're seen as kind of a basic necessity. So when egg prices are really high, people like to use that as one example of an economy that feels out of whack. We don't really need to dig too deeply into this, but eggs are an interesting example because sometimes the price of our food and other stuff we need, what are sometimes called basic commodities...

is affected by things out of our control and outside of our government's influence. Like with eggs, there's something called avian flu that's affecting a lot of chickens and other birds and starting to affect cows and other animals as well. So if there are fewer chickens, that could mean fewer eggs. And if everyone still wants eggs, but there aren't as many or it costs a lot more to produce them, the price of eggs is going to go up and it's going to go up fast.

That candy bar example is another good one. Climate change is making it harder for farmers in West Africa to grow cocoa, which is the base of chocolate. So prices are going up faster than normal. But chocolate isn't as much of a necessity as eggs are. We've got more of your economic questions coming up, like what's the stock market? And why do adults talk about taxes all the time? And we still need to figure out what are tariffs. So stay tuned.

I'm Jane Lindholm. Today on But Why, we're talking about money and the economy with business reporter and Bloomberg senior editor Stacey Vanek-Smith. Hi, my name is Judah. I'm 10 years old. I live in Los Angeles, California. And my question is, what is the stock market? The stock market is a big network.

It is a little bit like being inside of a video game. It's like its own world. So let's say you're inside of this video game and what everybody does in this video game is they buy pieces of companies. So a lot of companies are in this video game. All the companies that you know probably, big companies like

Target or McDonald's or Walmart or Starbucks, they're all in this video game and you can buy a piece of them. So let's say you really love the cookies at Starbucks. So you're like, I think Starbucks is going to sell a lot of these cookies. I love Starbucks. I believe they're going to grow. I want to buy a piece of it.

So you go into this little network and you buy a piece of Starbucks and you give them $10. Let's say that's how much it costs to buy a piece of Starbucks. So let's say a lot of people love their cookies. A lot of people are going to also buy a lot of pieces of Starbucks. So Starbucks is getting $10 from all these different people and suddenly it has more money and it opens more stores and makes more cookies and sells more cookies. And then Starbucks is worth even more money.

So then your piece of Starbucks is also worth more money, because all of the pieces of Starbucks are worth more money. So that is how the stock market works. And people go into this world, into this video game, because there's a company that they think is going to get bigger.

a company that they think is going to make more money, and they want to buy a piece of it. And so you can be kind of a part of that company as that company is growing and making more money. You can also make more money, and you own a little piece of it. Another thing to know about the stock market is that the value of these pieces of companies tends to go up and down.

It can be up one day and down the next or up for a few months and then down for a while. So people who are buying and selling on the stock market are always trying to figure out what they think is going to happen next. They're trying to sort of predict the future so they can buy or sell at the right time to make money. But why should kids care about the stock market? Well, it's just that it's basically a whole bunch of big companies.

And they're really important in our country. They're really important to our economy. They make a big difference in how many people have jobs, how much people get paid in those jobs, how stressed out people are. If people have a little extra money, they can enjoy themselves and go on vacation. Or if they're really stressed out and have to cut back all the time and they're in debt. So we watch them because the economy is so big and it's all around us.

It can be hard to know what's happening in it. You know, it's like you're inside a video game. It's like hard to know what's happening on the whole video game, but you take little indicators to try to figure out what's going on. And so the big companies are something people can watch and they can track it every day to try to figure out what's happening in this whole network that's all around us.

And so that's why everybody watches the stock market. So if you don't own stock, there's no need to stress about the stock market. But it's still an important thing in your life because it affects this kind of ecosystem that we're all a part of.

So, Stacey, let's talk a little bit about taxes because they're something that adults think about a lot and kids have questions. My name is Naomi. I live in Everett, Washington, and I'm seven years old. What are taxes and why do we have to have taxes? My name is Ben and I'm five years old. Why do people pay taxes?

Hi, but why? My name is Xavier and I live in Sydney, Australia. I'm nine years old. Why does the government make you pay tax? So the best way that I can describe taxes, I think that taxes are like a deal that we make with the government.

So, basically, the government is all around us, our country, and the government provides us with things. Police to keep us safe, a fire department to keep our houses from catching on fire, roads so we can get places, parks, we can go play in the park. And those things cost money, and in order to pay for those, the government takes money from us. We pay that money. So the government takes all the money that we all pay, and it provides things for all of us.

And I think the reason that people argue so much about taxes, this is one of the big things people argue about, is because we disagree over what this deal should look like. Some people say, well, we shouldn't pay very much and the government shouldn't do that much. Like maybe just the police and the fire department and maybe some schools and roads and

and done. And other people say, no, no, the government should do a lot more. It should put playgrounds in the parks and keep the playgrounds really nice. There should be snacks in school and the snacks should be really nice. There should be music programs and art programs and the government should be involved in helping create those too. Or sometimes people think the way the government's spending money is not the right way. It's like, why are you spending money on playgrounds instead of school lunches? Or why is there a music program but not a theater program? And so this

This is what everybody's always arguing about, about taxes. And it's a good thing to argue about because it's really the most basic thing that has to do with how we live and the relationship that we have with our country. How do we pay taxes? Not everybody pays exactly the same amount. That's true. It's different in different countries. In the US, we have different kinds of taxes, first of all. But the big tax that we pay is income tax.

So depending on how much money you make, if you reach a certain level, if you're below that level, you don't have to pay taxes usually. If you're above a level, then you have to pay a percentage of your income. So let's say, Jane, I make $100 and you make $200. Let's say the tax is 10%.

So 10% of $100 is $10. So I am paying $10 in taxes every year. But you make more money. You are making $200 a year. Then you are paying $20 because 10% of $200 is $20. So then you are paying $20 a year in taxes. So that's how it works. So if you have more money, you're paying more in taxes. And if you make a little less money, then you're paying a little less in taxes. That's how it works in the US. Another type of tax you might come across as a kid is a sales tax.

You might go to the store and decide to buy a toy that's $20. But when you go to the cash register to pay for your new toy, it costs a little more than that because there's a tax added on top of the price of the toy. Why do many places have a sales tax? A sales tax is another way to make money. Not only does the federal government, the whole country government have to raise money, but all the states that we live in have to raise money too.

And so they will sometimes take a portion of our income taxes, but also they raise money in other ways. On houses, people pay property tax, but on sales tax too. So yeah, it's a way for the state to raise money. And then they use the money from sales tax to pay for all kinds of things for us. One of the things that we've been hearing a lot about in the news is something called a tariff. What is a tariff? Is it different than a tax? Is it a kind of tax?

Tariffs are exactly that, a kind of tax. A tariff is a tax on something that was made in a foreign country. So let's say, Jane, you want to buy a scooter and there are two scooters in the store. One of them is made in the United States and one of them is, let's say, made in China. China makes a lot of the things that we buy. So let's say the scooter that was made in the United States costs $20.

A lot of that's because, let's say it took one person one hour to make that scooter, and that person got paid $15 in an hour. So then the company will pay the person $15, and then it'll take that scooter to sell it, and they want to, you know, they want to make a little money on the scooter, so they charge $20 for it. That's fine. Companies will also have to account for the cost of the materials needed to build that scooter, and that's built into the price too. But

But the amount of money someone had to be paid to make that scooter varies widely from country to country. In China, people make much lower wages. People get paid less. So in China, let's say the worker gets paid $10 for making that scooter. Well, then China can sell the same scooter. It can still make a little bit of money. Let's say it charges $15.

And then that means that if you go to the store and you're buying a scooter, the same exact scooter that took the same exact amount of time for a person to make will cost $20 if you get the scooter that was made in the US, or it will cost $15 if you get the scooter that was made in China. Well, you might want to save that $5 so you have candy bar money. So you will buy the cheaper scooter. Well, sometimes governments want to help out companies that are based in their own country.

So then let's say the U.S. says, "American scooter makers are complaining that they're not selling enough scooters. So we're going to charge a tax to all the Chinese companies making scooters so that their scooters end up being $20 too." So it's the same price. Or maybe they're going to charge so much in tariffs, they have to charge $25.

So it's a way for governments to kind of protect companies in their own country. But it is a tax that other countries have to pay when they want to sell stuff in the U.S. And we have to pay those taxes, too. When we want to sell scooters to people in China, we have to pay those taxes, too. Why is this...

all coming up so much right now. Why are tariffs in the news? This has to do with our relationship with other countries. So let's say we want to be friends with China. We are making a whole bunch of deals with China. China is a huge economy. It's a really important economy in the world. And so we are bargaining with them about a whole bunch of things.

And so part of the bargain, they want their scooters to sell really well in the U.S. And their scooters aren't selling very well because they're more expensive than the scooters made in the U.S. So, you know, the U.S. and China, they're making these big, fancy deals about all kinds of things. One of the things China might ask for in this deal is, hey, can you lower the tariffs? Can you lower these taxes so that we can sell our scooters for less money?

It's part of deals that countries make. And so if you're friends with a country, then you don't want to charge them too many taxes. You're like, no, no, no, we love you. We'll sell your scooters for the same price. And then they're, you know, that's what you do with your friends. But if you're not friends with them, if you're angry with them, or if you're

in some kind of competition with them, maybe you'll say, "You know what? We're gonna put a huge tariff on everything so that now, like, you won't be able to sell as many scooters in the U.S." So it's like a bargaining chip. It's like a deal that you make. So it's a way that you can reward your friends and punish people you're not friends with or you're trying to, like, make them do what you want. Tariffs are a way that you can do that.

One of the countries that the U.S. has been talking about putting extra tariffs on is Canada. Canada is a neighbor of the United States and generally Canada and the U.S. are really good friends. Yeah. And Canada is the U.S.'s largest trading partner. So why are we threatening to put new tariffs on Canada?

Well, that's a really interesting question. So President Trump wants to kind of

shake up the way that tariffs have been done. So for a really long time, the way that things were going, this is basically ever since the end of World War II, when a lot of the countries in the world got together and said, one of the ways that we'll make sure that we don't get into wars is if we're all trading a lot with no tariffs. It's just a way, it's like, well, if you have your friends and you trade candy with your friends every day, you're less likely to get into a big fight with them because you want your candy.

So you get this big selection of candy every day and you don't want that to stop. So even if you're mad at someone, you'll kind of brush it off or let it go because you don't want to break up this candy alliance. What's going on right now is that President Trump

wants to use tariffs as a way to make different deals with different countries and to kind of get his way on different issues. And so he's using tariffs. And the reason why is that in the U.S., we buy a lot of stuff, like a lot of stuff, like more than anybody else in the world buys. So people want to sell their stuff in the U.S. because we buy so much stuff.

And so it's a pretty big bargaining chip. Canada and the U.S. have a long history of working together on big issues, and we share a lot of cultural and family connections. That's true for the U.S. relationship with Mexico as well. So even though tariffs are an economic bargaining tool, they can also feel very personal. We're putting out this episode on March 7th, 2025, and a lot of this is still in flux, still changing as we make the episode.

So the news may have changed by the time you listen. But I hope you've at least got a little bit of understanding now of what's being discussed if you hear talk about tariffs in the news. We didn't want to end our conversation with Stacey on tariffs, though. So we threw her one more bonus question while we had her. My name is Brooke. I'm from Washtenaw, New Jersey, and I'm

Brooke is wondering, why do we say this thing costs $19.99 instead of $20? Why do we often have things that cost $0.99? That is not because...

of anything in the economy, it's just a little bit of a brain trick that companies will play on us. Because let's say, I don't know, is there something that you want to buy, Jane? I want to buy a new board game. Okay, you want to buy a new board game. So let's say you go to the store and you're trying to decide between a couple of different board games. And one of the board games is $20. And the other one is $19.99. Essentially, they cost the same amount. But the $19.99 one seems a

a little bit cheaper because there's a one at the beginning. And even though logically the difference is just a penny, in your brain it just seems like a better deal. Because our brains are kind of funny. It's like a little illusion in our brain. You know what I mean? So even if

Even if we know that trick is happening, it still works. I know that this is what companies do to make things seem less expensive than they are, especially a moment like now when the prices are rising a lot. But I still fall for it all the time. Thanks to Stacey Vanek-Smith for joining us today and helping us learn about money and the economy. She's been a business reporter for a long time, and she's a senior editor at Bloomberg News.

We went through a lot in this episode, from inflation to the stock market to taxes. All of those things are really complicated, and there's still so much more to the economy than we could possibly cover in this one episode. So if listening to this gave you even more questions about how the economy works, talk to the adults in your life. And maybe see if your school, or at least your middle or high school, has an investment club or classes about money and economics.

With the help of Stacey, we put together a list of resources to help kids learn more about money and the economy. You can find it in the show notes and on our website, butwhykids.org. As always, if you have a question about anything, have an adult record you asking it. It's easy to do on a smartphone using an app like Voice Memos. Then email it to questions at butwhykids.org. We listen to every single question you send us.

But Why is produced by Melody Beaudet, Sarah Baik, and me, Jane Lindholm, at Vermont Public. And we're distributed by PRX. Our video producer is Joey Palumbo. Check out our YouTube series, But Why Bites? We put out a short, bite-sized video episode every other Friday. So if you can't wait for a new episode, try one of our video ones in between podcast ones.

Our theme music is by Luke Reynolds. We'll be back in two weeks with an all-new episode. Until then, stay curious.