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Compare and Contrast

Minnesota is in the throes1 of the administration’s crack down on illegal immigration.2 It has resulted in the federal government shooting and killing two Americans under (the most favorable characterization) questionable circumstances.

This effort is being financed, in part, by OBBBA’s massive increase in DHS’s funding. That caused my tax-centric mindset to compare the signature discretionary spending increases for federal agencies under the Biden and Trump administrations:

  • Biden’s Inflation Reduction Act’s (IRA) IRS funding for tax compliance (most of which has now been undone)
  • Trump’s One Big Beautiful Bill Act’s (OBBBA) increase in the DHS funding for immigration enforcement.

I’ll compare the two efforts using a few different measures. I think they are revealing of the differences and some similarities in the character, ideology, and tactics of the two parties.

Dollars committed

The table compares the respective spending increases for the two agencies. To adjust for inflation, I converted the IRS funding baseline and the IRA authorization to 2025 dollars. (OBBBA was enacted in 2025, so I used its nominal amounts.) The baseline amounts are from IRS and DHS budget documents (for FY2022 and FY2025 respectively). I used their total resources, which include fees that agencies can spend in addition to their appropriations.

For DHS, I limited the baseline to that for Immigration and Customs Enforcement (ICE) and Customs and Border Enforcement (CBP), which filters out unrelated DHS spending, such as that for FEMA and TSA. Similarly, I excluded the IRS increases for taxpayer service (about $3 billion) and the amount for DHS increases to reimburse state and local governments for their costs (about $26 billion). Doing that was a crude effort to focus on the increase in agency enforcement-related spending.3 I used TIGTA numbers for the IRS and CFRB numbers for the DHS increase.  Because the increases were to be spent over different periods (10 years for the IRS and 4 years for DHS), I converted the increases to annual amounts to give a roughly comparable magnitude measure. All amounts are in billions of 2025 dollars.

IRA’s and OBBBA’s Signature spending initiatives
 IRSDHS
Baseline spending$15,291$33,514
Total $ increase83,300150,000
Annual increase $8,33037,500
Annual increase %54.5%115.9%

It’s clear that immigration enforcement received a much larger increase, both in absolute and percentage terms – more than twice as large.

The table amounts are a crude measure of enforcement efforts for both agencies. They include IRS spending on operations support, system modernization and so forth and DHS spending for the border wall, neither of which most would think of as enforcement.4 Getting beyond that requires a more granular knowledge of the agency spending than I have for DHS.

That said, the Congressional Research Service has estimated that the IRA funding (before rescissions) increased IRS enforcement by 69% or about $4.6 billion/year. The CFRB numbers that are more clearly related to ongoing ICE and CBF enforcement are $99 billion or $25 billion/year, which is a more modest 75% increase that is in the ballpark with the IRS enforcement increase per CRS. But if you focus exclusively on the ICE component with its much more modest baseline (a little more than $10 billion) and its much larger share of the increase (border funding was mainly the wall), then the increase balloons to 185%. That is probably is closer to the appropriate comparison – again, more than twice the increase for the IRS.

It is safe to say the immigration crackdown funding is at least twice the amount Congress original authorized for tax compliance in the IRA on an annualized basis. It’s probably much higher. For example, Wikipedia asserts that OBBBA “increases the funding for Immigration and Customs Enforcement (ICE) from $10 billion to more than $100 billion by 2029, making it the single most funded federal law enforcement agency.”  I have no idea if that’s right (it’s Wikipedia after all) but that would be close to 20X the annual amount in the IRA (as passed) for tax enforcement.

Net fiscal cost

As a fiscal or budget matter, comparing outlays for the two efforts is like comparing apples and oranges, more specifically means versus ends. Expanded IRS funding was intended to raise revenues – that is, as a means to pay for other government spending (the ends). OBBBA’s expanded immigration enforcement is spending on an end (immigration enforcement) and the economic consensus is that mass deportation would be a drag on economic growth and thus on revenues from the income and corporate taxes. See e.g., this Peterson Institute working paper (pp. 8ff and Figure 1).

So, a more accurate fiscal comparison should take those differences in kind into account. I’ll ignore the negative growth effects of mass deportation because I’m not aware of a neutral source that estimated the potential budget effects without relying on (likely shaky) assumptions about how many people could and will be deported.

  • IRA’s funding of the IRS was estimated by CBO as raising $180 billion in additional revenue. Thus, after deducting the $80 billion in outlays the net effect would have reduced the budget deficit by $100 billion over ten years.
  • OBBBA’s immigration funding (ignoring the negative growth effects), by contrast, increased outlays and the budget deficit by $176 billion. But it’s worse because its spending was compressed into four years. If Congress chose to make it permanent, CFRB estimated that the 10-year cost would rise to $293 billion.

Thus, a more accurate comparison is almost a $400 billion difference in the deficit effects over the traditional 10-year period – going from reducing the deficit by $100 billion to increasing it by just less than $300 billion. And that ignores whatever negative growth effects occur from deporting hundreds of thousands of workers. Of course, there’s a reasonable chance (let’s hope) the immigration funding will be cutback at some point.

Sustainability

Both efforts clearly were long-term in nature. You can’t deport 11 to 14 million people in a year or two.5 Similarly, building tax enforcement and auditing systems is a complicated and long-term project. It requires developing both IT and human capital systems in the tax administration agency. Both bills, thus, provided multi-year funding. Of course, unspent funds can be rescinded by future Congresses.

That is exactly what happened to the IRS funding. It provided 10 years of funding but in less than two years Congress began to rescind it. Full rescission of the enforcement funding has effectively occurred with resolution of the latest shutdown, less than four years after enactment. This chart from the Bipartisan Policy Center captures what has happened. Of the $45.6 billion for enforcement only $0.1 billion remains. The IRA money that remains for the IRS is mainly in operations support and business systems modernization, not enforcement.

The jury is out on the DHS funding increase. The GOP used a strategy that is less vulnerable to rescission. It provided funding compressed into four years, which means rescissions will need the agreement of the Trump administration. Overriding a veto even if the Dems retake control of Congress would be all but impossible.6 The resulting risk is that renewal or extension will come up sooner and is vulnerable to the Dems taking control of one or more of the three crucial budgeting entities and insisting on cutbacks. But frontloading the money certainly seems likely to ensure more is spent, even if ineffectively.

Policy execution

The cliché regarding recipes and cooking – the proof is in the eating – applies to public policies and programs as well. Policy design, enactment, and funding are critical, obviously. But implementation matters as much or more. A well designed and fully funded program is worthless if it is not appropriately implemented. In this regard, there are more differences than similarities between the two initiatives.

Expanded tax compliance was undertaken as the long-term bureaucratic initiative it was – methodical planning, starting to hire and train staff, acquisition and building of IT infrastructure, etc. The IRA passed in August 2022 and as described by CRS:

Shortly after the IRA’s enactment, the Department of the Treasury promised to deliver to Congress by mid-February 2023 a report detailing how the IRS intended to use the IRA funding. The report, delivered April 6, 2023, sets forth five key objectives for using the funds and a variety of initiatives and projects for accomplishing them.

The short (2 page) CRS report describes the objectives and how the Service intended to achieve them. One can disagree with the plan (warning 150 pp long) or some of its elements, recognize that its objectives are general, strategies ambiguous, and implementation crucial, but explicit and detailed plans were made and communicated to Congress and the public. Ongoing evaluation and reports were made on implementation by the Service and TIGTA (example). Of course, the baby was killed in the cradle. So, we’ll never know whether the plans would have been implemented or worked. But it was not for lack of effort in what was at least a reasonable plan to use the money. The money that was spent (a lot) went for anodyne taxpayer service and to improve systems, (i.e., generally unobjectionable unless you want the tax collection agency to fail and undermine government credibility as a general matter; I probably should not discount that possibility in the current environment).

Implementation or policy execution of the aggressive immigration enforcement funding bonanza could not differ more. We’re less than nine months out from OBBBA’s passage but are headlong into high profile implementation. If planning was done, it must have been started before OBBBA’s enactment (possible – recall Project 2025) and it has not been communicated to the public or Congress (unless privately only to GOP members). Hiring and training processes have been truncated and standard methods abandoned for meeting daily detention or deportation quotas (note that this occurred before OBBBA’s passage).7 Enforcement has been so aggressive and rapid-fire that DOJ has admitted in a court filing that it violated 50 court orders in immigration related matters (admittedly, some of these violations were one day delays in complying, but still).

The administration is reportedly paying more than $100,000 per deportee to third countries to accept individuals whose countries of origin won’t readily take them. This makes one wonder if anyone is even thinking about, much less calculating, the marginal benefit of their actions compared to alternative approaches to deal with these individuals.

The immigration enforcement effort comes across as a secret police action whose planning was DOGE-like (cut without measuring because you’re sure you know the size needed, if you’re not right, you’ll force it to fit).8 The only way it makes logical sense is that they decided to deter migration by making the US such a miserable place that migrants will not want to come here and those already here will voluntarily leave. What they forgot is that also makes the US an undesirable place for many citizens, as well as desirable migrants. In 2023, 25% of US physicians were foreign born as an example. Where would we be without a quarter of our medical doctors?9

Rhetoric/political messaging

Both bills were the result of partisan political enterprises, passing under the reconciliation rules to avoid the filibuster on straight party-line votes. But that’s not the full story. It’s useful to do a little subjective, qualitative evaluation of how partisan and extreme they were, including the rhetoric used to support and oppose them. Once again, there are similarities and differences.

Degree of partisanship

In evaluating how extreme the two measures are, two different metrics seemed instructive to me:

  • How closely did the measure relate to each party’s core agenda?
  • How much did each of the parties need to compromise among themselves to formulate viable proposals within the party?

In relating the two measures to the parties’ core partisan agendas, the striking difference relates to means versus ends. IRS funding was a means to fund the Dems’ policy agenda, while increased immigration enforcement was the actual GOP end policy.

IRS funding is obviously not an end in itself. Rather, it was a means to Dems’ ends of funding government programs.10 Depending on how the revenue was used, one could even view it as bipartisan (e.g., for deficit reduction, an oft-expressed GOP goal). More realistically, it funded the partisan priorities in IRA such as expanded ACA coverage, refundable child credits and so forth reducing the amount of debt financing. In that view, it’s an analogue of OBBBA’s SNAP and Medicaid cuts.

By contrast, OBBBA’s increased ICE funding directly addresses a major partisan campaign issue of the GOP: more aggressive border and immigration enforcement and policies generally. Since the 2016 campaign (“Build the Wall” was a consistent mantra and by many accounts a reason why Trump won the primaries and nomination11), border enforcement and general opposition to immigration of all types have been prime agenda issues that the GOP used to differentiate itself from the Dems.

In assessing the amount of compromise needed to assemble a measure that could pass, the differences are more striking. IRS funding was the most bipartisan of revenue raising options available to the Dems, while the GOP passed close to, if not, their actual immigration policy.

In coming up with revenues to fund their policies, Dems are arrayed as follows: (1) the hard left (Bernie Sanders, Elizabeth Warren, et al as the metric) would impose extremely progressive taxes such as a wealth tax, expanded corporate taxes and higher top individual income tax rates, (2) the middle of the party (Biden budget metric) would have expanded the income tax (grab bag of stuff that hit those with incomes >$400k such as carried interest, taxing capital gains at death, etc.) and clawing back some of TCJA’s corporate rate cut, and (3) the most conservative part of the party (whatever Manchin and Sinema would accept as the metric). After struggling mightily to agree on anything, they finally settled on (3) the most conservative approach – compliance funding for the IRS, a corporate minimum tax, and some other items. One could plausibly argue that in a divided government, the GOP might have agreed to much of this in a budget deficit reduction standoff as in the pre-Trump days. That was certainly true in 2013 when they agreed to allow some of the Bush tax cuts to expire as revenue raisers.

By contrast, as far as I can tell, OBBBA passed virtually what Trump campaigned on and wanted with regard to immigration enforcement. A more modest version would have been an expanded and modified version of the proposal that Senator Lankford negotiated with senate Dems (and Biden agreed to) in 2024. That agreement provided lower funding (less than $120 billion) and allocated the money to somewhat different priorities (e.g., funding more judges to handle cases). OBBBA allocated half again as much money and allocated almost all of it for enforcement and the wall with very little for judges to handle the resulting cases.12

In sum, by the very nature of the two measures and the way in which they were assembled, ICE funding was obviously much more partisan and extreme than the IRS funding.

Rhetoric

By contrast, the political slogans, tactics, and rhetoric used to oppose the two spending packages are eerily similar.

  • Abolish ICE/IRS – The Dems’ “Abolish ICE” messaging has been ubiquitous (after some handwringing about whether it would boomerang the way Defund the Police did) but the GOP’s version is easily forgotten, if more laughable. (ICE, at least, is a relatively new incarnation in the wake of 9/11. See the section below on Context and Background. The idea of killing the federal government’s main tax collection agency is ludicrous.) But eliminating the IRS is a feature of the FAIR Tax, a longstanding GOP proposal. The most recently confirmed IRS commissioner once was an author. It provided for replacing the individual and corporate income taxes, payroll, and estate and gift taxes with a sales tax to be collected by the states on behalf of the federal government. Essentially returning the country to a feature of the Articles of Confederation, where the national government relies on the states for its revenue. (Check with Alexander Hamilton; that was the prime rationale for the constitution.)
  • Jack booted thugs – Each side has characterized the spending as funding quasi-police state tactics. It’s been a few years, so it’s again easy to forget Senator Grassley’s, then Senate Finance chair, and Senator Cruz’s rhetoric on this that was echoed by other high-level Republicans. The difference, of course, is that the immigration funding has resulted in government killings, multitudes of false arrests, confinement in awful conditions for often no or only civil law violations, etc. The threat of auditing lemonade stands (the head of the Republican Party said that) pales by comparison, even if were reality. Making false charges may be more revealing of what you would do if you had power is all I can think.
  • Government shutdown threats – The ICE funding has resulted in a partial government shutdown (no DHS funding), as the Dems are on legal restrictions on ICE and CBP’s tactics before authorizing funding.13 Again, it’s easy to forget Senator Cruz, ever the fount of over-the-top, idiotic rhetoric, also advocated shutting down the government back in 2023 over the IRS funding.
Final thoughts

In sum, by the very nature of the two measures and the way in which they were assembled and implemented have parallels, but the ICE funding was hands-down more partisan and extreme than the IRS funding. And its actual effects were much worse than the GOP’s over-the-top rhetorical charges about the IRS funding.

I think this reflects basic differences in the character and composition of the two parties. The Dems are heterogenous bunch – reflecting widely divergent demographic groups and varying policy views, ranging from uber-lefty to centrist. The party’s tent now covers a cohort of refugees from the GOP’s extinct moderate wing. That constituency, by its nature, compels the Dems to be more moderate and normie.

By contrast, the GOP has become increasing homogeneous both demographically and in its policy views. The southern strategy, adopted in the 1960s and culminating with the 2016 nomination of Trump that de facto rejected the 2013 autopsy’s recommendations, made it more or less a party of and for whites.14 Trump’s death grip on the party and its policy agenda has also made the party unfriendly to anyone who does not hew to his MAGA populist agenda with all of its vagaries and idiosyncrasies. That has resulted in a critical mass of its base (nationally and in many localities) of xenophobes and conspiracy theory friendly types who can drive the primary result, which puts the fear of God in elected officials and potential candidates. That weird mix is the only way I can explain/understand their immigration agenda and its horrific practices in service of what seems to me, at best, idiotic economic policies.15

Contextual background info

The following provides some background information that seemed relevant to me and informed my thoughts expressed above.

History of IRS abuse. There is a long history of using the IRS as a partisan weapon – sometimes successfully (FDR going after Andrew Mellon and Huey Long) and others largely thwarted by principled opposition (e.g., IRS Commissioner Walters refusing to go along with Nixon). The most recent example was Lois Lerner and the scandal involving slow walking of the approval of tax-exempt status for Tea Party related groups (and others), which IMO was wildly overblown by GOP partisans but was still bad. There is a Wikipedia page on it.

That background makes the GOP’s over-the-top rhetoric about rebuilding IRS auditing more understandable, although still misplaced IMO.

Border patrol and ICE. As a tax guy, I was aware of the abuse of IRS powers across the years but not of the longstanding issues with the Border Patrol. See this NYTimes column by Reece Jones, the author of a book about the Border Patrol, for examples going back to its formation in the 1920s:

How the Border Patrol operates can be traced back to the agency’s origins in Wild West frontier policing. The United States Border Patrol was established in May 1924, days after the signing of the Johnson-Reed Immigration Act, which set very small quotas for immigrants from most of the world except Northern Europe. According to the Times headline at the time, the law was meant “to preserve racial type as it exists here today.”

Senator David Reed, a Pennsylvania Republican who sponsored the immigration act, explained in a 1925 Senate debate: “They [the border patrol] have no right to go into an interior city and pick up aliens in the street and arrest them, but it is just at the border where they are patrolling that we want them to have this authority.” He reassured his concerned colleagues, “We are all on the alert against granting too much power to these officials to act without warrant.”

His promises proved empty. The first agents were hired from frontier law enforcement and brought with them a frontier ethos. One agent bragged in his memoir that he had killed 27 people, but that was just whites; he didn’t bother to count Black and brown people. Another agent, angered when a smuggler shot his partner, went to the Rio Grande and indiscriminately shot at every Mexican he could see on the other side of the river.

ICE is a newer agency, created in response to 9/11. It too has had multiple issues in that shorter history. This Substack post by Garrett Graf is long but worth reading to get a flavor of issues and problems with both agencies:

ICE is an agency whose recruiting and training standards are so low that other federal law enforcement agents say pejoratively that ICE is “hired by the pound, from the pound.” And the paramilitary CBP, especially, has been uniquely callous with human life and suffers from a deeply ingrained culture of racism and misogyny, all of which is enabled by an all-but unequaled longstanding sense of impunity.

It’s no surprise, I guess, that tasking these agencies with an unprecedented with a mass deportation is generating the friction it has. (Operation Wetback during the Eisenhower Administration deported a small fraction of what Trump promised in a much different social context.) The Dems’ rhetoric and opposition are totally understandable to me.16

Fraud-fighting. This, of course, was one of the administration’s rationales for the Minnesota surge. It is a mere pretext. Minnesota does have a serious fraud problem in its social service programs and the fraud that has been uncovered is strongly linked to one of the state’s immigrant communities. But the surge is pretextual because:

  • The fraud that has been uncovered is nearly all linked to citizens or legal residents.
  • Neither ICE nor CBP have the mission or expertise to investigate white collar fraud. If fraud were the real concern, the feds would have sent white collar crime experts and investigators, auditors, and data scientists, not the equivalent of poorly trained bounty hunters.
  • Yes, Minnesota’s uncovered fraud is large – $250 million in Feeding Our Future alone and tens of millions in other cases. (Joe Thompson’s cited $9 billion IMO was purely speculative and is not based on actual evidence. It seemed to me an irresponsible assertion for a prosecutor to make. The report by Optum (coverage here and here), albeit commissioned by the state, seems more measured and realistic, and suggests a fraction of the amount might be fraudulent.) The evidence certainly could support well targeted federal enforcement efforts. But other states – notably Arizona’s $2.5 billion documented Medicaid fraud – have been larger and have not garnered the same attention from the feds, the GOP, or right-wing media. It’s easy to guess why. There isn’t convincing evidence that Minnesota’s Medicaid fraud is out of range with other states. There simply are reliable benchmarks that I’m aware of.

Notes

  1. As I was writing this post, the administration announced an end to it. Skeptics, including me, are withholding judgment on the extent to which that will happen. ↩︎
  2. It’s also a crackdown on legal immigration with the arrest/detention of people with TPS status, entrants with pending asylum claims, and already vetted refugees who have been confined to re-review their vetting. That says nothing of the many citizens who have been swept up because of their appearance, accents, or protest-related activity. ↩︎
  3. Some of the increased DHS spending was explicitly denominated to reimburse state and local governments for their costs, which I excluded. Much of the respective increases for both agencies was for infrastructure-ish spending – e.g., building the border wall and IRS system modernization. Also, I would note there is an asymmetry in the comparison because I did not adjust the IRS baseline to exclude non-enforcement spending such a pure taxpayer service; ICE and CBP amounts, by contrast, are more or less exclusively enforcement. ↩︎
  4. The border wall spending – over $45 billion – is IMO some combination of inefficiency and waste. There are simply more effective and less expensive ways to prevent border crossings. Consider also that the administration claims (with reasonable credibility) to have essentially stopped most illegal border crossings from Mexico without building the wall. Much of that, of course, may simply be due to making the US a much less attractive place for migrants in various ways, including the brutality that may be visited on you if you’re successful in crossing the border. ↩︎
  5. The last 2+ months in Minnesota alone reveal its impracticality, as well as its society-destroying effects. ↩︎
  6. The Biden administration did agree to the first tranche of rescissions in the IRS funding, so Trump and GOP members of Congress plausibly could agree to cutbacks. That seems unlikely given their MO. ↩︎
  7. This topic is well outside of my expertise. I based my conclusions on reading the general news media stories over the last months and Garrett Graf’s Substack post referenced in the last section of this post on Contextual background info under the heading, Border Patrol and ICE. ↩︎
  8. Along these lines, DHS has adopted what Politico describes as “a ‘mandatory detention’ push — an unprecedented reinterpretation of decades-old laws — has resulted in thousands of people, most without criminal records, being detained, even if they have lived in the country for decades without incident.” This, as one would expect, has led to a plethora of litigation and as Politico reports: “[D]istrict court judges appointed by every president since Ronald Reagan have overwhelmingly agreed, rejecting the new policy, while a small but growing minority — primarily of Trump-appointed judges — has endorsed the administration’s view. The 5th Circuit Court of Appeals has embraced that outlier view as well. But the issue is far from settled and could be on track for the Supreme Court.” The Politico article has a table that tracks the cases by the name of the judge and the president that appointed each, with links to the court orders. Here’s a link to David French’s scathing take on the 5th Circuit decision, the piece that alerted me to this issue. ↩︎
  9. See this NY Times story about a town in Alberta that resorted to paying big signing bonuses to attract seven family doctors from West Africa out of desperation. I guess that still may be possible in the US, but the Trump administration has imposed $100K fee on H1B Visas, one of the typical ways foreign physicians are legally brought to the US. So, a similar US town would need to pay that, in addition, to a signing bonus. It seems the opposition to any kind of migrants, included ones critically needed and who follow the rules, runs deep in this administration. ↩︎
  10. Sure, it could also be viewed as an end in itself, i.e., ensuring that more taxpayers pay their legal obligations, the full tax liability. It’s fairer to classify that as a desirable side effect and nowhere close to a core agenda item. ↩︎
  11. It was contrary to the general policy preferences of the GOP donor class – Club for Growth, Kochs, etc. They were more on board with the Gang of Eight immigration compromise during the Obama administration than the current Trump approach. Earlier efforts during the W administration were torpedoed by the efforts of Senator Jeff Sessions and his aide, Stephen Miller, who now is a key domestic policy advisor to Trump. Miller, by some accounts, was behind the Trump’s use of Build the Wall as a key 2016 campaign issue and contributor to his primary success. See these NYTimes and Atlantic pieces for background information on Miller and his role in Trump’s immigration policy. ↩︎
  12. This, of course, is a factor in the immigration case backlog. The DOGE-like firing of immigration judges, reported to be 100, is almost certainly another contributing factor. OBBBA increased enforcement spending by multiple factors but the number of judges by much less. That only works if the enforcers are also the de facto judges – i.e., the people detained are deported without hearings and adjudications or are detained for very long durations. I don’t know but doubt that DHS has even hired sufficient replacements for the fired judges, much less for an increase in the cohort. By contrast, hiring enforcement agents is a full go. ↩︎
  13. Count me skeptical of the negotiating power resulting from holding TSA and FEMA employees hostage, while ICE and CBP go merrily on their ways. Seems like a pure reflexive “do something/anything” reaction, much as I agree with the need for and sensibility of many of the restrictions. ↩︎
  14. They made inroads in the 2024 election with conservative Hispanics and Black males but kicked it away with their governing policies on immigration and economics. That reflects, I think, the current iteration of the party’s MAGA core philosophy. Building a large electoral majority does not seem to a big goal if it involves being friendly to more diverse constituencies.

    For a Rip Van Politico who went to sleep in the 1960s, this description of the party of Lincoln, which provided the necessary Senate votes to overcome the southern Dems’ filibuster and pass the civil and voting rights acts, would be hard to believe. I think it came about gradually by various transformations and moves necessary to capture white southern Democrats and northern blue collar “Reagan Democrats” (e.g., political messaging about welfare queens, Willie Horton, and similar) and to attract most of the conspiracy theorist “crank” element of society (accomplished by a succession of figures spouting faux populism, conspiracy theories, anti-intellectualism, and scapegoating – Gingrich, Buchanan, Tucker, RFK jr., etc.). That is now a critical mass of the party’s base – sufficient, as proven by Trump and others, to win most GOP primaries. It was fully confirmed with Trump’s freak election in 2016 and most importantly by 98% of the party’s elites’ acceptance of his characterization of the events of January 6th. That has made the party a wholly owned Trump subsidiary and excommunicated any normie, moderate element (most neocons, prudential conservatives, true limited government types and so forth) who were unwilling to always go along with whatever his wacky whims.

    This is a party that accepts the likes of Nick Fuentes and Candace Owens, while shunning Mitt Romney and Liz Cheney. It’s a truly remarkable metamorphosis for one of the nation’s two great political parties. At least, that is my analysis of what has happened as someone viewing it from the nonpartisan sidelines. ↩︎
  15. Proponents, including Trump and administration officials, frequently justify mass deportations as creating jobs for citizens and legal residents. (The real justification is likely more sinister with cultural and racial dimensions.) This is a classic Econ 101 justification that has some simplistic appeal but is contrary to reality (see e.g.). Even as a matter of common sense (economic study unnecessary), most citizens are unwilling to accept farm worker, roofer, long term caregiver and similar jobs. ↩︎
  16. IMO if Biden had followed a border and immigration policy closer to Obama’s, the 2024 election results might have come out differently. Biden’s laissez faire border policy for the first 3+ years of his administration made the Trump’s campaign focus on immigration more salient and acceptable to voters outside his xenophobic base. Moreover, it was an anchor dragging down Harris because of her assigned role in the administration (“border czar” to the Right) and the general impossibility of separating herself from the Biden policies. ↩︎
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Health care subsidies

Gene Steuerle has a good Substack post (“What Liberals Miss from tshe Recent Healthcare Debate: People Feel Entitled but Not Empowered by Many Government Transfers”) on the debate over extension of ACA tax credits. It’s short and worth reading on several levels IMO, providing insights into the effects of America’s massive allocation to health care services and the politics of providing and withdrawing direct government subsidies.

His opening paragraphs starkly illustrate the effects of America’s lopsided allocation FN of GDP/income to health care services:

After several decades of [allocating a substantial share of the growth in income to healthcare], total [U.S.] healthcare costs per household exceed $40,000, while insurance policies for working-age families typically cost more than $20,000. Politicians then insist that individuals should not be required to spend more than 10 percent of their income on these costs. This type of claim implies that only households earning more than $400,000 could afford to cover their share of the national health expenses. However, whether we pay through taxes, out-of-pocket outlays, lower cash wages, or government borrowing, we spend approximately 22 percent of personal income on health care.

That in my mind is a simple and clear illustration of the magnitude of the economic effects of our runaway health care system structure. It is a system in which somebody else pays without an overall budget constrain. As a result, we allocate almost twice as much economic output than other developed countries to health care services.1

It’s no surprise that when the subsidies (i.e., ACA tax credits) are withdrawn and personal costs rise dramatically, people are unhappy. Their displeasure will be directed at those responsible: the GOP.

What’s less obvious and creates consternation for Dems is why people do not give them credit for providing the subsidies in the first place. He cites others (Paul Krugman and Suzanne Mettler) to explain why: when people receive uncertain benefits, such as health coverage, they think they have earned them. Steuerle’s additional insight:

[I]t’s not just that voters often treat a benefit once received as an entitlement or “earned,” as Mettler claims. Many feel disempowered by a heightened sense of dependency and inability to make their own way. Many of these effects are indirect but very real. Transfers that become very large, such as in healthcare, displace much of what the government could provide to workers through programs that are more likely to enhance their productivity and take-home pay. Even for employees who receive fewer healthcare transfers because they have employer-provided insurance, high costs severely depress the cash wages employers can pay them. So, not only do workers fail to give Democrats much credit for giving them what they feel entitled to, but at times they rebel by turning to populists who tell them to blame their declining sense of control on immigrants or other government beneficiaries who receive “welfare” or foreign aid recipients.

Side effects are that health care subsidies crowd out government spending on education, research, and other efforts to build human capital that enhance general welfare and the political pattern passes the subsidy bill on to future generations. That is, the GOP backs down and uses deficit spending to keep the subsidies flowing at the expense of future generations.2

Notes

  1. There is no objective way to say whether that is bad or good. It’s a preference. My instinct is that it is suboptimal. Yes, health care is definitely a superior good, but I suspect that it reduces the US’s general welfare compared to with that of Europe, Canada, etc. ↩︎
  2. Steuerle seems to assign equal or more responsibility for resorting to deficit spending. I disagree with him on that. It likely was the case in the 20th century but has IMO ceased to be so in the face of anti-tax malignancy that has taken over the GOP essence. ↩︎
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Tariff Update

The obvious headline tax issue of the year is tariffs. So, I can’t help myself from writing about them, even though my expertise is thin at best.

SCOTUS Case

The challenge to the legality of the IEEPA tariffs,1 has attracted a lot of attention, especially with the SCOTUS oral argument last week. Many non-legal experts presume that the IEEPA tariffs are clearly illegal. For example, Paul Krugman who may be the foremost economic expert on international trade (that’s what he won the Nobel for after all) assumes that is the case and if the Court decides otherwise the conservative justices are just in the tank for Trump (i.e., it’s political).

I don’t share that view because the statute can easily be read to authorize it (even if you’re a textualist)2 and the Court has always given the President wide discretion in making judgments like this – is there an “emergency”? what actions should be taken to address it? That is especially the case when the issues involve national security or foreign affairs, as is likely to be thought the case here. This Brookings piece is a nice (albeit long), neutral summary of the legal and economic issues.

I was generally persuaded by Jack Goldsmith’s view of the case on the legal merits. And SCOTUS’s deciding the multitude of Trump 2 cases on the emergency docket overwhelmingly in the administration’s favor suggested to me that the tariffs would be upheld to the extent nonlegal, political considerations are important. (Translation: it sure looks like the Court has dipped its toe in, even if it hasn’t actually jumped in, the tank for Trump.)

I wasted three hours listening to the oral arguments last Wednesday.3 Going in, I thought the case was close to a 50-50 proposition. The oral argument convinced me that the plaintiffs had a modestly better chance of winning than I had thought, although it’s still not clear to me. The prediction markets clearly thought the argument indicated the plaintiffs is more likely to prevail. For example, Kalshi dropped from just under 50% probability that the tariffs would be upheld when the argument started to 30% at the end of the day. See this story.

The media has published many accounts of the arguments. Of those I read, Goldsmith’s interview in the Times was the best at assessing the potential insights into how the Court will rule and Amy Howe’s at SCOTUS Blog is an accurate and neutral summary. Given the textualist orientation of the Court, a lot of time was spent on grammar and parsing the meaning of words.

My guesses

  1. There are four likely votes to invalidate the tariffs: Jackson, Kagan, and Sotomayor (rationale: plain language of statute does not authorize imposition of tariffs and they’re Dems) and Gorsuch (statutory language does not authorize under Major Question Doctrine and if it did, it would be an unconstitutional delegation of Congress’s taxing power).
  2. There are three likely votes to uphold: Alito, Kavanaugh, and Thomas. They’ll reject the application of the Major Question Doctrine because of the foreign affairs and national security context. My conviction on Kavanaugh is the weakest.
  3. The big unknowns are Roberts and Barrett. I think it is a toss-up for Barrett who remains inscrutable (she asked really tough questions of both sides). Roberts is the most centrist of the conservatives and, thus, the most likely to vote to invalidate. But doing so would go against his strong preference for executive power, so I don’t have great trust relying on the fact that his questions seemed tilted toward invalidation.
  4. I think forfeiting the tariff revenues, given the massive federal budget deficit, will encourage the conservative justices to uphold the tariffs. Based on the Court opinion that was a factor in the Moore case. The conservative justices are likely old-fashioned fiscal conservatives who are concerned about stuff like the debt. As a legal matter, the government twisted itself in a pretzel during the argument to say the revenues were not relevant. They did that, because they were arguing the tariffs were imposed as a way to “regulate” (not to tax/revenue raise) under the statutory language. That despite POTUS’s repeated claims to the contrary in speeches, some of which are quoted in the government’s brief. The fact that many of the tariffs, if not all of them, could be reimposed under other, narrower statutory authority should cut against this. But invalidating the tariffs will generate a right to refunds, which creates a one-time budget hole and an administrative mess. Not as bad as Moore, though.
  5. To maintain an appearance of political neutrality, I suspect that the conservative justices (well, Roberts and Kavanaugh) will feel compelled to rule against Trump on the merits in a couple cases this term. The tariff case is a good candidate, because the conservative movement’s dislike of tariffs. An adverse decision for the government will not rile up the Republican base and may result in a sigh of relief by the normie Republicans and the donor class (i.e., the guys that wine and dine Thomas and Alito). Other good candidates: the Lisa Cook (Fed governor) firing, the national guard cases, and birthright citizenship case (assuming it actually makes it to the Court this term on the merits).
  6. The fact that Trump has made a big deal about the case and has explicitly pressured SCOTUS on it, in my mind, makes it a very good candidate for ruling against Trump. It will appear to politicos to be a big deal; the Court clearly asserting its independence/primacy in interpreting the law. It probably isn’t such a big as a real-world matter, because Trump can reimpose most of the tariffs under other authority. So, it’s the perfect case to rule against Trump in a big case on the merits. All that makes me lean toward invalidation.

Invalidation = Inflation fighting stimulus?

If SCOTUS strikes down the IEEPA tariffs, that will in addition to relieving importers from paying them presumptively provide refunds to those who paid the tariffs. Some commentators have pointed out that this would yield an unexpected, macroeconomic twofer by:

  1. Reducing inflation – imposition of tariffs is clearly inflationary as a de facto excise tax on imports, increasing their prices to buyers. Thus, repealing them should be deflationary, reducing the prices that included passed-along tariffs.
  2. Providing economic stimulus – if the tariffs are struck down, payment of more than a hundred billion dollars in refunds will result, injecting money into the economy: classic Keynesian economic stimulus, just like the pandemic rebates.

If this is true, the result could be a hidden Christmas gift (well, I’d be very surprised if the decision comes down THAT fast) for Trump. He has struggled with voters’ perceptions of his economic policies.4 Contrary to his campaign promises to slow or reverse inflation, it’s increasing, and the economy appears to be slowing with more layoffs and decelerating job growth.

Moreover, conventional wisdom is that a macroeconomic policy typically requires a tradeoff between either slowing inflation or stimulating growth. You can do one or the other, but not both simultaneously. Policies that bring down inflation usually slows growth. The typical policies are (1) higher interest rates or (2) contractionary fiscal measures like cutting spending or raising taxes. Both are growth inhibiting. Similarly, economic stimulus such as tax cuts or increased spending risk stimulating inflation. Is invalidating the tariffs a sort of miracle cure?

It’s correct as far as it goes but probably doesn’t go very far. In fact, close to nowhere IMO because:

  • The inflation reduction effect will be small, at best. Parenthetically, it’s worth noting at the outset that the potential is to reverse some of the inflation that the tariffs caused, not the inflation 2024 voters were concerned about. The inflationary effect of the tariffs has been modest, less than most economists predicted for various reasons (businesses stocked up in anticipation, they absorbed some of the burden temporarily, etc.). It’s reasonable to assume that the reverse will occur if the tariffs are struck down. Businesses will probably not immediately cut back their tariff-induced price increases, so they recoup some of the burden they absorbed, etc. Any beneficial inflation reduction will be very small.
  • The stimulus effect, if there is one, will be slow and muted. First, it will take some time for refunds to actually happen. SCOTUS will remand the case to the lower court to figure out. There will be the usual bureaucratic, legal dance to delay things. It’s generally observed that tax cuts are less effective economic stimulus than spending increases because much of the benefits go to recipients who don’t spend them. That depends upon the structure of the tax cuts obviously. Compare rebates to low-income people, which are more effective because they get spent, with cuts to investment income like capital gains, where more of the benefit goes to savings. Tariffs rebates are more like the latter than the former. Some of the potential refunds have been sold to speculators already (the refund rights are trading on commodity markets). In the remaining cases, they go to businesses who will likely absorb them into their working capital and wait to see whether Trump reimposes them under other laws.

The whole point about SCOTUS striking down the tariffs as anti-inflation stimulus is very clever economic theory, but probably much ado about nothing.

Revenues

The Penn Wharton Budget Models’ tracker shows Treasury has collected $225 billion in year-to-date tariff revenues as of November 3rd, compared to $82 billion in 2024 or a 174% increase. About $32 billion was collected in October.

Given the variability of the tariffs – both as to rate and base (good old mercurial Trump) – it’s difficult to extrapolate or annualize these revenues. If one simple-mindedly assumes the October revenues continue for the 10-year budget window, you get to $4 trillion (120 * $32 billion = $4 trillion). That is also what CBO estimated for the current tariffs and DOJ’s merits brief (p. 23) cites that estimate. Never mind that CBO’s estimate was for all the tariffs, not just the IEEPA ones, and assumes that they continue without change.5 A good portion of the revenues come from the non-IEEPA tariffs. The Yale Budget Lab has estimated 29% (September estimate that 71% of total tariff revenues come from IEEPA tariffs).

A reasonable estimate would need to account for a host of other factors, including dropping the rates under trade deals (e.g., the recent China deal) or just throwing in the towel as may be the case for bananas and coffee, legal avoidance (see next item), behavioral responses (e.g., the desired reshoring of manufacturing, long-term substitution effects for exempt or lower tariffed goods, etc.), administrative exemptions, illegal avoidance, etc. On balance, these other elements suggest the current monthly revenues will not continue at the October rate, but that’s just my amateur guess.

Further compounding matters, some or much of the revenue may be spent on new initiatives. Trump has proposed (per social media) a general tariff “dividend” of $2,000 per person other than “high income people.” It’s unclear whether this would be paid one-time or annually. If the latter, CFRB points out that the cost could be double the annual tariff revenues. Using the revenues for relief for farmers and others adversely affected by the trade war has also been suggested, as well as many others.

In short, don’t count of tariff revenues offsetting OBBBA’s revenue loss in any material way.

Complexity and Avoidance

Conceptually, tariffs are simple taxes – essentially a sales tax on importation of goods (and maybe services, like Trump’s idea to tariff foreign films), applying a tax/tariff rate to the price of the imported item. As is typical, the real-world tariffs are complex and full of ambiguity. Rates vary by type of product and country of origin. Moreover, products often have component parts that were produced in multiple countries, while being designed in yet other countries and may straddle legal definitions of product categories and so on.6

The varying rates and exemptions along with the inescapable ambiguity creates complexity and provides the inevitable incentives for avoidance behavior or tax planning. As an aside, that increases the already inherent inefficiency and deadweight loss of tariffs, especially tariffs with high rates.

Tax Notes has a good article, The Changing Landscape of Tariffs and Taxation, and What Companies Can Do (Oct. 23, 2025), that outlines (among other things) some of the standard avoidance or planning approaches:

  • disaggregating transactions that companies had aggregated for convenience, for example, services or unrelated intangible property bundled with tangible goods pricing;
  • modifying products to be appropriately reclassified in a lower-tariff category at the time of import;
  • changing intercompany flows or transactions so the final “substantial transformation” happens in a lower-tariff country;
  • using the “first sale rule,” that is, the initial price paid to the manufacturer, rather than the price paid to an intermediary; and
  • acquiring a third-party supplier or customer and modifying the transaction flows to optimize the tariff implications.

The article describes each of these strategies with a bit of detail and some examples. You can read the article (no paywall) if you’re interested. I won’t attempt to summarize them but will make two observations.

First, the core of the strategies is to characterize as much of the price of imported products as possible as falling in lower tariff rate or exempt categories.7 That essentially means jiggering the legal and accounting treatment to make it look like more of the prices paid are for stuff in low rate or exempt countries or product categories in various ways. In some cases, that may require acquiring third parties in your supply chain, so you can control these prices (see the last bullet). Several of the strategies (first and third bullets) should sound familiar to folks who deal with international corporate tax rules because they are essentially variations of transfer pricing games corporate tax planners play (e.g., Dutch Sandwich or Double Irish to name two that have gotten enough media attention to merit Wikipedia pages).

Second, avoiding tariffs will make avoiding corporate taxes more difficult. The international corporate tax game typically uses intercompany prices (transfer pricing), often involving intangibles or intellectual property royalties and fees, to shift profits to very low corporate income tax rate countries (tax havens). Now, the need to use similar strategies to avoid tariffs adds another dimension to that game. In some cases, reducing prices in a country subject to high tariffs may shift profit and corporate tax to a higher tax country or the US. That probably can be avoided by interposing more complicated structures but not always. In the short run, it could enhance corporate tax revenues by shifting income to higher tax jurisdictions, including the US which would also benefit states. Just a guess.

Notes

  1. It is important to keep in mind that the litigation applies to only a subset of the Trump tariffs. Very few legal experts think that the tariffs imposed under other statutes – i.e., a variety of statutes clearly authorize the executive branch to impose tariffs when specific conditions are met – are legally suspect. Trump used IEEPA as a shortcut to impose sweeping tariffs on almost all products in the entire world without the hassle of jumping through the various hoops or preconditions under the tariff statutes. Putin’s Russia, of course, was one of the few countries that was spared. ↩︎
  2. It just requires reading “regulate” foreign commerce to include imposing tariffs, which is a lesser burden than a total prohibition or embargo, something the statute explicitly permits. One can easily argue against that idea, but it’s not clearly wrong. The Court’s adoption of the Major Question Doctrine (MQD) seems like a bigger issue to me. If the Court were to treat the tariffs like student loan forgiveness (invalidated under MQD because the language was too general and Congress doesn’t hide elephants in mouseholes per Scalia), they would invalidate the tariffs as beyond the statutory authority. ↩︎
  3. Reading the briefs is typically more useful. In this case, you can probably skip the amicus briefs. Take Erwin Chemerinsky’s word, not mine. Joe Thorndike thinks otherwise, but he’s a historian reviewing three amicus briefs either by historians or about history. Much of their arguments would be more persuasive to a less textualist Court IMO. ↩︎
  4. That shows up both in his polls on how he’s handling the economy and in the recent Republican wipeout in the off-year elections. ↩︎
  5. The brief has sufficient weasel words (“upcoming years” rather than CBO’s specific 10-year window) so that it’s not a clear false representation, just misleading to a lay reader. The people writing these briefs have Ivy League law degrees after all and aren’t going to breach ethical rules causally. ↩︎
  6. For example, the complexity and typical low tariff rates led many importers of Canadian products to simply pay the tariffs, rather than go through the trouble of determining whether the product was exempt under NAFTA or USMC treaties. With the now high rates, that is no longer the case. ↩︎
  7. Of course, a typical purpose of tariffs is to cause that to occur WRT real economic activity, specifically to induce more domestic production. The strategies in the article focus on changing how the tariff law views the location, not actually changing anything in the real world. ↩︎
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Shutdown Musings

We’re at the end of the federal fiscal year with the likelihood of yet another government shutdown. I assume that will happen or whether the Dems will conclude at the eleventh hour that a shutdown is in neither their political nor the nation’s interests.1

Back in March, I assume they concluded that a shutdown would simply make more of the DOGE rampage through the federal government legal. That was so because a shutdown gives the executive wide discretion to determine what is an essential function and can continue despite the lack of appropriations. That concern has lessened a bit with the tempering of DOGE, probably increasing the likelihood of a shutdown.2 The messages out of DC confirm that a shutdown is highly likely. I see no good coming of this, no matter which course the Dems take.

The Dems are going to hold out for health care funding – reversing some or all of OBBBA’s health care cuts.3  Given that tax increases are surely off the table – as a matter of principle for Republicans and as a matter of politics for Democrats – that presents a classic Hobson’s choice (at least for me).4 Is it better to:

  • Increase an already unsustainably growing federal deficit by spending more on ACA tax credits – a serious long-term fiscal and economic risk of unclear dimensions; or
  • Make individual health insurance much more expensive for lower-middle income households who rely the tax credits – effectively throwing millions of folks off health coverage because they can’t afford it?

It might be fun to speculate about the political pros and cons of the Dems’ choice of whether to shutdown government to preserve health care coverage for a swath of folks in the individual market (a policy good) or to allow that to happen so the public can see the real impact of the Republican’s OBBBA decisions (a Dem political good possibly).5 Weighing in on such questions is NOT my comparative advantage. I’ll leave it to politicos and pundits.

Instead, I think a little thought experiment is useful. In a world where tax increases are not an impossibility, could the Dems’ fund their health care demands with reasonable tax increases that:

  • Are progressive and apply overwhelmingly to households with incomes north of $200k;
  • Do not increase rates – corporate or individual (As an aside, it’s still a political mystery to me that the Dems were unable to increase the corporate rates at all when they had Congressional majorities, given that neither Manchin nor Sinema were unlikely to and ultimately did not run again. They must really believe that the corporate rates matter a lot.); and
  • Leave untouched the idiotic “small business” break (i.e., QBI or the 20% exclusion for pass through entities)?

At the request of the Dems, CBO has estimated the 10-year cost of their health care proposals (i.e., enacting them permanently). The numbers are in the table below. Descriptions of what is involved with the various spending is in the CBO memo. Note that this addresses only the ACA related provisions, not the full Medicaid cuts in OBBBA, a much bigger fiscal nut to crack.

ProvisionCost
($ billions)		Increased # of insureds (millions)
Expanded premium tax credit permanently$3503.8
Nullify final admin rule400.3
Repeal OBBBA’s ACA provisions2722.9
TOTAL$6627

Thus, the total cost is a little less than $700 billion. It’s worth noting that repealing the OBBBA provisions are the provisions that deny ACA benefits to various immigrant groups (not unauthorized aliens FWIW), such as those on temporary protected status, with pending asylum claims, and so forth. They do not take effect typically until 2026 (one provisions is delayed until 2028).  

It is easy to assemble a list of tax increases meeting my three criteria above. The table below shows some possibilities that can be justified on a policy basis.6  The numbers for reversing OBBBA’s provisions are from the JCT estimates, the other two are per CFRB.

ProvisionsRevenue in billions
Reverse TCJA/OBBBA estate and gift tax expansion$212
Revert to TCJA’s SALT deduction142
Limit charity deduction to cash > 2% of AGI500
Apply NIIT to PIT income not subject to SECA490
TOTAL$1,344

The total from this limited list of high-buck options is almost twice the cost of the health care provisions, providing plenty of room to soften their impact by phasing them in, raising the dollar limits, lowering percentage inclusions, and so forth. Many small dollar options are also available, such as taxing carried interest of hedge fund and private equity investors as ordinary income rather than capital gains.

The estate and gift tax reversal would still provide a lifetime exemption for married couples that exceeds $16 million, indexed for inflation. That is sufficiently generous. The current antipathy for estate taxation is one of life’s imponderables, given its historic popularity. It must be a political messaging problem. The tax only affects a tiny percentage of the population.

OBBBA’s quadrupling of the SALT deduction limit to $40K is both regressive and unnecessary. (Disclosure: it will save me a material amount of tax. It’s still a bad idea.) The revenues from the SALT deduction limit could be further increased by reversing the IRS’s administrative decision to allow deduction of income taxes directly imposed on pass through entities. (That decision was probably contrary to the statute, but no one has both standing and an incentive to challenge it.) When OBBBA was under consideration, the congressional committees considered various options for limiting deductibility, one of which was in the House passed version but was ultimately dropped. Getting rid of it would treat wage earners and investors in stocks and bonds more equally with owners of pass-through business entities.

OBBBA already imposes a 0.5% AGI floor on charitable contribution deductions, starting for contributions next year. Ratcheting that up and imposing some sort of limit on the ability to deduct the fair market value of appreciated property makes both policy sense and can raise a lot of revenue. This is a favorite hobby horse of mine.

The final option – imposing the Net Investment Income Tax on (mostly) S corporation distributions – would close the John Edwards/Newt Gingrich loophole and treat S corporation shareholders similarly to partners. It only applies at incomes above $200k (single and head of household) and $250k (married joint).7 The amount of revenue involved never ceases to amaze me.

Bottom line: there are plenty of tax increases that should be politically acceptable to offset the cost of the Dems’ heath care proposals. In the current environment where any tax increases (except tariffs) are toxic, none of this will be considered. The more likely outcome is a compromise that increases the deficit by temporarily extending some of the Dems’ health care demands.

Notes

  1. The Kashi prediction market assigns a 82% probability of a shutdown as I write this. ↩︎
  2. The administration is trying to reanimate it by threatening mass firings of federal employees. Past practice would counsel Dems to take the administration seriously on stuff like this, not just to assume it’s a negotiating bluff. ↩︎
  3. Technically, OBBBA did not cut the ACA tax credit enhancement that was enacted during the pandemic. It allowed it to expire. OBBBA did make some ACA related cuts, terminating credits for immigrant groups, in addition to its major Medicaid cuts. ↩︎
  4. I assume that when push comes to shove, the issue will be whether to temporarily extend the enhanced ACA tax credits. The cuts in the out years are just too far off and too large to address. My amateur guess at the politics. ↩︎
  5. The latter option is occasionally referred to as touching the hot stove – essentially helping Trump voters realize the real-world consequences of Republican policies that are inconsistent with the populist campaign rhetoric they may have thought they were voting for. ↩︎
  6. My first preference would be simply to repeal QBI. That would more than solve the problem if the repeal were effective for tax year 2027. It’s been made absolutely clear that despite QBI’s lack of any policy basis both parties support it, fairly strongly. Sigh. ↩︎
  7. Here’s how Penn-Wharton succinctly describes it: “Under current law, individuals with high wage or self-employment earnings are generally subject to a 0.9% additional Medicare payroll tax on top of the 2.9% Medicare payroll tax. Similarly, individuals with high investment earnings are subject to a 3.8% net investment income tax (NIIT). However, certain pass-through business income of limited partners and S corporation shareholders escapes both of those forms of high-income taxation. This policy would expand the NIIT base to ensure that all pass-through business income would be subject to the NIIT.” ↩︎
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What’s in a name?

Words and language matter. Especially in politics. Language, the ability to communicate complexity, distinguishes us from other fauna, and is responsible for our species’ success.

Whatever you think of Trump, his person or politics, he is a master of political communication.1 But to even the mildly sophisticated, his communications often seem comical, if not ridiculous.2 His name for the big tax and budget bill: OBBBA, the One Big Beautiful Bill, is a case in point. Even if far from the funniest, most ridiculous, or absurd.

I like to read John McWhorter’s NY Times column because of his skill at documenting and providing insights into the hidden meaning and nuances of language, including Trump’s. One paragraph from his most recent column struck such a chord that I felt I had to archive it. (The whole column is worth reading.) His column focuses on Trump renaming DOD as the Department of War and how it reflects his consistent pattern of being active, rather than reactive, always on attack. But the quote relates to OBBBA:

Even Trump’s most positive-sounding coinages are acts of a certain kind of verbal aggression. I sometimes stop to marvel that the House passed something with the actual official title the One Big, Beautiful Bill Act. That goofy bark of a name is a boisterous clap back against opposing views, an attempt to drown out inconvenient facts with braggadocio. It is a linguistic snap of the locker room towel. Every Democrat in Congress, a few Republicans and hordes of people across the land thought the bill was a tragedy. For Trump to nevertheless call it big and beautiful, as if it were one of his buildings or a hairdo, was a jeering “Ha ha!” from Nelson Muntz of “The Simpsons.” This includes the informality of the phrasing. “Big Beautiful Bill”? Imagine the 13th Amendment, abolishing slavery, titled Eat It, Secessionists!

Notes

  1. His failures as a basic businessman, casino owner, developer and so on are well documented, but his years as a marketeer, salesperson, TV personality, and general shill honed his native communication skills. ↩︎
  2. Many must work politically or at least are not political liabilities. ↩︎
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Tariff revenue update

Last week, CBO updated its 2025-35 estimate of the increased tariff revenues attributable to Trump’s actions by a cool $1 trillion compared to the previous estimate in June. The total increase in revenue is $3.3 trillion with an additional $0.7 trillion lower borrowing costs for $4 trillion in total deficit reduction. (The June estimate of revenues was $2.5 trillion in increased revenue and $0.5 trillion in reduced borrowing costs.)

The main reason for the revenue increase is that administrative actions since June have increased the effective tariff rates. According to CBO:

the effective tariff rate for goods imported into the United States has increased by about 18 percentage points when measured against 2024 trade flows.

That is a shockingly large increase. The prior average was less than 3% (it was 1.8% before Trump 1). So, this was more than a 6X increase. The CBO blog post lists a variety of the specific rates – many are 25% and some 50% (steel, aluminum, and copper). Note that the latter are all inputs for US manufacturers. If the goal (aside from collecting revenues) is to stimulate US manufacturing, it’s being carried out in highly selective ways.

If the revenue projection proves to be accurate, the revenues increase (i.e., tax increase) and lower borrowing costs would come close to offsetting OBBBA’s increase in the deficit. That is a very big IF IMO for two reasons.

First, I’m skeptical that tariff revenues will actually materialize at the level projected by CBO:

  • CBO assumes that the current tariff rates will remain in effect. As I have noted previously, the one constant with Trump’s tariffs is that they change constantly. Of course, the trend has been upward, and CBO’s estimate do not reflect some increases that have been announced but have not gone into effect (e.g., elimination of the $800 de minimis exemption or the 50% India tariff that took effect yesterday). So, maybe the revenue estimate is low! I actually think that is more likely high, because Trump responds to push back made by the right people in the right way. And I expect that to occur predominantly by businesses or other interests seeking tariff reductions, not increases. That makes it likely that the average tariff rate will erode. But Trump loves tariffs and the Trump 1 normie advisors who restrained his impulses are gone. So, who knows?
  • Carve-outs and administrative exemptions are also sure to be granted, if history is any guide. This will dampen down revenues, perhaps by a lot, as the effective rate declines.
  • The estimates are not dynamic estimates. That is, they do not take into account the macro-economic effects of high tariffs, which are almost certain to be a drag on growth. Hard to know how big this effect could be, but it would be foolish to think it won’t be material.
  • The estimates do not take into account retaliation. I have been surprised at how little retaliation has occurred so far. I think foreign leaders keep expecting Trump to back off (TACO as they say). But if it looks like the tariffs are enduring, more retaliation and efforts to work around them are sure to occur. That will further dampen US economic activity.
  • Over time, smuggling and evasion are sure to become more common.
  • Domestically produced substitutes will grow. Has CBO adequately taken that into account?
  • It’s conceivable we’re on the wrong side of the Laffer Curve with some of these tariffs.1 That means that the drag on domestic economic activity could be bigger.
  • A subset of the tariffs is being challenged in two separate cases as beyond the scope of the president’s authority under the International Emergency Economic Powers Act (IEEPA). Both lower courts invalidated the tariffs, but I’m skeptical that that view will prevail when (if) the case ultimately gets to SCOTUS for a decision on the merits. I haven’t carefully looked at this but am inclined to Jack Goldsmith’s view, which reflects (partially) the strong deference SCOTUS accords to the executive in making discretionary decisions under statutes like IEEPA. I also suspect that the Court will flinch rather than blow what it likely will perceive (probably incorrectly) to be an almost trillion-dollar hole in the federal fisc (Cavenaugh’s “blast radius” comment and all that rot). The case may prove that the major question doctrine is really just an ad hoc tool for the conservative Court majority to invalidate executive actions that are inconsistent with their ideological and/or partisan priors.

Second, there is good reason to believe that OBBBA’s deficit effects will be larger than the $4 trillion estimate:

  • Some of OBBBA’s spending cut payfors will likely unravel. That’s been the pattern in the past, particularly with offsetting tax increases. It’s hard for me to imagine spending cuts will be much different. For example, I will be very surprised if the dramatic Medicaid cuts, especially the reductions in the provider tax rates that are off in the future, can hold when the effects on rural Republican communities become more apparent. If the Dems retake power, they’re sure to be trimmed back or outright repealed.
  • Some or many of OBBBA’s temporary tax cuts are likely to be extended or made permanent, further increasing its deficit effects.

There is a huge amount of uncertainty around these estimates. They are so out of range of past practice (you have to go back to Smoot-Hawley), that we don’t have much data to benchmark the estimates, such as assessing the likely behavioral responses. I continue to be highly skeptical of the enduring revenue yield.

Notes

  1. I’m dubious about that. But Brad De Long recently made this observation: “Back when I was running the detailed models for the U.S. Treasury during the NAFTA and Uruguay Round policy wars, I was amazed at how when you ran a model with virtually any scale effects at all, the Laffer Curve argument actually worked for tariff reductions and market access-barrier removals.” ↩︎
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Tariffs – 6 months in

For the last three or so months, my primary tax focus has been on OBBBA’s ugly complexity.1

In terms of revenue raising, the real action has been tariffs. It’s not easy to track what’s going on with the frequent changes. The Peterson Institute of International Economics (PIIE) maintains a timeline or tracker of tariff announcements for the second Trump administration. It is approaching 100 entries (including, admittedly, foreign responses). The administration is averaging at least a couple announcements per week, some of them quite consequential (assuming they are implemented and kept in place for a substantial amount of time). Keeping track of and understanding what is going on would be full time job for an expert in tariffs.

Any way you look at it, tariffs are the biggest or second biggest (after OBBBA) tax story of 2025.  It’s a constant, chaotic story. Scanning through the PIIE timeline is all it takes to convince you of that. And it includes using tariffs for the most questionable of purposes, like sanctioning Brazil for its prosecution of its former president for attempting to overturn an election.

TPC has a graph of the timeline of major announcements that gives an impression of the transitory nature of the policy:

Moreover, we’re in uncharted territory. US tariffs have not been this high since Smoot Hawley and these tariffs are imposed and regularly changed by executive fiat, unlike the ones enacted by Congress in the old days. That gave them permanency, which allowed businesses to make long-run investments based on the price effects inherent in tariffs. All that complicates the ability of economists to predict what their economic effects will be with any level of confidence. This affects whether and how quickly the tariffs will affect pricing (i.e., passing the tax along), investment, profits, etc. – economic behavior generally.

Revenues

We do know that the tariffs are generating material amounts of federal tax revenue. Conveniently, a couple of reputable organizations are regularly tracking and posting how much revenue is being collected:

  • The Penn Wharton Budget Model has a real time federal budget tracker. Selecting “Taxes, Customs Duties and Related Taxes,” allows you to see the cumulative collections (updated daily). As of August 9th, $128.1 billion had been collected, compared to $55.6 billion for the same period in 2024. So, tariff revenues are up almost $72.5 billion or a 129% increase over last year. The big revenue increases have occurred in the last two months. It’s possible an annual increase revenue could equal $600 billion as claimed by the Secretary of the Treasury, IF recently announced increases go into and stay in effect.2
  • PIEE also has a tariff tracker that charts tariff revenue by product type and country. Unlike Penn Wharton’s daily tracking, this is done monthly, but it provides additional detail, and it can be downloaded as an Excel file.

I continue to be skeptical that tariff revenues can prove to an enduring and reliable source of revenue to offset much of OBBBA’s cost. The political pressure to reduce the headline rates (from both foreign countries and US businesses and consumers) and to carve out exclusions (from US businesses) will erode revenues. Behavioral changes, such as reshoring, substitution and inevitably smuggling, will cause revenues to decline over time. Moreover, tariffs’ inherent inefficiency will be a drag on economic growth, slowing down income and corporate revenue growth.

With all that said, it is guaranteed that we will be collecting materially more tariff revenues over the next 3+ years than during the Biden Administration. The only question is how much more. A floor of $100 to $200 billion/year would be my guess.

Distributional effects

Given that reality, a key question is what the distributional effects of raising a lot more tariff revenues will be. The main federal tax story – OBBBA plus big tariff increases – may fundamentally be about changing who pays for the federal government services, in addition to the inevitable increase in federal debt.

In the long run, the consensus assumption of economists is that tariffs have about the same distributional effects as an excise tax on the tariffed commodity. The distributional effect will depend upon the type of product and typical purchaser (e.g., is it a basic item or a luxury good; how easy is it to substitute a non-tariffed good; etc.). A reasonable assumption, then, is that the tradeoff is increased regressivity (OBBBA + high tariffs on most imported = more regressive federal revenues). The actual effects depend upon the rates, goods subject to tariffs, and how long they are maintained so behavioral responses settle down to the expected reaction (i.e., the tariffs are passed along to consumers).3

Because of the constant changes in tariff rules, it will be hard for economists to analyze the distributional effects with any precision. That won’t stop them from doing analyses, of course. See Figure 7 for the Yale Budget Lab’s shot. I’m sure TPC will do one sooner, rather than later, which will appear on the tracker page.

Thus, the main story may be about making the tax system more regressive or protecting the economic interests of elites. This book, Trade Wars are Class Wars (Yale U Press 2020), makes that point as a general matter. (Disclosure I have not read the book yet; see Noah Smith’s review for an intelligent summary and assessment).

I guess this is, in part, what right-wing populism is about or what one can expect when electing a billionaire with Trump’s values.

Growth effects

Nearly all taxes are growth inhibiting (exceptions: head and land taxes, both of which have severe political and administrative problems). Broad-based, low rate, and neutral taxes are the least so. By contrast, because they are imposed only on selective transactions, tariffs distort market allocations and tend to slow growth relative to the revenue raised.4 Imposing them at high and variable rates makes them worse on that score. From a growth perspective, to justify them one needs measurable benefits (national security to ensure a safe supply of crucial products, stimulating a key domestic industry, etc.). None of that has been done.

If OBBBA is growth enhancing (probably questionable), tariffs negate that. More likely, they’re both growth drags.

Price effects

An obvious key question is the extent to which tariffs push up consumer prices, rather than being absorbed by the foreign producers, importers, and US sellers of the tariffed goods. A couple organizations are attempting to track that:

  • The Digital Design Lab at the Harvard Business School has a price tracker that tracks daily changes in prices of some goods by category and country of origin. They update graphs and the data is downloadable. The data is somewhat limited because it comes from just four major retailers. But it gives a good impression of what’s going on and supports the conclusion that initially much of the burden of tariffs have been absorbed, rather shifted to consumers. However, inflation in imported goods is twice what it has been in pure domestic goods.
  • The Hamilton Project has a more general price tracker that uses BLS data (Figure 3) and tracks changes in prices by industry category and country.

Note: this was added 8/28/2025.

Export tax?

According to the NY Times:

Nvidia and Advanced Micro Devices are expected to pay the United States 15 percent of the money they take in from selling artificial intelligence chips to China, as part of a highly unusual financial agreement with the Trump administration.

The deal, which was described by three people familiar with the agreement who spoke anonymously because they didn’t have permission to discuss it publicly, comes a month after Nvidia received permission to sell a version of its artificial intelligence chips to China.

While the Trump administration publicly said a month ago that it was giving the green light to Nvidia to sell an A.I. chip called H20 to China, it did not actually issue the licenses making those sales possible.

On Wednesday, Jensen Huang, Nvidia’s chief executive, met with President Trump at the White House and agreed to give the federal government its 15 percent cut, essentially making the federal government a partner in Nvidia’s business in China, said the people familiar with the deal. The Commerce Department began granting licenses for A.I. chip sales two days later, these people said.

Article I, section 9, clause 5, of the Constitution provides:

No Tax or Duty shall be laid on Articles exported from any State.

It kinda looks like that is what is going on. But is it a tax or duty if the companies “voluntarily” agree to pay it (or at least they say they voluntarily agreed to pay it)? Does anyone have standing to challenge it?

It’s just one more instance documenting the character of the administration – it’s transactional nature, making much (if not everything) about money, treating constitutional provisions as something to work around, etc. On a positive note, it may reflect a recognition that the fisc needs more revenue, even though this is absolutely not the way to raise it.

Notes

  1. Disclosure to subscribers: A second post was too long (>5k words) to email out. It’s just more of my archiving of thoughts and sources. ↩︎
  2. Extrapolating from the last month or so, the increase in collections would be about $350 billion per year. If it were maintained for 10 years, that would materially reduce the revenue loss from OBBBA. As expressed in the text, I am highly skeptical that the rate of increase for July 5th through August 9th can be maintained for a decade. That is so, even though Trump has announced or is promising even higher tariffs will be imposed. ↩︎
  3. A lot of people have been surprised how little the tariffs have shown up in the price indexes. This is explained by many factors – businesses stocking up in anticipation (Penn Wharton estimates that this reduced tariff revenues by $6.5 billion), both foreign and domestic businesses absorbing the costs to retain customers (WSJ story), the lag in reporting price data, etc. ↩︎
  4. This is what CFRB says about the growth effects: “Current and recent tariffs have been estimated to reduce expected output by 0.4 to 1.1 percent, which in turn could reduce revenue. Based on CBO, these effects could shrink the deficit impact by roughly a tenth. Based on Yale Budget Lab and Tax Foundation, the primary deficit reduction could be 17 to 40 percent smaller.” ↩︎
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Books I’ve Read Recently – Enchanted America

This is another in my series of bad high school book reports on selected nonfiction books that I have read recently. I write them to memorialize my thoughts in the vain hope that I will remember a bit more of what I read.

Author and book

J. Eric Oliver and Thomas J. Wood, Enchanted America How Intuition and Reason Divide Our Politics (U. Chicago Press 2018).

Why I read it

This is another book that I read in my quest to better understand how polarization and tribalism have come to define our politics. More specifically, I want to better understand why the GOP seems to have gone so off the rails (i.e., ceasing to reflect prudential conservativism – truth be told to abhor it). The book came out when I was still working (2018) and had little time to read political science literature.

In retirement I’ve been reading more political science books as part of my quest and saw references to this book. I was intrigued by its basic thesis, which (stated crudely) is that cognitive styles of thinking/reasoning/perceiving reality are big contributors to polarization, more so than philosophical or ideological differences. The authors cast this as a difference between Intuitionists and Rationalists. In their words:

This ontological polarization [i.e., between their Intuitionists and Rationalists] is defining the contours of US politics. Much of America’s ideological gap stems not from abstract considerations about the scope of government but rather from differences in worldview. Increasingly, liberals and conservatives are becoming as separated by their ways of perceiving reality as by their governing philosophy.

Enchanted America, p. 3.

When the two political parties were more heterogenous, Intuitionists were more evenly divided between them. As the parties have become more homogeneous ideologically, Intuitionists have come to dominate the Republican Party and the conservative movement. In response, GOP candidates have become more Intuitionist and have resorted to rhetoric and appeals of that nature. In the authors’ view, that has big implications for politics, because Intuitionists are more reluctant to compromise, more accepting of authoritarianism, and more susceptible to conspiracy theories.

It’s a provocative theory that the authors support with a mildly complicated method of analyzing survey data they collected. Specifically, they develop an index or scale of intuitionism based on individuals’ responses to nonpolitical survey questions. Then, they determine how values on this scale correlate with political views and affiliations, while controlling for respondents’ demographic and other characteristics. 

The book describes how they did this analysis, the results they found, and the political implications. They appropriately characterize the research as preliminary or a first cut that needs more research and analysis to validate. I think it is fair to say that they’re loosely pushing political science in the same way that proponents of behavioral economics did to economics.1

What I found interesting

What is an intuitionist?  The authors very loosely divide reasoning or perceiving reality into the two types as follows: Rationalists test abstract theories with observable facts to determine their validity (very loosely like the scientific method) and make appropriate adjustments. Intuitionists, by contrast, rely more heavily on emotions, feelings, symbolism, and metaphors.  Of course, everyone relies on intuition in making decisions. It’s just that Intuitionists, as they define them, “make intuitions the primary determinant of their beliefs. For almost any explanation to be accepted, it must comport with their beliefs.” (p. 4) Reflecting the reality of an Intuitionist/Rationalist continuum, their index is scalar – i.e., it attempts to measure the extent to which one relies on intuitions – not binary.

In their construction, the Intuitionist method of decoding reality (1) is fundamentally emotional, relying on clues about the world and (2) has a specific grammar or structure, i.e., a set of heuristic or shortcuts that explain what’s going on (representativeness, contagion, anthropomorphism, and availability or recency are examples of these heuristics). They characterize this as symbolic thinking, which is inconsistent with testing abstract theories using observable or verifiable facts.

Construction of their index. Their index is constructed based on survey respondents’ answers to a set of questions divided into three categories to measure scales of (1) apprehension, (2) pessimism, and (3) symbolic thinking. These questions are devoid of explicit political or religious content and designed to interrogate a cognitive style or thinking mode (my terms, not theirs). Examples:

  • Apprehension scale: do respondents regularly check whether their doors and windows are locked, intentionally locking car doors, etc. (5 questions)
  • Pessimism scale: asking respondents to gauge the probability of negative events (e.g., a terrorist attack or recession) occurring within a year, compared to average responses
  • Symbolic thinking scale: These are the most unusual questions and quick responses were requested to elicit whether respondents tend to think symbolically. Two examples: “Would you rather stick your hands in a bowl of cockroaches or stab a photograph of your family six times? Would you rather spend a night in a luxurious house where a family was recently murdered or a grimy bus station?” The questions are designed to get at those key heuristics (contagion, representativeness, etc.) that the authors identified as characterizing intuitionism.

The answers are combined to get an index with a value between 0 (most rationalist) and 1 (most intuitionist). Again, the scale is a continuum. They regard values above 0.4 as Intuitionist and consider one of their most remarkable findings that fundamentalist and conservative religious beliefs (not just Christian) are highly correlated with their intuitionist scale.

Who are Intuitionists? The authors use their index to assess correlations with various demographic characteristics of their survey respondents. The following characteristics correlate with being an Intuitionist:

  • Lower income
  • Lower educational attainment
  • Being female
  • Being a religious conservative (fundamentalist, orthodox Jewish, conservative Catholic, etc.) – the authors consider this to be one of their most striking findings (p. 56)2
  • High disgust sensitivity

The authors are political scientists, and their point is how the scale correlates with (predicts loosely) political views. So, they test their index values relative to political ideology and find that being conservative and/or Republican correlates with being an Intuitionist. That is particularly true for those whose conservativism is defined by moral traditionalism. It is not true for free market conservates (e.g., libertarian types) who tend to be Rationalists. Trump supporters have higher Intuitionist scale numbers.

More generally, they find (with chapter treatments for many categories) that the scale (controlling for other factors statistically) correlates with:

  • Susceptibility to populist claims – they characterize populism as us (“the people”) versus them (nefarious elites or “the powerful”) rhetorical, rather than substantive policy positions3 – whether political or cultural (e.g., distrust of experts in science and medicine)
  • Belief in conspiracy theories – birthers, Big Pharma is sitting on simple and cheap cancer cures, 9/11 was an inside job, etc.
  • Ethnocentrism, nationalism, general xenophobia, etc. (e.g., Intuitionists are more likely to think immigrants impose a burden on society and that free trade agreements cause net economic harm)
  • Skepticism about vaccines (injecting toxins into little babies), medicine generally, food safety (anti-GMO, considering gluten to be bad for those w/o celiac disease, etc.)

The last bullet point illustrates the political genius of Trump in enlisting RFK Jr. in his electoral coalition. It likely attracted many Intuitionists who typically vote Dem (anti-GMO, anti-vaxxers etc. were often lefty types) to vote for him, if the authors’ analysis is correct. Since the book was published in 2018, this is my inference, not something they discuss. But I think they presciently anticipated Trump’s 2024 strategy, which was to appeal to male Intuitionists who typically voted for Dems or didn’t vote at all.

The last chapter, “Nation Divided by Magic,” summarizes their overall analysis and applies it to 2018 political situation. As they put it:

Donald Trump won the [2016] election largely because he was the Republican nominee; but he won the nomination because the Republican Party has become dominated by Intuitionists. With his presidency, Intuitionism became a force in US politics largely because it is the defining feature of modern conservatism.

Enchanted America, p. 172.

The chapter weaves their theory about cognitive styles with other elements of the political culture – e.g., the changed media environment, the decline in trust in civic society, the decline in religiosity, rise of the New Right, etc. It is as good an explanation for how we got to this place as I have seen – regardless of whether you buy (wholly or partially) their basic thesis.

What disappointed me

I have some misgivings about the book’s basic premise or hypothesis. One stems from the novelty (at least to me) of its basic hypothesis. As the authors acknowledge, there is a potential endogeneity or reverse causality issue (chicken versus egg problem) with their research. They make a good effort to address this concern by wringing politics as much as possible out of their survey questions used to create their Intuitionist scale. But I have a nagging concern that that might not be good enough. Hypothesizing the problem and defining a set of survey questions to test that seems particularly susceptible to that risk. As a result, I have a healthy degree of skepticism until more research is done and published, ideally by others.

A second concern is the strong correlation between the Intuitionism scale and being a conservative flavor of religious, as noted above. Starting in the 1970s, Christian evangelicals (and to a lesser extent conservative Catholics or orthodox Jews) have migrated to the Republican Party, to the point that they may be the largest and most reliable part of the party’s base. The reason for that is, I think, complex – abortion decision, actions by televangelists, tactical political strategy, etc. A nagging concern is that sorting is the key to what is going on and what the authors are detecting and the sorting by cognitive styles is mainly a side effect.

A third element (related to the second) that raised my hackles was the implication that conservatism is inherently susceptible to the disease of Intuitionism. That is certainly true of the current iteration of the GOP and the dominant conservative movement in America. But I’m mildly skeptical that it is true more broadly.

Is this really an inherent feature of conservative movements?4 Did the Republican Party avoid this fate for a century or so, because it was more heterogeneous philosophically and not really conservative per se (certainly at its founding and during the Progressive Era it wasn’t really conservative)? Maybe, but I have doubts. The authors acknowledge that the libertarian flavor of conservatism is dominantly rationalist. I think that the prudential flavor of conservativism,5 which used to be an important part of the movement and the GOP, is also mainly rationalist. It’s the nostalgia-driven and social conservatism that is much more susceptible.

My general hypothesis is that it is not the inherent nature of conservatism as a philosophy. Rather, two things caused this:

  • That traditional prudential or cautious, limited government conservatism was too hard a sale to make to the electorate. This caused GOP politicos, starting with the Reagan campaign if not before, to coopt populist and nontraditional conservative campaign rhetoric (classically, tax cuts that pay from themselves, making cuts in government programs of only fraud and waste, etc.).6 They didn’t really believe any of that and planned to and did govern mainly like traditional prudential conservatives. In short, their political campaigns were Intuitionist, but their governing was Rationalist.
  • After a couple of generations of GOP politicos (the Rubicon in my view was the 1992 campaign), their persistent Intuitionist campaign rhetoric came to be viewed as reality by many/most in the movement. Trump came along and further shifted the reality to adopt more nonconservative and Intuitionist views (no cuts to popular safety net but we can still fund big tax cuts, nativism, free trade is for losers, etc.). This confirmed the current version of American conservatism and the GOP as fundamentally Intuitionist as Oliver and Wood define it.7

This is especially a problem for the US with its dominant two-party structure and its constitutional overweighting of rural voters in Congress (mainly the Senate).  Most prudential conservative and business-oriented types (i.e., Rationalist conservatives) are stuck with a Hobbesian choice between voting for MAGA Republicans or Dems who they regard as dangerously favoring big government and woke social policies.

As I noted above, I do think that Trump has explicitly sought to realign more Intuitionists into the GOP by bringing RFK Jr into the coalition. Trump is a talented demagogue and demagogues, by definition, depend upon appeals to Intuitionists. As someone who is not fundamentally conservative and does not care about ideology, Trump recognized the need to broaden his appeal across the ideological spectrum. That likely (temporarily?) realigned more of these folks to the GOP.

What I consider to the be the crucial difference now (compared, say, with pre-1990) is that the rationalist gatekeepers are gone – specifically, there is no longer a dominant mainstream media that calls out Intuitionist BS for what it is. That is thanks to repeal of the fairness doctrine and the rise of the right-wing media ecosystem (talk radio, Fox News and similar outlets, the online right-wing media, etc.). Second, conservative elites (most elected officials and business interests) who traditionally are rationalist have also abdicated their gatekeeper roles. This is puzzling but explainable by Trump’s demagogic skills, his taking over the party, the two-party system leaving them with no alternative, a collective action problem, and similar. What is unclear to me is how much of this is simply a matter of Trump being a unicorn or a more systematic problem that will endure after he leaves the scene. The reality that Wood and Oliver identify is a necessary, but likely not a sufficient, condition for the political pickle were in now.

SALT connection

NA

Notes
  1. That’s a very imperfect comparison because economics relied on models based on idealized and simplified explanations of human behavior – i.e., that everyone is a utility-maximizing automaton. Other than the median voter model, borrowed (I think) from economics, political science had little similar theoretical underpinnings and is inherently more descriptive, prescriptive, and subjective. At least, that’s my amateurish view of the matter, as someone who was not trained or educated as either political scientist or an economist. ↩︎
  2. It’s worth noting that all the characteristics through this bullet tend to correlate with being part of the current Republican base. That was not true decades back when more highly educated people were Republican. Now more educational attainment is a predictor of being a Dem. ↩︎
  3. This distinguishes it from socialism. Of the 2016 candidates, Trump and Ben Carson had the most populist supporters by their definition. Saunders and Clinton, the fewest. ↩︎
  4. I would concede that Intuitionism is a feature of emotional reactionaries to the extent their principles are a core feature of conservativism, which maybe they are? ↩︎
  5. This is the go-slow, carefully vet potential changes in government regulation and programs, etc. version of conservatism. Edmund Burke style conservatism. It heavily relies classic rationalist methods and arguments, which tend to be hard sells to the great unwashed masses. ↩︎
  6. This was in addition to employing dog whistle racism, starting with Reagan’s characterization of welfare, etc. ↩︎
  7. The scary thing is that Intuitionism is driving governing decisions, at least for Trump 2.0 with the exit of adult or normie Republicans from the administration (compared with Trump 1.0) who put a rationalist brake on the impulse to base decisions on emotions and magical thinking. ↩︎
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Managing Trump and tariff policy

An Axios story, Behind the Curtain: The art of persuading Trump, describes how White House advisors try to restrain Trump’s instinct to shove all the tariff chips into pot, strategies to protect him (us, really) from economic disaster. The need to do that stems from two realities:

Trumps’s love of tariffs. One of Trump’s few core policy beliefs is a sort of mercantilism, that a country’s wealth or economic prosperity is bolstered or enhanced by producing and selling a more stuff to other countries than you buy from them. This translates into his longstanding love of tariffs. They are a very direct way to promote domestic production by making foreign goods and services more expensive (by taxing them). He clearly believes a “strong” tariff policy – high tariffs on a lot of stuff – would return America to its former greatness, when it was the manufacturing powerhouse of the world.1 Simple and straightforward.

Conventional and accepted economics moved on from this view centuries ago (starting with Ricardo). Nobody with any creditability in economics believes it in the simplistic way Trump does. Trump’s economic advisors (except Peter Navarro) know this and also know that universal tariffs, tariffs on intermediate inputs, or very high tariffs on key trading partners (100%+ tariffs on China) are economically disastrous.

Trump’s psychology. To state the obvious, Trump is not a deep thinker, and he sees things in black and white terms. Nuance, complexity – fuhgeddaboudit. Trade wars are easy to win. A trade deficit with a country = we’re losing to them. US trade policy has been run by morans who have allowed other countries to rip us off. ETC

It’s a juvenile mentality with a simplistic view of reality that is never in doubt. His confidence has been enhanced (compared to his first term) by his popular vote victory and the failed assassination attempt, which likely confers an aura of divine destiny in his own mind.

Moreover, tariffs are just a means, a policy instrument that in the right circumstances can be useful. And they have political support in some quarters (among labor unions, blue collar workers, populists, etc.), minimizing the political pushback on his views, even from Dems.2

In short, Trump has a firmly held, but simplistic (and wrong) belief that there is a quick and easy solution to a complex and multi-faceted problem. It’s just a matter of mustering the political will apply maximum tariffs. Advisors who accept conventional economics, thus, have the challenge of deterring him.

Here’s the list of their six strategies from the Axios story:

  1. The Block: Trump is notorious for reacting impulsively to the last thing he heard. So, Treasury Secretary Scott Bessent and those aligned with his view of winding down the trade war work hard to get alone time with Trump, away from pro-tariff warriors like Peter Navarro. Sometimes, they track physical locations of rivals to pounce on meetings with Trump.
  2. The Scare: Trump is very hard to persuade after winning two elections and surviving being shot. His self-confidence and self-certainty are soaring. But he’s not fully impervious to fear. That’s why top officials wanted him to hear dire economic warnings from Walmart, Target and Home Depot last week — or Jamie Dimon’s forecast of a potential meltdown three weeks ago. Trump’s walk-back on firing Fed chair Jay Powell showed this.
  3. The Glorification: This is increasingly common in trying to move Trump. Make a different idea — “We’re trying to isolate China!” or “Negotiate genius deals!” — sound like it’s both brilliant and Trump’s. This requires using Trumpian language to make the ideas feel fresh, wise — and definitely not a capitulation.
  4. The Nudge: This is next-level Trump persuasion. Trump hates being cornered — forced to compromise or surrender. So aides delicately, slowly use a combination of data points, friends, and CEOs Trump admires, to subtly and slowly move him.
  5. The TV: This is an oldie but goodie for a reason — it works. Get respected CEOs on the right shows saying the right things, knowing Trump will either be watching or shown a clip. It’s why so much tariff news is made on Fox News, often with Fox Business anchor Maria Bartiromo on her “Mornings with Maria” show.
  6. The Level-Set: This is where Trump receives blunt advice, but he needs to be ready for it. Trump hit the 90-day tariff pause after the stock and bond markets revolted and after Vice President Vance and White House Chief of Staff Susie Wiles had multiple meetings with him. Trump also began talking about lowering the sky-high 145% tariffs on China when Commerce Secretary Howard Lutnick told him that the U.S. will collect zero tariff revenue if there isn’t trade with China at all.

That partially explains the volatility of the policy. The bad news is that Trump is a true believer in a false fix that he’s determined to implement.3 The good news is that he suffers from something like ADHD and is easily distractible.

The other explanation for the policy volatility is that the administration probably doesn’t really know what the goal of its tariff policy is. They have suggested all of the following, which are inherently contradictory to some extent:4

  1. Reviving American manufacturing and blue-collar jobs – this requires targeted tariffs that businesses can rely on being in place for very long periods of time to justify investing in factories etc. and was a central theme of the campaign and afterward.
  2. Raising revenues – Trump has repeated used tariffs to explain how he would pay for his array of proposed tax cuts.
  3. Inducing other countries to lower trade barriers to our products – i.e., the tariffs are just a cudgel to get other countries to make a deal.

Raising revenues as a goal is inconsistent with goals #1, as manufacturing moves back to the US, the revenues from imports decline, and #3, which implies the tariffs are temporary and won’t raise revenues. #1 and #3 are inconsistent, unless the foreign trade barriers are what caused the decline in US manufacturing, which is not the case.

I have two reactions to the Axios story:

  1. It seems like an obvious case of a CYA leak by one or more administration insiders who are embarrassed by the disastrous tariff policies that Trump has rolled out.5
  2. Their management techniques are obviously ineffective. It’s hard to imagine a tariff proposal more nonsensical than that revealed on “Liberation Day.” The version that they retreated to only look good by comparison. They’re higher in aggregate than the Smoot-Hawley tariffs and impose a de facto embargo on many Chinese imports. Given that administration trade staff were explicitly selected for those who were pro tariffs, that’s no surprise.6
Notes
  1. The idea of America’s manufacturing decline is something of a fallacy. The US remains a manufacturing powerhouse. By some metrics (e.g., output/worker), we’re at the top. See this Cato essay, The Reality of American “Deindustrialization” (October 24, 2023) for details. ↩︎
  2. Democrats, for example, are conflicted about tariffs because of the labor movement is part of their historic base of support. This has prevented them from forcefully and unequivocally opposing Trump’s tariffs. See, e.g., this NY Times story. ↩︎
  3. Volatility in a core economic policy is inherently bad. Businesses and individuals need consistency and predictability to make long-term investments, whether in physical or human capital. Maybe the only thing worse than a bad policy is oscillating back and forth between different bad policies. With a consistent bad policy, the market can at least adjust to it. ↩︎
  4. The fact that tariffs can be used for each of these purposes may partially explain their attraction to Trump. They’re like a Leatherman tool you can pull out of your pocket to address whatever problem is at hand. ↩︎
  5. It’s interesting that they’re doing this even before the real economic impacts of the tariffs – inflation, less stuff on store shelves, slower growth, etc. – have appeared. For example, this Briefing Book post estimates that the tariffs will “rais[e] aggregate U.S. prices by 5.4% and lower[] real income by 0.8%.” See this LA Times story for assessment of the impact on traffic at Long Beach, a main port for Chinese imports – reporting an estimate of a coming 35% decline. ↩︎
  6. The just-out Atlantic story, I Run the Country and the World, describes the process: “Same, too, with trade. [Cliff] Sims [who helped Trump’s transition team manage hiring] called Jamieson Greer, who had served as the chief of staff to the U.S. trade representative in Trump’s first term before taking over the role himself this time around. He asked Greer who Trump’s pro-tariff “killers on trade” were. “And he’s like, ‘I’ve been sitting here hoping someone would call about this; I’ve already got a list ready,” Sims told us.” ↩︎
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Economic themes

After two months, I see two overarching themes to Trump’s economic policies:1

  • Tariffs obviously
  • Chaotic cuts in discretionary spending with a heavy emphasis on eliminating federal employees.

This is based on the unilateral executive actions he has taken. Some of those were almost certainly extralegal because they required congressional action.2 SCOTUS will need to sort out which ones, but only a modest subset will likely make it that far. In the final analysis, it may not matter that much: all the King’s men and horses (or the Court) probably cannot put Humpty back together again in some or many cases.

Tariffs

Trump is obviously entranced by tariffs as some sort of magical policy instrument – both economically and politically.

On the economic front, he seems to be living in a mercantilist time warp that ignores both economic theory and reality, including the modern economy with its interconnected global supply chains and interdependencies, highly susceptible to disruption. The securities markets obviously do not share his view. They go down when more tariffs appear likely and partially recover when he relents. But only partially. So, it’s not just pointy-headed economist types with their fancy theories and empirical studies.

On the political front, he perceives that tariffs are politically acceptable. The 2024 election result following Trump’s strenuously promoting them confirms that, at a minimum. A cadre of people are favorably disposed. Two major groups, both big parts of Trump’s voting constituency, are (1) old fashioned laborites, like the UAW and many union members, who think tariffs protect high-paying jobs3 and (2) xenophobes who perceive, as Trump misleading keeps saying, that tariffs mainly adversely affect foreigners and foreign interests.

So, away we go with tariffs. Nobody can fairly claim that this is a surprise, including all the business types who supported him and oppose tariffs (e.g., WSJ editorial page), assuming it was just political rhetoric or that he would back down when the markets pushed back. No sign of that. When Trump claimed he was Tariff Man, they should have believed him.

This graph, posted on Twitter, is striking in showing this isn’t the first term:

A longer run view – w/o the handpicked time period – provides a more balanced view. We aren’t anywhere close to Smoot Hawley territory, but it does show how dramatic a deviation Trump’s policies are from immediately preceding generations.

Tariffs are Trump’s all-purpose billy club that he uses to bully foreign countries that aren’t doing what he wants. Examples include the threats against Mexico and Canada regarding fentanyl. The most recent nonsensical use is his threat to impose tariffs on Russia to bring it to heel in the negotiations for a ceasefire in Ukraine War. He obviously thinks that all the sophisticated efforts to impose economic sanctions on Russia were ineffective because they forgot about the possibility of using maximum tariffs of our imports from countries that buy Russian oil (e.g., China and India). Seems like an obvious bluff, which is the typical reaction of the targets, because it’s unclear who would be hurt more – the U.S., our trading partners, or Russia.4

Peter Navarro, a longtime Trump economic advisor, claims the tariffs will raise $6 trillion in revenues over a decade. This does not square with the estimates made by government economists, the Tax Foundation, or CRFB, all of which are half or one-third of that amount for higher tariffs. (Navarro comments appear to be for Trump’s proposed tariffs, not the universal tariffs estimated by the credible sources I linked to.) None of this takes into account the likely retaliation. It’s magical thinking like this that helps explain the radical and risky actions Trump is taking.

I doubt that Trump thought his tariffs would stimulate China, South Korea, and Japan to work on negotiating a free trade agreement, but that appears to be in works jarring lose negotiations that had been at an impasse for over a decade. The world is not static. Classic retaliatory tariffs are only one possible response.

This post by Noah Smith, an econ blogger, is worth reading for context. He points out indirect effects that most people likely don’t think about. Some examples:

  • Auto tariffs will drive up the auto insurance costs as the prices of auto parts and, thus, repairs rise.
  • Higher steel tariffs make it harder for “drill baby drill” proponents by raising oil industry’s equipment costs (e.g., pipes and drilling equipment).
  • The demand effects have hit the Iron Range, as Strib coverage has pointed out.

It’s always useful to look for possible bright spots, Reagan’s pony that must have produced all the manure in the room.  One thought is that imposition of Trump tariffs might offer the opportunity to transition to a broad-based consumption tax to fix a disastrous economic and fiscal policy in a post-Trump world. Tariffs are largely a consumption tax on foreign goods. Their revenues could be replaced and augmented by a VAT. That would eliminate their distortive economic effects, while simultaneously could cut the deficit depending upon rate and base. This seems unlikely but plausible. It’s the only pony I can think of.

DOGE spending cuts

I don’t have much insight into the dramatic and chaotic cuts in the discretionary spending. But I’ll still make a few random points:

  • It’s a truism that discretionary spending is such a small proportion of the budget, that cutting it cannot be a material factor in dealing with the budget deficit. But it’s good theater/PR for the uninformed who want stuff done, resent public employees, etc.
  • Consider the net result so far of the termination of probationary employees. They were fired for poor performance, which was not supported factually. A few courts have ordered them to be rehired. Most of them have been rehired and put on paid administrative leave. So, they’re getting paid for not working. Move fast and break things. I guess it doesn’t matter if you think their services were totally worthless. That is absolutely not true for the largest category in this group, IRS employees.
  • If the goal is to reduce fraud and mistakes in entitlement payments, firing federal employees who could uncover mistakes and fraud is going in the wrong direction. Hiring investigative staff (or contractors) and applying resources in a concerted and thoughtful way is what’s needed. Medicaid and Medicare mistakes and fraud are likely a big deal and should be targeted. But it will take a long-term commitment and is not a quick budget fix.
  • Don’t expect immediate negative effects of these cuts on a macroeconomic level. The cuts in staff compensation, contractor payments, and grants are relatively small compared to the overall size of the economy. Moreover, the effects of tariffs will overwhelm. However, the layoffs and cuts do reinforce the negative effects on expectations that are occurring and the drop in spending.
  • Also do not expect the general public to perceive much degradation in federal services. Some anti-Trump former Republicans are asserting that if the public does not see the decline in services, that is a damning indictment, given the wholesale and chaotic cuts DOGE has made. In short, little outcry about disastrous effects implies we could have been cutting these expenditures all along. (Sarah Longwell at the Bulwark has repeatedly suggested this. That perspective reflects her roots in limited government, quasi-libertarian ideology, as she admits.) I think that is unlikely and a wrongheaded way to think about it. Most federal agencies and employees provide very few services directly to public. Rather, what they do is like an element of the economy’s basic infrastructure. Cutting their services have long run and often not obvious effects (slight degradations in the quality of weather forecasts, slower approvals of drugs and medical devices, less basic research, fewer college and grad students, etc.). The general public will not notice. Yes, the feds do provide some direct services, such as social security, and that is why the administration keep backing off of making dramatic changes. (Martin Malley’s claims of an imminent collapse of agency probably will not come to pass IMO. Of course, he hedged it as “could.”) The cuts to VA staff may be an exception. The effects in a few geographic places with big federal footprints will also be noticable.
  • It’s the long run effects that are corrosive – reducing spending on basic research, laying off FDA staff, etc.  These are public goods that the private sector will not do (ROI is 0) and that have provided some of the dynamism of the US economy, in combination with its reliance on private market incentives. Attracting foreign talent to America with higher education and research institutions has been a big deal. This Axios story (America Progress in Peril) provides some sound bites on that: e.g., “40% of U.S.-affiliated Nobel Prize winners in the sciences — physics, chemistry and medicine — between 2000 and 2023 were immigrants.”
  • DOGE has confirmed a part of Paul Ryan’s old hypothetical budget plans that I thought were implausible and that never gathered much attention – massive cuts in discretionary spending in the out years. I assumed that his inclusion of them was akin to David Stockman’s magic asterisk – a politically easy way for Ryan to cover up untenable math in his plans to fund tax cuts – but it turns out to be one of the things he got right about where the Republican Party was going. I had always thought that a sober conservative would not have wanted that; it was just a sleight of hand. Wrong or at least wrong for current iteration of the party (not sure about Ryan’s real policy preferences). Reconciliation may also prove that his Medicaid cuts are another thing he was right about politically – can definitely see conversion to block grants with big cuts tilted toward blue states as a strong possibility to finance tax cuts. Or not, given the slim majorities in Congress. We’ll see.
Footnotes
  1. I’m not counting immigration as primarily an economic policy, although there likely will be important economic effects in the long run. Changes in noneconomic policies are IMO more alarming with the descent into authoritarianism (knee capping law firms, police state-like grabs of people off the streets, shipping people to foreign prisons w/o due process, and similar). ↩︎
  2. In terms of talk and plans for legislative action, it’s all about massive, deficit-increasing tax cuts, partially offset by cuts in the safety net, largely Medicaid and SNAP. Whether this closely divided Congress can pull that off or exactly what it looks like, if it can, remains to be seen. ↩︎
  3. I think this is backward thinking. It’s based on the idea that manufacturing jobs are “better” (i.e., higher paying), which was based on a former reality when they were more heavily unionized and allocated oligopolistic profits to labor. That is simply no longer true. Manufacturing and service sector wages are converging. ↩︎
  4. The simpler and more straightforward approach would be to tell Putin that we are going to give Ukraine more and better weapons with fewer restrictions on their use, if he does not start making concessions. I guess that’s too complicated, dangerous, expensive, or something. But it would be more credible and might work. Secondary tariffs, not a chance. ↩︎
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