Tag: SCOTUS

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. ↩︎