Tag: tariffs

Categories
Uncategorized

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. ↩︎
Categories
Uncategorized

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.” ↩︎
Categories
Uncategorized

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.” ↩︎
Categories
Uncategorized

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.” ↩︎
Categories
Uncategorized

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. ↩︎
Categories
Uncategorized

The politics of tariffs

Warning: This is one of my overly long posts in which I conclude that using a universal tariff as general revenue raiser, at least when promoted by Trump, may work as a political matter. That is so, despite conventional wisdom’s near universal disapproval of them as regressive growth-killers for an advanced economy like the US. That political paradox is explained by their opaqueness, long-running support in a few key quarters, the ease with which they can be demagogued, and other factors.

The post is not about the policy flaws of using tariffs as revenue raisers, just the politics of selling them. It consists of three parts:

  1. A confession of my policy priors – using tariffs as revenue raises is a terrible policy idea
  2. My observations about how tariffs are now being sold to “elites” or opinion makers (very little as far as I can tell) and to average voters (the retail pitch)
  3. My take

They’re back

After a near century of absence, tariffs have reemerged as a central part of the American tax/revenue debate. That’s thanks to the mercantilist mind meld that is Donald Trump’s fiscal brain. Wharton’s economics courses obviously did not take.

During the Gilded Age through Hoover’s presidency (remember Smoot-Hawley), tariffs were a key federal revenue source and an ongoing subject of vigorous political debate. De-emphasizing them was a key political and policy reason for enacting the income tax. See Ajay K. Mehrotra, Making the Modern Fiscal State Law, Politics, and the Rise of Progressive Taxation, 1877 – 1929 (Cambridge University Press 2013) for the full story. For the five decades covered in Mehrotra’s book, they were a hot political topic.

The Great Depression, FDR’s presidency, and emergence of the US as the dominant economic power (i.e., a prime beneficiary of free trade) led to their abandonment, except as a feature of US trade and national security policy. Who even remembers that there was a highly influential American Tariff League that promoted tariffs, published a journal, and lobbied Congress to maintain and increase tariffs? Instead, the mere idea of tariffs as a major general revenue source was consigned to the dustbin of history (or so we thought) until Trump arrived on the political scene.  Indeed, Congress almost totally ceded their imposition to the executive in 1934. They became a matter of trade and foreign policy, rather than tax and revenue policy.

Trump’s belief in their magical powers – foreigners pay them, they don’t affect domestic prices, they will create good jobs, or whatever he really believes – and his use of them as the fiscal answer to how he will pay for his policy agenda (tax cuts, free IVF, etc.) has ended that. Of course, this may be just another edition of Mexico will pay for the wall. Tariffs now are now a key part of the national tax debate. As evidence for that they’re actually starting to appear in political cartoons (see ## 11 and 12), just like in the good old days (1921):

My priors

I’ll be upfront that my priors are stuck in the conventional wisdom I learned in economics courses decades ago – using tariffs as a general revenue source is stupid. Doing so would be disruptive, inefficient, inflationary, regressive, encourage corruption, and spark retaliation, to name just a few drawbacks. The thought that imposing a special sales tax of 10% or 20%, depending upon the day, on a large subset of goods, including intermediate inputs, without creating major disruptions and inflation is implausible. US imports equal about 11% of domestic production. The disruptive and inflationary effects of a substantial tax on them (much higher on those from China) – the scramble to find domestic substitutes, seek legal or illegal exemptions, raise prices, etc. – are obvious.

As a matter of fundamental economics, trade is wealth enhancing. Putting a special tax on it to raise general revenues makes no sense. To the extent one thinks (as many union types appear to) that tariffs create jobs by encouraging domestic production (e.g., for steelworkers), actual results are counterintuitive when analyzed empirically (Trump’s steel tariffs created 1,000 steel jobs while destroying 75,000 other manufacturing jobs). There is a good reason tariffs have not been seriously considered as revenue raisers for almost a century and have been used sparingly as trade policy.

Yes, some portion of their burden may be borne by foreigners, as foreign businesses seek to remain competitive and cut their prices sometimes (not much apparently based on empirical studies). But the domestic burden surely dwarfs that by many multiples. If they raise as much revenue as predicted (count me skeptical), their revenue productivity declines over time. There is no US source for some goods (how many bananas, coffee, diamonds, or cocoa do we produce?) that a universal tariff would apply to. That reality is sure to result in exempting many items as political factors come to bear on the administration, reducing tariff revenues. Yes, legitimate reasons justify using tariffs in targeted and limited ways, such as ensuring we have domestic sources of key military materiel and key essentials or to manage trade (e.g., to deter others from dumping goods below cost or imposing their own tariffs on our exporters). But that’s it, in my view. My views obviously shade the rest of what I say.

The Political Sale

The more interesting phenomenon for me is the political selling of the idea of returning to using tariffs as major fiscal and economic policy instruments. The sales pitch, like most in the political world, occurs at two levels – (1) as an intellectual idea to elites or opinion makers and (2) as a matter of retail politics, to Joe and Jane Voter. Most policies don’t succeed unless a sale is successfully made at both levels. The two pitches can be quite different.

Elite Pitch

Major policy initiatives generally need to have support from elites and opinion makers – e.g., some collection of policy experts, academics, DC think tank employees, trade associations, lobbyists, media commentators, etc. Without that type of support, they have little credibility as viable.

Using tariffs as broad revenue raisers has a large hill to climb in this regard because of a longstanding policy consensus against it. As evidence of how steep that hill is, here are two data points. As a matter of context, the nominee and leader of the (presumed) conservative national party has made raising substantial revenues from tariffs a core plank in his platform. So, one would normally think that conservative experts would be inclined to try and make a case for them. The two data points:

  • The Peterson Institute solicited seven think tanks to develop plans addressing the federal fiscal situation (i.e., the large and growing federal debt). All of them proposed tax increases to offset TCJA’s extension and six to raise revenues beyond that. None of them proposed using tariffs to do so, including AEI, American Action Forum, and the Manhattan Institute, all conservative-oriented organizations.
  • The Heritage Foundation is a very Trump-friendly think tank. (It did not participate in the Peterson Institute exercise.) Many have cast its Project 2025 is a de facto policy blueprint for a Trump administration (Trump himself and the campaign have denied it). Project 2025’s tax policy plans do not advocate using tariffs. For a simplified primer on Project 2025’s tax policy plans see Martin Sullivan, Your Guide to Tax Policy in Project 2025Tax Notes (7/8/2024). Project 2025 does advocate for a broad consumption tax that has elements that make it look a bit like a tariff, but it is very different as Sullivan explains (more below).

But one would still expect some in the right-wing intelligentsia to take up the challenge and explicitly support the idea. (Most of them just dance around and don’t oppose the broad-based tariffs Trump is proposing. For example, watch Kevin Hassert, a chair of Trump’s CEA, avoid the question on Firing Line.) Oren Cass stepped up with a 2,000-word Atlantic article. Cass is the founder of American Compass, a new way conservative organization (populist-friendly?) he founded. He lists himself as its chief economist, but he graduated from Harvard Law School and does not appear to have a graduate degree in economics.

His article, Trump’s Most Misunderstood Policy Proposal, is subtitled “Economists aren’t telling the whole truth about tariffs.” He argues that tariffs can be justified as a sort Pigouvian tax on an externality (foreign production?) that is justified on a cost-benefit basis. Economists (as opposed to lawyers claiming to be economists) in his view make three mistakes in their analyzing and dismissing tariffs:

  1. Undervaluing the benefits of domestic production/manufacturing – its (in his view) better jobs, more innovation, etc.
  2. Are myopic, looking too much at short-term costs (higher consumer prices etc., I assume), as opposed to the long-term benefits of more domestic manufacturing (see point 1)
  3. Often ignore the benefits of the government revenues they generate.

Policy digression: The first two points are basically empirical issues that no legit economic studies support (that I’m aware or that he cites). Yes, cost-benefit analysis is the right evaluative technique. Credible studies all show costs exceed benefits.  Regarding the third point if you’re using tariffs as a general revenue source (that is what Trump is advocating), the appropriate comparison is their ill effects (the classic tax policy principles) compared with other alternative general revenue taxes (income or a broad consumption tax). The use of the revenues can be the same in either case and is not a “benefit” in determining whether tariffs work to yield net domestic economic growth. All the credible studies I’m aware of say they don’t.

His article is economic gibberish to me and doesn’t face up the reality of the universal, across-the-board nature of Trump’s proposal. But I’m no economist either. Real economists have responded. See Kimberly Clausing and Maurice Obstfeld, What populists don’t understand about tariffs (but economists do) (10/1/2024) for a succinct response. Cass’s pitch appears to be falling flat with the National Review, a now Trump friendly outlet. See also this criticism from the Right of an earlier pro-tariff piece by Cass that questions his historical narrative on past American use of tariffs. In short, the pitch to the elite does not seem to be going well among conservative elites and is thin, at best.

I don’t think that will put a dent into their support for Trump. But it may suggest that they think Trump doesn’t really mean what he says or that they think he can be convinced to move on (hello, even bigger deficits). In that vein, it’s worth turning back to Project 2025, which advocates using Paul Ryan’s original TCJA pay-for, the Destination Based Cash Flow Tax. It is a broad-based consumption tax (i.e., not distortive like a tariff), but it has a border-adjustment mechanism (VATs do too, of course), which might make it look like a tariff to Trump. That’s wishful thinking, in my view. Ryan’s version got shot down in the 2017 Congress, but I guess the 2025 Congress (i.e., the GOP conferences in both houses) look nothing like 2017. (Compare Mike Johnson with Paul Ryan.) So, maybe it does have legs. It would not be the unmitigated disaster that a 10% to 20% tariff on almost all imports surely is.

Where’s Grover? The Republican presidential candidate regularly advocating for tax increases is so jarring it might make you wonder what happened to Grover Norquist’s tax pledge. Back during Trump’s presidency when he was imposing tariffs, Norquist forthrightly came out and said they were taxes and advocated against them. He has been largely silent during the campaign about the much bigger and more economically destructive universal tariffs. What gives?

His behavior is entirely consistent with the ATR tax pledge. That is so, because Trump’s tariffs will be more than offset (pay for) other tax cuts (even assuming extending TCJA’s expiring provisions is not a tax cut). The pledge is only violated if you raise taxes more than you cut them (more or less). Grover’s allegiance is to the Republican Party. So, his silence is entirely to be expected.

It demonstrates that among tax pledges many flaws is their inability to protect against the worst of all tax worlds – imposing a bad tax increase to fund bad tax cuts. Here, imposing a universal tariff so you can exempt tips, overtime pay, and social security from income tax and restore deductions for SALT and auto loan interest deduction. Tax pledges are no protection against the political impulse to adopt stupid tax policies, whether increases or cuts. It’s hard to imagine worse economic policy: a destructive tax increase funding tax cuts that make income tax base simultaneously less fair and efficient. An expert might be able to think up something worse, but it would take real work to do so.

Note: In addition to Cass, Robert Lighthizer’s book, No Trade is Free, is another elite pitch supporting tariffs, but not universal tariffs. Lighthizer was Trump’s trade advisor and will likely have a position in a Trump administration. I haven’t read it. Foreign Policy has a review. This piece in the Hill in May by a lobbyist type makes the case for “more aggressive” tariffs – whatever that means – but again not the universal and mega version Trump is now promoting or as a basic, general revenue source. The piece also contains assertions about the 2018-19 Trump tariffs that don’t square with empirical research I’m familiar. Trump’s current proposal would be something like 8X to 9X bigger than his 2018-19 tariffs.

Retail Pitch

As taxes go, tariffs have inherent natural selling points for the average voter (translation: someone who doesn’t think in Ricardian economic terms):

  • Tariffs are opaque and indirect. They’re remitted by importers. Their incidence is indirect. Who pays depends on market price responses, unlike an income tax or a retail sales tax. In this sense, they bear some similarities to corporate taxes, one of the easier political sells as taxes go because of their invisibility
  • The explicit payers (i.e., those with the legal obligation to remit) can be foreigners (whoever the importer is). And foreign firms may absorb some of the burden if their marginal costs allow them to do so and still make a profit, if market forces impel them to reduce prices. There are obviously big limits to that effect – e.g., the extent to which domestic sources or other ready substitutes not subject to the tariffs are available.
  • The two previous points play into Trump’s rhetorical troupe that they are paid by foreigners, as contrary to basic economics as that may be. It is easy to see a ordinary voter falling for that pitch, especially if they’re not paying much attention or they are inclined to do so based on their partisan or ideological priors.
  • Because they were considered a fringe policy, the political debate has ignored tariffs. Unlike the relentless (largely Republican) attacks on taxes per se, they have not been vilified or their ill effects explained ad nauseum. That makes it easier to fall for the false narrative of who pays. Would average folks think that Exxon Mobil (its shareholders) actually bears the burden of the gas tax or Philip Morris of the cigarette tax? No, because it’s not only obvious they don’t but because the merits of those taxes have been debated endlessly.
  • Their funky name (“the most beautiful word in the dictionary” according to Trump), which doesn’t sound like a tax, helps in this regard. The average person likely does not think of them as “taxes.” Can you imagine Trump calling himself a “Tax Man” if they did?  An import tax would be a tougher sell. 
  • Moreover, the candidate of the anti-tax party is aggressively promoting them, not reluctantly turning to them as necessary to pay for basic government but happily singing their praises. I suspect this may inoculate them (in many minds) from concerns that they will hit the average voters’ pocketbook.
  • The old mercantilist pitch: the fallacy that domestic manufacturing is an intrinsic good, worth pursuing on an undifferentiated basis. Despite its economic illiteracy, this notion has intuitive appeal and Trump plays on it big time. (Harris FWIW appears to have bought into it.) Its appeal is demonstrated by the staying power of mercantilist policies across the centuries. Not until the 19th century was it shown that its zero-sum logic to be a fallacy. Trump’s seemingly universal view of the world as a matter of zero-sum exchanges probably explains a lot about his affinity for tariffs.
  • There is longstanding traditional support for tariffs in some quarters – particularly by industrial unions – who perceive them as providing protection against cheap foreign labor undercutting their collective bargaining power and wages. (Translation: they can capture as wages some of the higher prices that domestic producers can charge because of the tariffs.) For example, this showed up as support on the Iron Range for Trump’s 2018 steel tariffs (Bloomberg) and from Amy Klobuchar in a 2022 press release in favor of steel tariffs. Put simply, tariffs typically are viewed as pro-labor. That probably goes a long way to explain why Biden, the self-proclaimed most pro-union president, left most of the Trump tariffs in place after criticizing them during the 2020 campaign. Similarly, domestic producers with no or few foreign inputs will favor them as enhancing their profits. The Coalition for a Prosperous America is a case in point.
  • Because conventional wisdom has rejected tariffs, supporting them appears anti-establishment, which plays into a Trump anti-elite theme. Free trade is an abstract concept, associated with egghead economists and big business type, the quintessential establishment. In combination with reflexive support by much of the old labor movement, this plays into Trump’s campaign theme: I will fight elites for you.
  • There is a perception that foreign trade, particularly with China and other SE Asia countries, has eliminated high-paying good quality manufacturing jobs and that tariffs can reverse that. These jobs were often held by folks who are major component of Trump’s realignment of a formerly Dem constituency to the GOP – i.e., the white, blue-collar workers – while many higher educated and white-collar workers who are more likely to see tariffs for what they are now vote Democratic. (Policy aside: There is no obvious reason why manufacturing jobs are better or higher paying than service jobs. That former reality, I suspect, was attributable to the strength of unions and firm size or that they were typically filled by males. Service jobs –many examples in finance, medical, legal, and tech come to mind – can be as high or higher quality and paying. Manufacturing jobs were considered “better” or higher paying only because in the past they were. Pure nostalgia, not economic fundamentals.)

Trump relies on all these pitches and more. Someone has created a searchable archive of Trump’s and his campaign’s postings on Truth Social, his social media website. It is replete with examples. Here’s a recent one (8/17/2024):

Here is the truth: Kamala wants to put massive taxes on American jobs and American industries—I want to CUT taxes on Americans, while putting tariffs on China and other foreign countries to bring our jobs back home to Pennsylvania. A tariff is a tax on a foreign country… there’s no tax if they build in PA – it’s very simple.

According to a recent WaPo article:

Trump has repeatedly insisted that tariffs represent an unmitigated positive for the U.S. economy, recently calling them “the greatest thing ever invented.”

It’s working. Given that, it should be no surprise that polling shows the pitch appears to be succeeding. For example, consider this Reuters/Ipsos poll from September:

Some 56% of registered voters in the Sept. 11-12 poll said they were more likely to support a candidate backing a new 10% tariff, or tax, on all imports, as well as a 60% tariff on imports from China. By comparison, 41% said they were less likely to support a candidate attached to that proposal.

Like many issues today, partisan-affiliation and polarization are big determinants. Tariffs are closely associated with Trump and the polls cross tabs show two-thirds of Democrats opposing a candidate supporting the tariffs. Trump’s affinity for tariffs affected partisan views of them, even before the current campaign.

Residual labor support for tariffs, I suspect, explains the still substantial Dem support for Trump’s tariffs:

The poll found one in three Democrats said they were more likely to vote for a candidate backing higher tariffs and steep levies on Chinese goods, compared with two-thirds who said they were less likely to do so. Independent voters mirrored the wider electorate.

My take

The bottom line is that tariffs are not unpopular. A segment of the population (largely in Trump’s base) even perceives them positively. Most don’t think of them as taxes. I don’t think Trump has suffered much, if any, political downside from promoting them and using them as a fiscal foil for his fanciful tax cut agenda. Trump has serious competence issues when it comes to governance, truth-telling, and other essentials for a good leader. But he has an uncanny instinct for political pitches and marketing; this is a case in point. The economic nonsense he continually spouts on tariffs burnishes his anti-establishment credentials (ironic obviously for someone with legacy wealth and his policy position generally). More importantly, it has allowed him to successfully deflect questions about his tax cut agenda – i.e., how the country can afford it fiscally? That is so because the general media is ill-positioned and unwilling to call BS on his claims and because tariffs have been out of the political debate for several generations, so their negative economic effects are simply not in the public’s consciousness.

As an aside, I find this most remarkable given the total lack of a credible pitch to elites. That is a testament to polarization and the US’s pure team-based political world. It’s remarkable that the long-running free trade orthodoxy of the Republican Party could be reversed so quickly and easily by as craven a pitchman as Trump.

Growing opposition

The anti-Trump world (translation in this context: the establishment) has belatedly come, I think, to recognizing that reality.  Until very recently, it has been remarkably restrained in responding to his wild proposals beyond a normal amount of academic and MSM articles. As the campaign has ramped up, Trump’s proposed tax cuts mounted, and his crescendo of assertions that all will be magically paid for with tariffs, it’s obvious that concern is finally growing, given the recent spate of articles, op-eds, conferences, podcasts, news articles, etc. on tariffs. With Trump having a 50-50 chance (at a minimum) of winning that concern is well placed.

A sampling (these are all pitches to elites; the Harris campaign has deployed Mark Cuban to make a retail pitch at campaign events, as well as adding opposition to Harris’s stump speech):

Will it matter? I don’t think so. It’s too little and too late. The message requires digesting, understanding, and accepting modestly complicated economic analysis. That’s asking a lot of voters in such a short period of time. Conservative elites (e.g., the Wall Street Journal editorial page, business organizations, business leaders, etc.) would need to call him out in a full-throated manner to lend it the necessary credibility. They haven’t and won’t because they (most of them, anyway) want him to win and either assume it’s mainly campaign rhetoric, that they will fight the battle with his administration after he takes office, and/or saner minds will prevail to moderate substantially his extreme proposal (high universal tariffs).  Even if they did so, it’s unclear it would matter – a necessary condition, but unclear if it would be sufficient.

Debt coda

Despite favoring Trump’s fiscal approach, the Reuters/Ipsos poll cited above found Harris leading him by 5 percentage points! More paradoxically to me, it also found respondents thought Trump was more likely to reduce the national debt than Harris. That is hard to square with reality.

CRFB‘s analysis of his proposals shows they increase the debt by at least 2X more than Harris’s do. That analysis does not include some of Trump’s latest proffers of more tax breaks (e.g., exempting policy and military from income tax!). If Trump is elected, a GOP-controlled congress is highly likely, making it easier for him to enact much of his extensive tax cut agenda. By contrast, if Harris is elected, at least one house of congress (Senate) will almost certainly be controlled by the GOP and will block much/most of her plans for more spending and tax cuts. Some version of TCJA’s extension is likely to pass in either scenario, of course, growing the deficit. So, I find it hard to conclude he would be better for those concerned about the deficit/debt.

I think there is a sticky residual belief that Republicans, as the ostensive conservative party, are more hawkish on the deficit. That perception is not back up by their governance practices in the last decade. GWH converted a surplus to a big deficit; Trump obviously blew up the deficit during an economic expansion; and Boehner rejecting a grand bargain with Obama because of the Hastert Rule prevented him from getting it through his conference.

But if one thing is clear about the current campaign, the debt and deficit are a minor issue at best.

Design a site like this with WordPress.com
Get started