Trump's tariffs are making money. That may make them hard to quit

NZ Herald

7 days ago

Indeed, Trump has routinely cited the tariff revenue as evidence that his trade approach, which has sowed uncertainty and begun to increase prices for consumers, is a win for the US.
Members of his Administration have argued that the money from the tariffs would help plug the hole created by the broad tax cuts Congress passed last month, which are expected to cost the Government at least US$3.4 trillion.
'The good news is that Tariffs are bringing Billions of Dollars into the USA!' Trump said on social media shortly after a weak jobs report showed signs of strain in the labour market.
Over time, analysts expect that the tariffs, if left in place, could be worth more than US$2t in additional revenue over the next decade.
Economists overwhelmingly hope that doesn't happen and the US abandons the new trade barriers. But some acknowledge that such a substantial stream of revenue could end up being hard to quit.
'I think this is addictive,' said Joao Gomes, an economist at the University of Pennsylvania's Wharton School. 'I think a source of revenue is very hard to turn away from when the debt and deficit are what they are.'
Trump has long fantasised about replacing taxes on income with tariffs.
He often refers fondly to American fiscal policy in the late 19th century, when there was no income tax and the government relied on tariffs, citing that as a model for the future.
And while income and payroll taxes remain by far the most important sources of government revenue, the combination of Trump's tariffs and the latest Republican tax cut does, on the margin, move the US away from taxing earnings and towards taxing goods.
Such a shift is expected to be regressive, meaning that rich Americans will fare better than poorer Americans under the change.
That's because cutting taxes on income does, in general, provide the biggest benefit to richer Americans who earn the most income.
The recent Republican cut to income taxes and the social safety net is perhaps the most regressive piece of major legislation in decades.
Placing new taxes on imported products, however, is expected to raise the cost of everyday goods.
Lower-income Americans spend more of their earnings on those more expensive goods, meaning the tariffs amount to a larger tax increase for them compared with richer Americans.
US President Donald Trump. Photo / Tierney L. Cross, The New York Times
Tariffs have begun to bleed into consumer prices, with many companies saying they will have to start raising prices as a result of added costs.
And analysts expect the tariffs to weigh on the performance of the economy overall, which in turn could reduce the amount of traditional income tax revenue the Government collects every year.
'Is there a better way to raise that amount of revenue? The economic answer is: Yes, there is a better way, there are more efficient ways,' said Ernie Tedeschi, director of economics at the Yale Budget Lab and a former Biden Administration official. 'But it's really a political question.'
Tedeschi said that future leaders in Washington, whether Republican or Democrat, may be hesitant to roll back the tariffs if that would mean a further addition to the federal debt load, which is already raising alarms on Wall Street.
And replacing the tariff revenue with another type of tax increase would require Congress to act, while the tariffs would be a legacy decision made by a previous president.
'Congress may not be excited about taking such a politically risky vote when they didn't have to vote on tariffs in the first place,' Tedeschi said.
Some in Washington are already starting to think about how they could spend the tariff revenue.
Trump recently floated the possibility of sending Americans a cash rebate for the tariffs, and Senator Josh Hawley, (Republican-Missouri), recently introduced legislation to send US$600 to many Americans.
'We have so much money coming in, we're thinking about a little rebate, but the big thing we want to do is pay down debt,' Trump said last month of the tariffs.
Democrats, once they return to power, may face a similar temptation to use the tariff revenue to fund a new social programme, especially if raising taxes in Congress proves as challenging as it has in the past.
As it is, Democrats have been divided over tariffs. Maintaining the status quo may be an easier political option than changing trade policy.
'That's a hefty chunk of change,' Tyson Brody, a Democratic strategist, said of the tariffs.
'The way that Democrats are starting to think about it is not that 'these will be impossible to withdraw.' It's: 'Oh, look, there's now going to be a large pot of money to use and reprogramme.''
Of course, the tariffs could prove unpopular, and future elected officials may want to take steps that could lower consumer prices.
At the same time, the amount of revenue the tariffs generate could decline over time if companies do, in fact, end up bringing back more of their operations to the US, reducing the number of goods that face the import tax.
'This is clearly not an efficient way to gather revenue,' said Alex Jacquez, a former Biden official and the chief of policy and advocacy at Groundwork Collaborative, a liberal group.
'And I don't think it would be a long-term progressive priority as a way to simply collect revenue.'
This article originally appeared in The New York Times.
Written by: Andrew Duehren
Photographs by: Alyssa Schukar, Tierney L. Cross
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