Trump wants to cut taxes for Americans. His $700bn tariffs raid could pay for it

Yahoo

04-04-2025

Alarm bells may have rung across the globe after Donald Trump's announcement on Wednesday but closer to home the president's tariffs blitz also amounts to America's biggest tax rise in nearly 60 years.
His 'reciprocal' measures alone will raise nearly $400bn (£305bn) of new revenue, according to JPMorgan, with the cash that businesses pay on tariffs going directly into the pocket of the US government.
'This would be the largest tax increase since the Revenue Act of 1968,' says Michael Feroli, an economist at the investment bank.
On the surface, it feels contradictory for a US president who has promised to slash taxes for Americans to start dipping into the pockets of American businesses.
But Trump has bigger plans for his windfall: he wants to use the revenue raised from the tariffs to pay for cuts to taxes paid by US citizens.
'For years, hard working American citizens were forced to sit on the sidelines as other nations got rich and powerful, much of it at our expense. But now it's our turn to prosper and, in doing so, use trillions and trillions of dollars to reduce our taxes,' Trump said in his White House Rose Garden speech.
'Now we're going to pass the largest tax cuts in American history.'
The sums that Trump can play with are huge. Wednesday's barrage came on top of charges already imposed on imports from Canada, Mexico and China, as well as all steel and aluminium imports.
All in, Citi bank calculates that Trump's tariffs will raise at least $700bn for America's public purse – a colossal sum equivalent to double the GDP of Portugal.
Ironically, Trump's flagship 'tax cut' will actually mean simply maintaining the status quo.
A package of tax reductions including sweeping income tax cuts passed during his first term, known as the 2017 Tax Cuts and Jobs Act, was only temporary and is due to expire at the end of December.
This means that if Donald Trump does nothing, millions of Americans will be hit by income tax rises at the start of 2026.
Trump is now pushing Congress to pass a package that would make the 2017 Tax Cuts and Jobs Act permanent. Republicans are hoping to tag on additional tax cuts to these plans.
Keeping the 2017 tax cuts in place will cost $5.5 trillion over the next decade, or around $550bn per year – a figure that will almost wipe out the lion's share of Trump's $700bn tariff windfall.
James Knightley, chief international economist at ING bank in New York, says making the 2017 tax cuts permanent will be the president's main priority.
Partly, this is because Trump knows tax cuts are essential for maintaining his support.
US Chamber of Commerce polling last month showed overwhelming public backing for extending the 2017 cuts, with the share of those in favour outnumbering those against by a ratio of three to one.
'We may see Trump lean into the tax cuts, which could be accelerated and be bigger than originally thought as an effort to give the market what would be a very welcome proverbial dessert,' Libby Cantrill, head of US public policy at Pimco, said.
And economic pain will make them even more urgent. American stocks slumped on Thursday, with the S&P 500 falling by as much as 4.5pc and the Nasdaq dropping by as much as 5.9pc.
After extending his 2017 cuts, Trump's next priority is likely to be cutting corporation tax for companies that produce their goods in America from 21pc to 15pc.
This is a key part of Trump's bid to get companies to bring their operations back to American shores. The measure would cost between $20bn and $30bn a year.
Trump will also push to end tax on tips, a campaign promise that actually received bipartisan support, says Knightley. 'I think that one would be easier to get through.' This would also cost around $30bn a year.
If Trump presses ahead with all three of these tax cuts, the combined cost would therefore be around $610bn, in theory leaving him about $90bn to play with.
But this would not be enough to cover the bill of Trump's other promises to make overtime pay tax-free, which would cost around $200bn a year, or exempt social security benefits from tax, at a cost of around $100bn, says Knightley.
In total, then, Trump has outlined plans for tax cuts that would cost the public purse more than $1 trillion a year – far more than he can claw in from his new tariffs.
Trump needs to get tax cuts approved by Congress – to do this, he needs to show that he can balance the books. And economists warn that simple calculations on tariff revenue and tax cuts do not account for the fact that tariffs are likely to depress tax revenues elsewhere.
Warnings are mounting that if he keeps his tariffs in place, Trump will push the US economy into a painful downturn.
Mark Haefele, from UBS, warned in a client note on Wednesday that: '[if] the tariffs announced today remain in place for more than three to six months … we believe this could lead to a US recession.'
Tariffs will drive up inflation. Pimco warns that consumer price growth could accelerate to 4.5pc, nearly double the current 2.8pc rate of inflation.
Higher inflation means that real incomes could drop this year, bringing consumer spending down with it, says JPMorgan's Feroli. 'This is before accounting for the additional hits to gross exports and to investment spending.'
Companies will pull-back on hiring and investment, says Andrew Hollenhurst, US chief economist at Citi. Though foreign producers may pay for some of the tariff charges, at least part of the cost will be extracted by American consumers, he says.
High tariffs to pay for tax cuts may therefore be a self-defeating logic. 'What you're doing is you're giving with one hand but taking away with another,' says Knightley.
While tariffs will hit poorer families hardest, the benefits of income tax cuts will be felt primarily by higher earners. This could prove a major threat to Trump's support in the rust belt.
In turn, aggressive tariff charges may bring in less than expected because lower economic growth could reduce income tax receipts, says Knightley.
'If there is weaker consumer activity and weaker jobs, we're going to get less revenue from other sources. If the economy starts losing jobs, we're going to get less payroll tax revenue.'
While tax cuts for ordinary citizens could offset some of the economic toll from higher tariffs, they will not be able to shield America from an incoming economic tornado of higher inflation, a slump in spending, job losses and the increasingly likely prospect of recession.
Or in other words, Trump could simply be shooting himself in the foot.
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