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Boston Globe
2 days ago
- Business
- Boston Globe
Trump's tariffs could pay for his tax cuts -- but it likely wouldn't be much of a bargain
The Congressional Budget Office, the government's nonpartisan arbiter of tax and spending matters, says the One Big Beautiful Bill, passed by the House last month and now under consideration in the Senate, would increase federal budget deficits by $2.4 trillion over the next decade. That is because its tax cuts would drain the government's coffers faster than its spending cuts would save money. By bringing in revenue for the Treasury, on the other hand, the tariffs that Trump announced through May 13 — including his so-called reciprocal levies of up to 50% on countries with which the United States has a trade deficit — would offset the budget impact of the tax-cut bill and reduce deficits over the next decade by $2.5 trillion. Get Starting Point A guide through the most important stories of the morning, delivered Monday through Friday. Enter Email Sign Up So it's basically a wash. Advertisement That's the budget math anyway. The real answer is more complicated. Actually using tariffs to finance a big chunk of the federal government would be a painful and perilous undertaking, budget wonks say. 'It's a very dangerous way to try to raise revenue,' said Kent Smetters of the University of Pennsylvania's Penn Wharton Budget Model, who served in President George W. Bush's Treasury Department. Trump has long advocated tariffs as an economic elixir. He says they can protect American industries, bring factories back to the United States, give him leverage to win concessions over foreign governments — and raise a lot of money. He's even suggested that they could replace the federal income tax, which now brings in about half of federal revenue. Advertisement 'It's possible we'll do a complete tax cut,'' he told reporters in April. 'I think the tariffs will be enough to cut all of the income tax.'' Economists and budget analysts do not share the president's enthusiasm for using tariffs to finance the government or to replace other taxes. 'It's a really bad trade,'' said Erica York, the Tax Foundation's vice president of federal tax policy. 'It's perhaps the dumbest tax reform you could design.'' For one thing, Trump's tariffs are an unstable source of revenue. He bypassed Congress and imposed his biggest import tax hikes through executive orders. That means a future president could simply reverse them. 'Or political whims in Congress could change, and they could decide, 'Hey, we're going revoke this authority because we don't think it's a good thing that the president can just unilaterally impose a $2 trillion tax hike,' '' York said. Or the courts could kill his tariffs before Congress or future presidents do. A federal court in New York has already struck down the centerpiece of his tariff program — the reciprocal and other levies he announced on what he called 'Liberation Day'' April 2 — saying he'd overstepped his authority. An appeals court has allowed the government to keep collecting the levies while the legal challenge winds its way through the court system. Economists also say that tariffs damage the economy. They are a tax on foreign products, paid by importers in the United States and usually passed along to their customers via higher prices. They raise costs for U.S. manufacturers that rely on imported raw materials, components and equipment, making them less competitive than foreign rivals that don't have to pay Trump's tariffs. Advertisement Tariffs also invite retaliatory taxes on U.S. exports by foreign countries. Indeed, the European Union this week threatened 'countermeasures'' against Trump's unexpected move to raise his tariff on foreign steel and aluminum to 50%. 'You're not just getting the effect of a tax on the U.S. economy,' York said. 'You're also getting the effect of foreign taxes on U.S. exports.'' She said the tariffs will basically wipe out all economic benefits from the One Big Beautiful Bill's tax cuts. Smetters at the Penn Wharton Budget Model said that tariffs also isolate the United States and discourage foreigners from investing in its economy. Foreigners see U.S. Treasurys as a super-safe investment and now own about 30% of the federal government's debt. If they cut back, the federal government would have to pay higher interest rates on Treasury debt to attract a smaller number of potential investors domestically. Higher borrowing costs and reduced investment would wallop the economy, making tariffs the most economically destructive tax available, Smetters said — more than twice as costly in reduced economic growth and wages as what he sees as the next-most damaging: the tax on corporate earnings. Tariffs also hit the poor hardest. They end up being a tax on consumers, and the poor spend more of their income than wealthier people do. Even without the tariffs, the One Big Beautiful Bill slams the poorest because it makes deep cuts to federal food programs and to Medicaid, which provides health care to low-income Americans. After the bill's tax and spending cuts, an analysis by the Penn Wharton Budget Model found, the poorest fifth of American households earning less than $17,000 a year would see their incomes drop by $820 next year. The richest 0.1% earning more than $4.3 million a year would come out ahead by $390,070 in 2026. Advertisement 'If you layer a regressive tax increase like tariffs on top of that, you make a lot of low- and middle-income households substantially worse off,'' said the Tax Foundation's York. Overall, she said, tariffs are 'a very unreliable source of revenue for the legal reasons, the political reasons as well as the economic reasons. They're a very, very inefficient way to raise revenue. If you raise a dollar of a revenue with tariffs, that's going to cause a lot more economic harm than raising revenue any other way.''
Yahoo
03-03-2025
- Business
- Yahoo
How Republicans plan to use ‘weird accounting' to pass $4 trillion in tax cuts
Republicans have proposed trillions of dollars in tax cuts that are all but impossible to make permanent with the party's slim majorities in the House and Senate. So now, Senate Republicans may use what one budget expert calls "weird accounting" tricks to push through cuts that are controversial even to some in their own party, and which could have huge implications for future policymaking. In order to pass the budget bill with a simple majority and avoid a filibuster by Senate Democrats, Republicans would have to rely on a process called budget reconciliation. One of the requirements of budget reconciliation is that bills cannot add to the national deficit beyond the budget window, in this case 2034. But all of the tax cuts and other budget items that Republicans have proposed would be so costly, there's no way to do it within that structure, says Kent Smetters, an economics and public policy professor at the University of Pennsylvania's Wharton School of Business. So Senate Republicans have said when they extend the 2017 tax cuts set to expire this year, they can say it costs $0 to do so because the tax cuts are already "current policy." This so-called current-policy baseline is a major change from the metric that Congress has traditionally used. Of course, that's not how budgets work. Even if Republicans claim they cost $0, the tax cuts and other proposed budget expenditures would add trillions to national deficits, according to the Penn Wharton Budget Model (PWBM). "If I have a subscription for eight years to Sports Illustrated, and then I tell my wife, Well, I'm gonna renew it for another 10 years, but it's not gonna cost us anything, because I already have one," says Smetters. "It's kind of a weird accounting to do that, but that's essentially what they're going to try to do." The House budget reconciliation resolution calls for $1.7 trillion in net spending cuts—which could likely come from Medicaid and SNAP—and $4.5 trillion in net tax cuts, leading to a $2.8 trillion increase in deficits over the next 10 years. That's where the weird accounting comes in: By not counting the cost of extending the 2017 tax cuts—which comes to around $4 trillion over the next eight years, PWBM projects—Republicans hope they can then also afford to add in some more of President Donald Trump's stated policy objectives, like not taxing tips or Social Security payments. Sen. Mike Crapo (R-Idaho), endorsed the new "current policy" approach last week, saying it "recognizes that extending current law does not change the tax policy, does not reduce tax revenue," according to NBC News. "They're saying, 'Well, this is our current law…so it's not like this is really costing us more money.' And there's a lot of intellectual problems with that," says Smetters, noting that Democrats could use the precedent for things that Republicans could object to in the future, like extending the lapsed Enhanced Child Tax Credit. "This is almost the nuclear option on budgeting right here. It's pretty darn close to that." Even other Republicans are taking issue with the GOP's math. Rep. David Schweikert (R-Ariz.), told the Wall Street Journal that the idea is akin to fraud. "Am I giving you enough inflammatory language?" Schweikert said. "I can actually go much further." According to Penn Wharton's calculations, the wealthy will benefit much more than middle- or lower-class Americans if the budget plan goes forward. The largest increases in after-tax income would go to the top income quintile, while everyone else sees "much more modest increases in after-tax income." In the event cuts to Medicaid and other safety nets are used to help offset the tax cuts, the least wealthy Americans may actually lose ground financially in the long term. This situation could arise since the House's budget resolution doesn't specify exactly where spending cuts will come from; it is more a framework for spending cuts than an actual bill. Instead, it says certain committees must identify where they can make cuts. The bill calls on the Energy and Commerce Committee, which oversees Medicaid, to identify $880 billion in cuts, and for the Education and Workforce Committee, which oversees school funding and child nutrition, to nip $330 billion in spending. Meanwhile, Republicans have called on the Agriculture Committee, which oversees SNAP and farm subsidies, to identify $230 billion in cuts. The upshot, says Smetters, is that low- and middle-income Americans who depend on those programs could see their benefits reduced over the rest of their lifetimes. And that reduction would wipe out any potential tax cut they could see long term. Exactly what the committees decide to cut is scheduled to be unveiled later this month. When just looking at the tax cuts themselves, "it looks like everybody's a winner," says Smetters. "But this is only [an] analysis on the tax proposals themselves. What's also required is these mandatory spending cuts." This story was originally featured on
