Source: CAUS News

The Economist: Trump's trillion-dollar tariff revenue dream will ultimately come to naught, and reliance on tariffs will make the US even more dependent on Chinese imports.

In the early 20th century, before the introduction of income tax in the United States, tariffs covered most of the federal government's expenses. Trump hoped to restore this method. He repeatedly proposed the idea of establishing an "External Revenue Bureau," allowing the federal government to eliminate income tax and instead rely on border taxes, theoretically having foreigners pay for the U.S. government.

"This will be a feast," Trump recently posted on his own social platform, loudly announcing that tariffs could exempt those with annual incomes below $200,000 from paying income tax.

However, there are many problems with tariffs. Economists criticize that they distort business. The bearers of tariffs are usually not "external" companies but American consumers. In 2020, Mary Amiti of the Federal Reserve Bank of New York and her colleagues found that most of the tariffs during Trump's first term were ultimately borne by American businesses through reduced profits or by consumers through higher prices.

In addition, agreements reached with the UK and China have already brought overall tariff levels down from previous highs, reducing government revenue. As the U.S. signs more agreements, tariff levels will continue to decline.

Even so, the tariffs pushed by Trump will still bring substantial revenue. How much exactly? Last year, out of the total federal government revenue of $4.9 trillion, only $10 billion came from tariffs. However, this number is rising. Treasury Department daily data shows a surge in collections. By May 13, tariff revenue for the year had reached $47 billion, an increase of $15 billion over the same period last year.

It is not easy to determine how much of this is due to Trump's latest tariff policies versus the result of companies importing in advance to avoid future tax hikes. Most likely, the latter accounts for the larger portion.

Nevertheless, some economists are still trying to predict tariff revenue. Trump's trade advisor, Peter Navarro, claimed that border taxes could bring in over $6 trillion over the next decade, or about $600 billion annually. His calculation was very simplistic: taking last year's $3.3 trillion worth of imported goods and directly multiplying it by a 20% tariff.

This method ignores basic economic laws. High tariffs suppress demand for foreign goods, shrinking the tax base, and also reduce income and wage tax revenues, offsetting up to 25% of the gains. Considering trade retaliation and tax evasion, expected revenue would further decrease.

Navarro's trillion-dollar forecast is based on a static fantasy, assuming buyers and sellers and trading partners ignore price changes.

Independent institutions give far lower forecasts.

The budget model at the Wharton School of the University of Pennsylvania estimates that all proposed tariffs, including currently suspended "reciprocal" tariffs, could bring in a maximum of about $290 billion annually. This estimate takes into account weakened import demand and its impact on corporate income tax and wage tax.

Other forecasts are even lower. The nonpartisan research center under Yale University's Budget Lab estimates an annual revenue of $180 billion; the Tax Foundation's estimate is closer to $140 billion.

However, there is a particularly notable aspect in these estimates. The reduction of tariff rates on Chinese goods from 145% to 30% has little impact on revenue changes. A 145% tariff rate has already exceeded the peak of the Laffer Curve, meaning that increasing the rate further would actually reduce revenue. Such a high rate would drastically cut imports from China, making the overall revenue decrease even though a small amount of goods are still taxed.

According to the Wharton School of the University of Pennsylvania's model, even if a 145% tariff rate were imposed on Chinese imports, it would only generate an additional $25 billion annually compared to the current 30% rate.

Even with this "lenient" adjustment, Trump cannot achieve his desired large-scale tax cuts through tariffs alone. Last year, individual income tax brought in $2.4 trillion in revenue, with expectations of reaching $4.4 trillion over the next decade.

The Tax Foundation estimates that eliminating income tax for those earning less than $200,000 would result in a loss of $737 billion in revenue in 2025, two to three times the revenue that tariffs can bring in.

Theoretically, to achieve balance, only tariffs on people earning around $80,000 or less would suffice, which accounts for only 10% of income tax revenue. In reality, exempting low-income earners from taxes means lowering the lowest marginal tax rate applicable to everyone's starting income, ultimately benefiting higher-income individuals.

The tax reform bill proposed by House Republicans includes numerous other tax cuts, such as significantly raising thresholds for most tax brackets. Just this one measure would exceed the revenue that tariffs could bring in.

In the early 20th century, tariffs could sustain the federal government because government spending accounted for only about 2% of GDP, primarily used for debt repayment, defense, and infrastructure. Now this ratio is ten times higher.

Imports themselves are a narrow and volatile tax base, incapable of supporting modern state finances. Ironically, reliance on tariffs would make the U.S. fiscal system more dependent on Chinese goods production.

Most political figures are reluctant to return to the practices of the early 20th century for good reason.

Original article: https://www.toutiao.com/article/7506297388949193227/

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