VINACHEM

We might think of him as a tax-cutter, an enemy of big government, and an instinctive ally of businesses and consumers, and in his first term he certainly was. And yet as his second term takes shape, President Trump is morphing into something very different.

The final details of “Liberation Day” on Wednesday still have to be finalised. But the White House appears to be planning steep new tariffs, imposed on all of the US’s trading partners. On Fox News, Peter Navarro, one of the key backers of the tariff policy, suggested that levies on auto imports should raise $100 billion a year for the federal government. More significantly, he estimated that across the board tariffs would collect $600 billion annually.

Economists and trade experts will no doubt argue about the precise sum that might be raised. No American government has imposed tariffs on this scale in more than a century.

Some of the burden might be absorbed by foreign companies. State-backed Chinese companies, for example, might choose to live with the levies, given that they are more interested in increasing market share than making money. In other cases, production might shift from Stuttgart to San Francisco, or Lyon to Louisville, turning imports into domestic products.

By far most likely, however, is that much of the increased cost will be passed onto consumers in the form of higher prices. Either they will be forced to pay more for imported goods, or prices may rise in general because US companies have less of an incentive to improve productivity thanks to the protections afforded by that tariff wall.

And if tariffs do raise $600 billion annually, that is no small sum of money, even for an enormous economy like the United States.

For context, the US government raises $4.9 trillion a year in tax revenue, so if Navarro is right the tariffs will add a little under 15 per cent to that total. It would be more than the $424 billion the government raises from corporate taxes annually. Tariffs would be turned into the third largest source of government revenue, after federal income taxes, which account for just over 50 per cent of the total, and social security or payroll taxes, which account for around 30 per cent.

In effect, it would be the largest tax rise any president has ever imposed, and trigger a huge shift in how the federal government raises money.

President Trump and his team occasionally talk about replacing income or other taxes with tariffs instead. In fairness, it is not a completely ridiculous idea. Re-wind the clock by 150 years, and tariffs were indeed the main way that the American government, like most others around the world, funded itself (in 1850 they accounted for 90 per cent of revenues).

Here’s the catch, however. The government was far, far smaller in those days, and needed to collect far less money. Even if we assume that Elon Musk manages to cut $1 trillion or more out of the budget, the tariffs would have to be at least five or six times larger than anything yet proposed to cover Washington’s annual expenditure. They would need to be at least 100 per cent and possibly more simply to replace the federal incomes tax.

Tariffs at that rate would be off-the-scale, and would do huge damage to the global trading system. At risk of stating the obvious, if trade collapses to zero because of tariffs, then tariff revenue would also be zero.

Even worse, the president, and perhaps more importantly, the team around him, are getting this the wrong way around. If tariffs are imposed, they should be immediately offset by cuts elsewhere. Corporate taxes could be abolished, for example, or income taxes cut by at least a fifth, or social security contributions dramatically reduced, or some combination of all three.

That would be a shift in the tax base, and one that could be rationally debated. Instead, the president is imposing tariffs, while at the same time talking vaguely about taxes that might or might not be reduced at some point in the future. That is not even close to an acceptable way to run the administration.

So Trump is about to impose a huge tax rise, and the blunt truth is that like any other tax rise it will crush the American economy.  

– Source: Yahoo News –