Tariffs May Wipe Out Gains from Tax Cut

Perceptions matter. If asked today to sum up the current U.S. administration’s economic policy, one might respond, “Tax cuts for households and corporations, along with protectionist tariffs.” But with the announcement this week of the most far-reaching tariffs yet, one might soon be able to say, “Tax cuts for households, along with socially engineering the corporate tax landscape to entrench protectionism.”

Piling On

As 2018 has unfolded, new tariffs on imports have only grown in size. Initial tariffs such as those levied on imported solar panels and washing machines probably added less than $1 billion each to government coffers.

The next round, on steel and aluminum, rightfully evoked outrage and began poisoning the well of global trade politics, but will likely cost corporations around $7 billion per year — significant, but small relative to the hundreds of billions saved from tax cuts.

In this age of tweeting presidents, it’s sometimes hard to disentangle threatened tariffs from those actually enacted, but the rest of the year has largely been a story of severely escalating tariffs against Chinese imports. In July, the United States announced 25 percent tariffs on a list of mostly industrial Chinese goods valued at about $50 billion per year.

Then this week, the administration announced tariffs on an additional $200 billion of Chinese goods. As if to soften the blow, the tariffs will be 10 percent until the end of the year before increasing to 25 percent in 2019.

This may not be the end. The president warned that “if China takes additional retaliatory action, which is almost certain, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”

Yes, that’s a 25 percent tariff on virtually everything imported from China.

The Free Trade Tax

For well over a decade, policy makers have discussed a revenue-neutral carbon tax, in which new taxes paid on emissions would be offset by lowering the overall corporate tax rate. Nobody would have considered this a tax cut. It would have been a change to the corporate tax structure designed to achieve a certain policy goal.

With the new round of announced and threatened tariffs, we are approaching a policy that can best be described as a revenue-neutral free trade tax.

(Note: The numbers below are rough estimates that do not account for substitution away from taxed items or impact on the economy, but effectively convey overall magnitudes. Also, while some of the tariffs on goods impacted by the last round of tariffs might be thought of instead as offsetting the recent individual income tax cuts, most of these goods are likely imported by corporations that pass along some of the higher cost to consumers.)

The Joint Committee on Taxation estimated that lowering the corporate rate from 35 percent to 21 percent would provide relief of $125 billion. Tariffs already on the books that will likely hit corporations first have cut into this relief by over half. Add on the extra phase of tariffs threatened this week, and corporations can essentially wave goodbye to their 14 percentage-point tax cut.

There are, of course, winners and losers as a result of the revenue-neutral corporate free trade tax. That’s exactly the point. Businesses that rely on imports are hit, while those that do not get a break. The policy aim is to reduce the number of the former in favor of the number of the latter.

I sincerely hope there haven’t been enough new tariffs by this time next year to be writing about a revenue-neutral household free trade tax as well.

For those who think these tariffs are simply a negotiating tactic to correct China’s bad actions, let me make another suggestion. Perhaps enacting the overall corporate tax cut first was also a tactic, to soften up potential resistance when the deluge of tariffs began.

 

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Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research often focuses on free markets and technology, including blockchain and cryptocurrencies, the sharing economy, and internet commerce. He is a frequent speaker at industry conferences, especially on blockchain technology. Max’s research and writing also touch on other economic topics, including governance, competition, and small businesses.
 
Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.