Trump's proposed tax cuts and increased tariffs could hurt poorer households

Washington: When former President Donald Trump met with House Republicans last month, he touched on a mix of policies core to his economic agenda: cutting income taxes while also significantly raising tariffs on foreign goods.

Trump told Republicans he would "love to raise tariffs" and cut income taxes on Americans, potentially to zero, said Rep. Marjorie Taylor Greene, R-Ga.

"Everyone was clapping in the room," Greene said. "He said, 'If you guys are going to go vote on something today, vote to lower taxes on Americans.'"

Tariffs and tax cuts were core to Trump's economic thinking while he was in the White House. If he wins in November, he is promising a much more aggressive approach, including potentially a blanket 10 per cent tariff on nearly all imports and a 60 per cent tax on Chinese goods.

Trump and his supporters say that mixing tariffs with tax cuts will revitalize American businesses and manufacturing, boosting jobs and benefiting working-class Americans. And they see tariffs on foreign products as a lucrative source of revenue, one that could be used to offset a drop in tax receipts.

Some economists have a different view, saying that cutting taxes while raising tariffs could have harmful consequences by widening the gap between the rich and the poor. Companies often pass on the cost of tariffs to consumers in the form of higher prices.

As a result, economists say, lower-income households would be hit hardest by tariffs since they spend a greater share of their income on goods. Income taxes tend to fall more heavily on wealthier Americans since many low-income workers do not make enough money to owe federal income taxes.

Kimberly Clausing, an economist at the Peterson Institute for International Economics, who served in the Treasury Department under President Joe Biden, said combining tax cuts and tariffs would increase income inequality substantially and "hurt the very voters that Trump is counting on to put him in the White House."

The income tax "acts to reduce income inequality in our country by asking more for those at the top," she said. "A tariff is never going to achieve that."

Robert Lighthizer, who served as Trump's chief trade negotiator and continues to advise his campaign on trade issues, contended in an interview that tariffs were neither inflationary nor regressive. To the extent that tariffs increase production and create more high-paying manufacturing jobs, he said, "they are probably deflationary."

Lighthizer said studies that showed that tariffs were paid by American consumers were "fundamentally wrong," maintaining that tariffs are very often paid by foreign producers and importers.

He also said a tax cut could be structured to benefit middle-class Americans more. Even if you buy the argument that consumers pay for the tariffs or the tariffs are inflationary, Lighthizer said, "you can very easily have a tax reduction for middle-class people that more than offsets the tiny increase."

"A tax-and-tariff regime can be progressive," he said. "What it will do is it will change the relationship between importers and American manufacturers. It will create jobs."

Those in the room with Trump on Capitol Hill in June described his statement as more of an off-the-cuff remark than a firm policy proposal. Still, the idea appears to be attracting more interest in the Republican Party, where even politicians who have traditionally been skeptical of tariffs have shown signs of favoring them if the generated revenue is used to help finance further tax cuts.

Rep. Thomas Massie, R-Ky., who is known as a libertarian, described Trump's proposal as vague but "intriguing" after the meeting last month.

Some Senate Republicans said they wanted to see more information about Trump's plans. "I'm for increased tariffs," said Sen. Josh Hawley of Missouri. "Tariffs do raise revenue, so why not use the revenue to reduce taxes? I'd start with working people."

Trump's proposal to impose tariffs on most foreign products would have been anathema to many Republicans in previous decades, when the party was more staunchly in favor of "free but fair" trade. Tariffs can protect American manufacturers from foreign competition and have been shown to boost US factory production. But some economists argue that they do so in a costly way, relative to the number of jobs created.

The Republican Party, however, has strongly shifted toward a platform that mirrors Trump's views. In a video on his campaign website, Trump describes "a sweeping pro-American overhaul of our tax and trade policy" as "the heart of my vision."

His pick of Sen. JD Vance of Ohio as the Republican nominee for vice president this week is another sign of the party's direction. Vance has harshly criticized Chinese trade practices and called for protecting American manufacturers from "all of the competition."

In a statement, Anna Kelly, a spokesperson for the Republican National Committee, said Trump had "put America first by instituting tariffs while simultaneously keeping inflation and consumer prices low."

"President Trump's policies brought forward a booming economy, and he will once again lower taxes, impose tariffs on foreign producers, bring jobs back to the US and put America first on day one," she said.

At the core of Trump's tax agenda is extending the cuts he enacted in 2017. Many of those -- including lower individual tax rates and a larger standard deduction -- are set to expire at the end of next year, setting up a high-stakes legislative battle in Washington.

While low- and middle-income Americans benefit from the tax cuts, the gains still disproportionately accrue to the rich, according to an analysis by the Tax Policy Center, a Washington think tank that studies fiscal issues.

Republicans have largely rallied around extending the expiring provisions. Trump and some of his economic advisers are also eyeing tax cuts that go beyond the 2017 law, including lowering the 21 per cent corporate tax rate and suspending the payroll taxes that businesses and employees pay to fund Social Security and Medicare.

Stephen Moore, a Trump economic adviser, is ambivalent about raising tariffs. But if the revenue collected from doing so helps pay for cutting, if not eliminating, income taxes, he said, the trade-off could be worthwhile.

"I'm not a fan of tariffs, but if it were an across-the-board revenue tariff, and you use the revenue to reduce taxes that are harmful to growth, I think it could make sense," he said.

Michael Stumo, the chief executive of the Coalition for a Prosperous America, which advocates for more protectionist trade policies, said the conversation about swapping some taxes for tariffs was "pregnant with potential."

"We saw much more intriguing and thoughtful comments based on that proposal than I've seen in the old guard before," he said. "Clearly there's a tax-cut wing of substance in the Republican Party, and if you finance that with tariffs, it's a very different conversation."

The US government was largely funded by tariffs when the country was in its infancy. But starting around the time of the Civil War, the government introduced other taxes to generate more revenue for the state, said Douglas A. Irwin, an economic historian at Dartmouth College. The income tax was introduced in 1913 in part to counteract the soaring income inequality of the Gilded Age.

Charging a 10 per cent tariff on most foreign goods, as Trump has suggested, could generate as much as $2.5 trillion over 10 years, according to an estimate by the nonpartisan Committee for a Responsible Federal Budget. That could help fill the fiscal hole created by extending the 2017 tax cuts, which the Congressional Budget Office projects could cost more than $4 trillion over 10 years.

But a 10 per cent across-the-board tariff would not come close to replacing roughly $2 trillion in income tax the government collects annually. A study by Clausing and Maurice Obstfeld, also of the Peterson Institute, found that the maximum revenue the United States could earn from tariffs would peak at about $780 billion, less than 40 per cent of what income taxes currently bring in.

It would also be likely to trigger a trade war, which could prompt Trump to once again use tariff revenue to compensate farmers and other businesses that suffer losses. In Trump's first term, his tariffs prompted retaliation from foreign governments, which put their own taxes on American exports. American farmers in particular were hit hard by retaliation, prompting the Trump administration to give them $23 billion to offset their losses.

Clausing and Obstfeld also calculated what would happen if the United States imposed enough tariffs to earn the maximum level of revenue, $780 billion, and then cut income taxes by a similar amount across all income groups.

They found that the result would be a net 8.5 per cent reduction in after-tax income for the lowest-earning 20 per cent of Americans, compared with an 11.6 per cent increase for the highest-earning 1 per cent.