Weird Trump idea would shut America off from the world

Donald Trump is known to say some peculiar things, but last week he floated a truly weird idea: repealing all US income taxes and replacing the forgone revenue with income from tariffs.

The rather novel suggestion was made during a private meeting with Republican members of Congress in Washington.

Donald Trump floated a strange idea during a private meeting with Republican members of Congress in Washington last week.Credit: AP

It’s not surprising that the self-described “Tariff Man” would regard raising tariffs as the solution to all financial problems, given that he, and his campaign, are convinced that tariffs are paid by the exporters rather than, as every credible independent analysis has concluded, the US importers.

Tariffs are a tax on consumers. They raise prices and cost jobs, which was the bottom line to most studies of the impact of Trump’s original round of tariff increases in 2018 and 2019.

That’s not, however, what the Trump campaign believes.

Before raising the prospect of a direct swap of income taxes for tariffs, Trump had announced that, if he regained the White House, he would impose a base tariff of 10 per cent on all imports into the US and a 60 per cent tariff on imports from China.

A number of respected think tanks have evaluated the impact of that plan. The Peterson Institute for International Economics, for instance, calculated the cost for the average middle-income US household at $US1700 ($2554) a year. Other studies are in a similar ballpark.

A Trump campaign spokesperson, responding to those studies, however, said the notion that tariffs are a tax on US consumers was a “lie pushed by outsourcers and the Chinese Communist Party”.

The fact that import duties are actually paid by the importer when the goods arrive in the US and then that cost is passed on to retailers or, if they are intermediate goods, on to manufacturers and then built into the end prices for US consumers doesn’t appear to have registered with Trump or his advisers.

While it is possible that the exporters might absorb some of the duty to maintain their product’s competitiveness, most investigations of what actually happened in 2018 and 2019 found there was a near 100 per cent pass-through of the costs to consumers.

Trump’s plan would fundamentally damage America’s international relationships, leaving China, led by Xi Jinping, as the dominant geopolitical force.Credit: AP

The additional problem with Trump’s latest tariff thought bubble is that the numbers don’t add up.

The US Congressional Budget Office has forecast the US government’s individual income tax receipts will be $US2.45 trillion ($3.7 trillion) this financial year and $US2.55 trillion in 2024-25. Corporate tax receipts are expected to be $US525 billion this financial year and $US490 billion in 2024-25.

Last year, the total value of US goods imports was just over $US3 trillion. Replacing income taxes with tariffs would entail imposing a tariff of 100 per cent on all imports.

In fact, it would probably require a rate of more than 100 per cent, given that it is likely that doubling the price of the goods would significantly shrink their volume.

It would also, inevitably, lead to retaliation by America’s trade partners (as would Trump’s initial proposal for the across the board 10 per cent tariff and the 60 per cent tariff on imports from China).

As former US Treasury secretary Larry Summers said, this is a prescription for “the mother of all stagflations”. It, and the reactions it would provoke, would be extremely damaging to, not just the US economy, but the global economy.

It would also be extremely regressive. Nearly half of all Americans pay no income tax and, therefore, while getting no benefit from its abolition, would face steep increases in the cost of imported items, for many of which there are no domestically produced substitutes.

If the tariffs-for-tax swap is unworkable, Trump will have to find another way to fund the extension of his 2017 tax cuts, which expire after 2025. The Congressional Budget Office has projected that an extension of the cuts, which Trump has said he plans to do, would cost $US4.6 trillion over a decade. He debt-financed the existing cuts, which has been a major factor in America’s swollen debt and deficits.

The plan would put further pressure on US households.Credit: Bloomberg

If Trump were to return to the White House and follow through on his more achievable proposal to put a 10 per cent “ring around the collar” of the US economy with his universal tariff and just about wipe out imports from China with the 60 per cent tariff rate, he would inevitably invite a global response.

Trump might think, and has said in the past, that trade wars are good and easy to win but no one actually wins a trade war. Consumers on both sides of the conflict are hurt, along with exporting companies in the jurisdictions involved. There are inflationary effects, and economic growth and employment are reduced relative to what they might have been.

Neither Trump’s original tariffs on more than $US300 billion of Chinese imports, which Joe Biden has left in place (largely for domestic political reasons) nor China’s retaliatory tariffs did anything positive for either economy.

Biden’s more focused tariffs on electric vehicles and solar panels have at least been imposed with an understanding that there are material costs incurred in protecting the green industries that the administration is trying to develop.

Nearly half of all Americans pay no income tax and therefore … they would face steep increases in the cost of imported items.

Biden has invested massively in subsidies and other incentives to on-shore strategic industries in order to reduce America’s over-reliance on China for products regarded as central to 21st-century economic development.

The Europeans are, for similar reasons, imposing higher duties on Chinese imports of electric vehicles and will probably raise the tariffs on other green technologies to offset the impact of China’s layers of subsidies for strategic products.

So far, America’s average tariff, across all of its imports from all sources, is only about 3 per cent.

That’s why even Trump’s proposed 10 per cent universal rate is a far bigger deal for America’s trade partners, including its allies, than it might appear at first glance and why it is likely to produce tit-for-tat responses.

If he were to push ahead with his ill-conceived tariffs-for-tax plan, he would effectively be shutting off the rest of the world’s access to the US economy.

That might not worry Trump, who has isolationist tendencies, but it would fundamentally alter and damage America’s international relationships, along with its economy, and leave China as the dominant geopolitical force. Despite his admiration for Xi Jinping, that’s probably not the legacy Trump would intend or want to leave.

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