Donald Trump apparently believes his tariffs will bring so much money to the US treasury that the US will be able to afford another giant Trump tax cut.
But Trump’s tariffs – and the retaliatory tariffs already being imposed on American exports by the nation’s trading partners – will be paid largely by the American working class and poor.
And the people who will benefit most from another giant Trump tax cut are America’s wealthy.
It will be a giant upward transfer of wealth.
Trump has made astronomical estimates about how much money tariffs can raise.
“We will take in trillions and trillions of dollars and create jobs like we have never seen before,” he said during his recent joint address to Congress. “Tariffs are about making America rich again and making America great again.”
Last Sunday on Air Force One, Trump was even more ebullient. “We’re going to become so rich you’re not going to know where to spend all that money,” he said.
The Committee for a Responsible Federal Budget estimates that if Trump’s already-announced tariffs on China, Mexico and Canada went into effect, they would bring about $120bn a year into the US treasury, and $1.3tn over the course of 10 years.
Among Trump’s first actions at the outset of his second term was to order the treasury to establish an “External Revenue Service” to collect tariff revenue that would enable the US to pay down its debt and reduce taxes.
Howard Lutnick, Trump’s secretary of commerce, said on Fox News in late February that the goal of the External Revenue Service “is very simple: to abolish the Internal Revenue Service and let all the outsiders pay”.
In other words: the US will raise so much money from Trump’s tariffs that Americans will no longer need to pay income taxes.
The first problem with this is mathematical. America raises about $3tn each year from income taxes. The nation also imports about $3tn worth of goods each year.
So to replace income taxes, tariffs would have to be at least 100% on all imported goods. Also, Americans would have to continue to import $3tn worth of goods every year. Neither of these is remotely plausible.
The second problem is who pays.
Trump keeps saying other countries pay for tariffs. That’s not how they work.
Tariffs are in effect taxes on imported products. They’re paid by Americans.
Say there’s a 60% tariff on Chinese imports. When Walmart imports Mr Coffee machines from China (where they’re made), China doesn’t pay the 60% tariff to the US government. Walmart does.
If Walmart had bought the coffee machine for $20 before the tariff, the 60% tariff requires Walmart to pay an extra $12 – bringing the total cost of each coffee machine to $32.
Walmart doesn’t want that extra $12 to cut into its profit margin, so it will try not to absorb that cost. Instead, it will pass the extra $12 on to its customers.
Walmart’s CEO has already said it expects to raise prices in response to Trump’s tariffs in order to protect its profits.
Now, targeted tariffs can be used to protect industries critical to national security.
This is what the Biden administration did when it levied tariffs on Chinese electric vehicles, solar panels, computer chips and batteries after making massive domestic investments in these technologies.
But Trump has proposed across-the-board tariffs on almost all imports – particularly from America’s largest trading partners.
While Americans will pay more for imported goods due to tariffs, countries that export the products to America are also harmed because Americans presumably will buy fewer of their coffee makers and anything else they sell in the United States that now costs more. These countries are retaliating by raising tariffs on American exports.
On Monday, China began imposing tariffs on a range of American farm products, including a 15% levy on chicken, wheat and corn.
These retaliatory tariffs will hurt America’s farm belt – mostly Republican states and Trump voters.
On Wednesday, after Trump imposed a 25% tariff on all aluminum and steel imports coming into the United States from the rest of the world, the European Union announced retaliatory tariffs on about $28bn worth of American exports, including beef and whiskey.
Not incidentally, Europe’s retaliatory tariffs are on goods mostly produced by Republican states (think Kentucky bourbon). Europe is also slapping tariffs on Harley-Davidson motorcycles, made in America’s rust belt.
On Thursday, in response to Europe’s tariffs, Trump threatened a 200% tariff on all alcoholic products from EU member states. If he follows through, Trump voters will be paying more for much of the alcohol they consume.
Canada also announced new tariffs on about $21bn worth of US products.
This is called a trade war. There are no winners in such a war.
One of the biggest global trade wars started with the Smoot-Hawley Tariff Act in 1930. After the 1929 stock market crash, President Herbert Hoover and Republicans thought sweeping tariffs would help the economy.
They didn’t. Import prices surged, and exports plummeted because of other nations’ retaliatory tariffs. Global trade fell by 66%, worsening the Great Depression.
Smoot-Hawley seemed to prove that across-the-board tariffs don’t work. Then came Trump’s first term and his sweeping tariffs, largely on China.
Higher prices from Trump’s first-term tariffs on thousands of Chinese imports are estimated to have cost American families close to $80bn.
This cost took a larger chunk out of the incomes of poorer families than richer ones.
If you make $50,000 a year, the cost of a coffee maker that rises due to tariffs affects you more than it does someone making $1m a year who can better afford the price increase.
To put it another way, tariffs are a highly regressive tax.
Following Trump’s first-term tariffs on China, Beijing retaliated with its own tariffs on American exports. This led China to import less from America.
In the US agriculture industry alone, the result was a $27bn loss in exports from mid-2018 to the end of 2019. Even though the government increased aid to affected farmers, farm bankruptcies shot up 20%.
Another consequence of Trump’s first-term trade war was that American manufacturing shrank, as demand for exports slumped and as raw materials used in manufacturing became more expensive.
One study estimates that Trump’s first-term trade war cost nearly 300,000 American jobs.
Instead of learning a lesson from this fiasco, Trump is now promising even bigger tariffs – more tariff hikes on China and, starting on 2 April, 25% tariffs on imports from Canada and Mexico.
These new tariffs would cost the typical American household an additional $1,200 this year. If Trump makes good on previous pledges to slap more tariffs on imports from around the world in addition to aluminum and steel, American families can expect to spend as much as $4,000 more.
Trump says he’ll use the revenue from tariffs to “offset” more of his big pending tax cut.
That tax cut will disproportionately benefit wealthy Americans and big corporations, as did Trump’s first-term tax cut. But revenue raised from tariffs will be coming disproportionately from average working people.
Hence, it will be a massive transfer of wealth from most Americans to the super wealthy and giant corporations.
Will most Americans know that the higher prices they’ll pay for groceries, gas, housing and all sorts of other things will be going into the pockets of the wealthy? Will they know whom to blame?
Trump was able to fool most Americans during his first term into believing he had created a marvelous economy for them and that they benefited from his tariffs and tax cuts.
It was a lie, of course. But he tells lots of lies that many Americans believe. Will he be able to do it again, on a much larger scale?
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Robert Reich, a former US secretary of labor, is a professor of public policy emeritus at the University of California, Berkeley. He is a Guardian US columnist. His newsletter is at robertreich.substack.com
