Trump's 60 Percent Tariff on China Would Not Only Hurt the Economy, But Could Hurt Government Revenue

For my regular readers, it does not come as a surprise that I despise former President Trump's obsession with tariffs. This is not simply a matter of mainstream microeconomic theory. The negative impacts of tariffs were clear before Trump began his tariff tirade. Trump's tariffs during his first term lowered the GDP by 0.21 percent, lowered wages by 0.14 percent, and reduced employment by 166,000 full-time equivalent (FTE). Making the economy worse off with his tariffs was not enough for him. He would like to take tariffs to a new level. 

In February, Trump proposed a 60 percent tariff on Chinese goods. Shortly thereafter, I showed how such a tariff would cost the economy anywhere between $200 billion and $495 billion per annum. Remember that the economy is not some amorphous blob. It consists of business and producers, as well as consumers like you and me. On average, it will cost the typical U.S. household upwards of $3,492 if this tariffs gets implemented. If that is not bad enough, it looks like this tariff could adversely affect something else: government revenue. 

An analysis from the bipartisan Committee for a Responsible Federal Budget (CRFB) examines the effects that a 60 percent tariff on China would have on government revenue. This seems counterintuitive at first. After all, if we look at a standard supply-demand graph of the effects of tariffs (see below), increased government revenue is one of the main economic benefits of a tariff. 

This CRFB analysis questions that premise in the case of Trump's 60 percent tariff. Why? In short, because it is such a large tariff. Remember that a tariff is a fancy way of saying "import tax." The larger the tax, the more likely it is to distort the economy in what is known in economics as deadweight loss. In the CRFB's static analysis, it assumes $2.4 trillion of government revenue in a decade. The problem with a static analysis is that is premised on unrealistic assumptions. Once accounting for macroeconomic effects and trade flows, we get a more accurate picture. 

In part, higher tariffs with China means less trade with China, which means less tax revenue. This, of course, depends on if certain goods are replaced with domestic or other foreign substitutes. Even assuming some offset from income and corporate tax revenue, CRFB estimates in its more conventional modeling that the tariff has the potential to lose somewhere around $200 billion to $500 billion of revenue over the next decade. 

While there is a possibility that it could bring the government a net positive in tax revenue, the fact that it could plausibly create a net negative in tax revenue should make even tariff sympathizers pause. For those who care about the impacts of tax policy, this finding is another example out a long list of examples of why we should be more than wary of tariffs.