Paying for Trump Tax Cuts with Trump Tariffs Doesn’t Make Sense

First, tariffs are a particularly bad way to raise revenue. Tax systems that prioritize economic growth and fairness have relatively low tax rates that are transparently and consistently applied on a broad, neutral tax base. Tariffs meet none of these criteria.

Imported goods make up about 11 percent of U.S. consumption, so a 10 percent universal tariff would have a narrow tax base, thus reducing revenue potential and increasing economic distortions. In the first Trump administration, tariffs undermined the significant economic benefits of the 2017 tax cuts, most notably eroding domestic investment. The proposed second-term tariffs and retaliation from other countries will likely fully outweigh the economic boost and direct tax savings from extending Trump’s expiring tax cuts.

Reviving tariffs — not as an alternative to modern income and payroll taxes, because Trump isn’t actually going to replace them with tariffs — reintroduces a regressive and inefficient funding mechanism. As we saw during the first Trump administration, tariffs require more bureaucracy to determine product exclusions, monitor compliance, and police evasion. New and expanded sources of revenue also tend to erode a meaningful constraint on state expansion: limits on higher revenue. This is the cautionary tale of value-added tax adoption across Europe.

The second leg of Bessent’s stool — protecting domestic industries — is similarly misguided. Around half of U.S. imports are used by American manufacturers, and around 80 percent of U.S. manufacturing workers are employed by firms that import and export. By raising the prices of these imported inputs and their domestic alternatives, and by prodding foreign governments to retaliate, tariffs increase costs and close off markets for American manufacturers.

This is precisely what happened following the Trump tariffs in 2018 and 2019. U.S. export growth slowed due to higher import costs and retaliatory tariffs from Europe, China, Mexico, Canada, and others. And while some protected industries, such as steelmakers, benefited, they did so at the expense of far more steel-consuming American companies that were paying higher prices for steel with money they could no longer use to pay workers or invest in improvements.

History also shows that protectionism rarely ensures the long-term viability of domestic companies. Insulated from foreign competition, U.S. firms in the steel, automotive, sugar, shipbuilding, footwear, and other industries spend their windfall profits on lobbyists and bonuses instead of innovation. They become dependent on Uncle Sam, instead of productive and innovative businesses.

The retaliation also reveals the weakness of the third leg of Bessent’s stool — tariffs as a negotiating tool for freer trade overall. In response to Trump’s tariffs, not a single nation lowered its tariffs on U.S. goods, while many responded with tariffs of their own. Today, most U.S. and foreign tariffs from 2018 and 2019 remain in force in their original or modified form, and Beijing’s trade practices have stayed the same or gotten worse.

Tariffs as a tool to change foreign governments’ behavior have a long history of failure. In 1964, the U.S. tried to eliminate French and German tariffs on American poultry by imposing a 25 percent tariff on imported trucks. Those governments never backed down, and the “chicken tax” remains in force today. A comprehensive analysis of every U.S. unfair-trade investigation from 1975 to 1993 found that when Washington used trade restrictions to pressure foreign countries to open up their markets, it succeeded in just 17 percent of cases.

Overall, the Bessent stool embodies a kind of economic schizophrenia. If tariffs are to raise revenue, they must be low enough to allow imports to keep entering the country, therefore not protecting domestic industry. If tariffs are to protect domestic industry, they must be high enough to prevent imports from entering the country, therefore raising little revenue. And tariffs can’t steadily fund the government or protect domestic industry if they’re frequently applied and then withdrawn in international negotiations.

Tariffs may make for a good campaign sound bite, but they make for terrible international relations and even worse economic policy.