Of the many tax policies modeled in our new Options for Reforming America’s Tax Code 2.0, repealing the tariffs imposed under President Trump’s administration would be one of the simplest ways policymakers could boost economic growth.
Starting in 2018, the U.S. imposed tariffs on a variety of goods, including aluminum, solar panels, steel, and washers and goods from the European Union and China. About $460 billion worth of goods were subject to the tariffs, raising prices for consumers. In fact, we estimated the tariffs were about an $80 billion annual tax increase, reducing consumer purchasing power.
Advocates of tariffs argue that by making imported goods more expensive, benefits will accrue to domestic producers. However, recent research on tariffs shows that the negative effects on consumers and other producers that rely on imported goods as inputs more than offsets any temporary benefits for specific industries.
Despite this evidence, and rapidly increasing lumber prices, the U.S. Department of Commerce recently doubled the duty imposed on Canadian lumber imported into the U.S..
According to the Tax Foundation model, repealing tariffs imposed since 2018 would raise long-run GDP by 0.1 percent, long-run incomes (gross national product) by 0.2 percent, and create about 83,000 full-time equivalent jobs. This growth would boost after-tax incomes by about 0.3 percent for people across the income spectrum, helping low-income and middle-class taxpayers.
The trade-off of repealing the tariffs would be reduced revenue, as this option would reduce revenue by about $759 billion over 10 years on a conventional basis. When accounting for the larger economy, the revenue decline would be about $665 billion over 10 years. However, there are more efficient sources of revenue than tariffs, particularly because tariffs are a non-neutral form of taxation that targets a narrow set of imported goods. Our estimated revenue loss may also be a higher bound, as we do not factor in a reduction in the level of imports when tariffs are imposed, which would reduce expected revenue.
Repealing the tariffs would be a simple option to boost growth because it can be done without congressional authorization by President Biden, and would provide timely relief to businesses and households working on returning closer to normal as the pandemic recedes. The timeliness of tariff relief is one advantage it has over other pro-growth tax options that may take time to take effect.
Options for Reforming America’s Tax Code 2.0