Tariffs Won't Be an Effective Revenue Source, PIIE Economists Say
New economic research shows that universal tariffs will not be an effective revenue source for the U.S. government, economists with the Peterson Institute for International Economics said during an event April 30.
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PIIE President Adam Posen said that the economic analysis, which came from studies by Peterson and the Tax Foundation, showed that universal tariffs will "do harm to the growth, investment and employment" of the U.S. economy and "as a result, they will produce much less revenue than advocates for these tariffs claim." Counterintuitively, higher tariffs actually bring in less revenue than lower rates because "there's more damage done to the economy," he said.
Warwick McKibbin, a nonresident senior fellow at PIIE, analyzed revenue gained from universal tariffs set at 10%, 15% and 20%, and found that the lowest rate of 10% actually yielded the most revenue at $1.6 trillion over a 10-year time frame, compared with $791 billion for the highest rate of 20%. He said that the revenue dropped because of the higher tariffs' impact on U.S. growth, decreasing overall tax revenue, and the anticipated retaliatory tariffs from other countries.
Erica York, vice president of federal tax policy at the Tax Foundation, said that the projected revenue from tariffs was dwarfed by the reduction in revenue by fully extending the expiring tax cuts, as President Donald Trump has urged Congress to do: "Even very extreme, 20% universal tariffs would fall short of covering the budgetary cost of extending what's expiring, let alone adding additional tax cuts on top of that."
The analysis the two organizations completed is complicated by the "on-again, off-again" nature of Trump's tariff policies, said Alan Cole, a senior economist at the Tax Foundation, because they modeled the data based on "a parameter we don't have, which is, how long do tariffs" last.
Maurice Obstfeld, a senior fellow at PIIE, said that in addition to the economic argument against universal tariffs, there also is "an important efficiency argument" against them because of the "possibilities of costly transshipment of goods" and the "record-keeping difficulty" of maintaining "individual tariff lines for individual countries." He said that kind of policy "just leads to endless inefficiency."
Obstfeld succinctly summed up the conclusion of "these careful, detailed general-equilibrium studies" by saying that "if the current tariff policy is persisted in and relied on as a source of revenue, the outcome will be bad for the U.S. economy. It will be bad for a sustainable government fiscal position. That's all I got."