As the Trump administration explores ways to deliver a new middle-class tax cut, the most obvious answer is to repeal the administration’s newly imposed tariffs. Tariffs tax middle-class American families and threaten to undermine the economic growth generated from the new tax reform law.
Not even a month after signing the nation’s first major tax reform bill in more than 31 years, the Trump administration began imposing tariffs on American imports. So far this year, the administration has imposed tariffs on steel, aluminum, washing machines, and thousands of products that American businesses and consumers buy from China.
President Trump argues that these tariffs are paid by China and overseas companies, but it’s American families who bear the real cost.
These tariffs increase taxes on the middle class as they increase costs for U.S. businesses. The steel needed to produce a U.S. car is more expensive, driving up the total costs of production, for example.
Faced with these higher costs, businesses can respond in several ways, each of which would hurt working families. They could pass the price increases on to consumers, meaning consumers spend more to buy the same items. They could also decide to cut back elsewhere. Perhaps they hire fewer workers or simply pay current workers less. Or they invest less in factories. Fewer jobs are available and there is less opportunity for advancement. Either way, everyday Americans ultimately pay the cost of higher import taxes.
How large are these costs? The Tax Foundation estimates that tariffs imposed by the United States so far will raise taxes on Americans by nearly $42 billion annually, reduce the long-run size of the economy by $30.4 billion, and eliminate more than 94,000 full-time equivalent jobs here in the United States.
But these costs are not inevitable. The president is now calling for enacting a “10 percent middle-class” tax cut. Repealing these tariffs fits the bill. It would raise after-tax incomes on average by 0.3 percent. But, this increase is more concentrated for households in the middle and bottom quintiles, rising by 0.33 percent, while the top 1 percent would only see an increase of 0.23 percent.
Repealing these tariffs would cut taxes for the middle class, while boosting economic output.
Unfortunately, the administration seems to be heading in the wrong direction, threatening even more tariffs on automobiles and additional products from China. These tariffs would increase taxes by nearly $130 billion.
Indeed, in this worst-case scenario, if all the U.S. tariffs on the table were imposed in addition to those already in effect, the Tax Foundation model estimates that more than 313,000 full-time equivalent jobs would be eliminated. In terms of the effect on labor, the job losses resulting from U.S. and retaliatory tariffs could outnumber the job gains from tax reform.
Following this approach would further hurt the middle class at the same time the administration is pushing to cut their taxes. Combined, these tariffs would reduce after-tax incomes for middle and bottom quintile households by 1.37 percent. Repealing the enacted tariffs and de-escalating a trade war would deliver relief to the taxpayers the president says he wants to help.
If the administration is serious about further reducing the tax burden on the middle class, the easiest and most effective solution is to walk back these misguided tariffs and avoid imposing additional trade policies that would further increase taxes and destroy jobs.
Scott Hodge (@scottahodge) is the president of the Tax Foundation in Washington, D.C.