In fact, it may seem like Trump’s only goal is tariffs. But he doesn’t really have a choice. He has to love them, because here’s the thing.
Trump made a lot of promises to the working class during his campaign. He vowed to keep the tax cuts from the Tax Cuts and Jobs Act (TCJA). That law provided a temporary tax cut for the middle class, but most of the benefits actually went to big corporations and the wealthy. But those benefits are set to expire at the end of 2025, so Trump wants to keep them.
On top of that, Trump has big plans for more tax cuts. He wants to cut income taxes for about 93 million Americans by eliminating things like tips, overtime, and Social Security benefits. He’s also pushing for special exemptions for firefighters, police officers, military personnel, and veterans. And his biggest promise? Eliminating the federal income tax entirely.
But such drastic tax cuts could mean less money coming in, which could lead to a bigger deficit or the government spending more money than the country is making. So how does Trump plan to close this gap?
Tariffs, of course!
That’s exactly why Donald Trump loves tariffs. His idea is simple — make other countries “pay” for everything America has done to them over the years, and impose a 10-20% tariff on everything imported into the U.S. If the goods come from China or Mexico, he’s considering raising it to 60% or even 100%. The plan is to use that money to make up for lower taxes and fulfill his promise to make America “GREAT” once again.
Will it work, you ask?
Unfortunately, it probably won’t. To see why, here’s a simple analysis of the Laffer Curve from the Peterson Institute for International Economics (PIIE). If you’re wondering what it is, it’s a theory by economist Arthur Laffer that shows how government revenue changes under different tax rates. The goal is to find the “sweet spot,” or tax rate, that generates the most revenue for the government.
So when PIIE applied the Laffer Curve to Trump’s tariff plan, the findings were not so promising.
Tariffs on imported goods in 2023 would bring in about $160 billion. On the other hand, income and corporate taxes (which people and businesses pay on their earnings) would bring in about $2 trillion. Now, if Trump wanted to replace all of those taxes with tariffs, he would have to take a huge amount of money from a much smaller pool of imported goods. To reach $2 trillion, the tariffs would have to be set incredibly high.
But there’s a problem. If the tariffs are too high, imports will fall, making it even harder to achieve that goal. In fact, the most revenue they could generate with a 50% tariff rate would be about $780 billion. And anything higher than that would backfire. Because when imported goods are too expensive, Americans buy less, and the negative effects of lower imports outweigh the extra revenue from higher tariffs.
It doesn’t end there. You can probably guess what’s going to happen next. If America starts imposing tariffs on other countries, those countries aren’t going to just sit back and watch, are they?
Take Europe, for example. If the US were to impose tariffs on them, it could deal a blow to the Eurozone economies, similar to the one Russia suffered during the energy crisis after its 2022 invasion of Ukraine. It’s certainly not a small blow.
Naturally, those countries will respond with their own tariffs. It’s similar to what happened with the Smoot-Hawley Tariff Act during the Great Depression. The US raised tariffs, other countries responded with their own tariffs, and global trade collapsed.
This time around, Trump’s tariffs could set off a chain reaction, starting a trade war that makes everything more expensive, not just for Americans but for consumers around the world, including you and me.
So yes, Trump’s “favorite word” may not exactly help him deliver on his campaign promises. If he somehow proves us wrong, we will all be very happy because who wants higher prices, right?
