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The Tariff Wars Are Killing Tax Reform’s Boost

Higher taxes from the tariff war have eroded tax cuts for both consumers and businesses.

Tax reform is so far the one significant legislative victory of the Trump Administration. The law that brought corporate tax rates down to a point where they were competitive with the rest of the world was sorely needed and individual tax cuts were the icing on the cake. However, the president’s tariffs, which are defined as “a tax or duty to be paid on a particular class of imports or exports,” are offsetting the competitive advantage that tax reform brought to American companies as well as the tax cut for consumers.

In a report that focuses on the individual aspects of tax reform, Bloomberg reports that middle-class earners got an average tax break of about $931 per the Urban-Brookings Tax Policy Center. The New York Federal Reserve estimates that the tariff wars have already cost the average household about $831. On average, the trade wars have eaten up all but about $100 of the benefits of tax reform for the middle class.

The report also cites estimates on new tariffs threatened by President Trump. The tariffs on $300 billion worth of Chinese goods would be estimated to cost an average family of four about $2,294 annually according to Tariffs Hurt the Heartland, a coalition of business groups opposed the trade war. Gary Hufbauer of the Peterson Institute for International Economics estimates that Mr. Trump’s tariffs on Mexican imports could cost households an additional $1,700 annually if the tariffs reach the highest level threatened by the president. The combined total cost of $3,994 annually to American families would be more than four times the average benefit from tax reform.

Many other taxpayers may have already passed the point where tariffs have eaten up any advantage from tax reform. A Tax Policy Center analysis of IRS tax data found that low-income households got an average tax cut of only about $40. Since low-income households rely disproportionately on cheap imports from China and elsewhere, tariffs have likely already eaten up any advantage that these households received from tax reform. About six percent of taxpayers received a double whammy when they paid more under the new tax law and then were forced to pay tariffs (and/or pay higher prices for domestic goods due to decreased competition) as well.

The effect of tariffs reaches beyond American households, however. Data on the effect of the corporate side of tax reform is harder to come by, but Accounting Today reported last year that the cost from the steel and aluminum tariffs was larger than the tax savings from tax reform for major automakers General Motors, Ford, and Fiat Chrysler for the first quarter of 2018. The report, made in July before the trade war heated up, forecast that tariffs could eat up a third to a half of the benefit of tax reform.

“The steel and aluminum tariffs hurt,” Ed Cohen, Honda Motor Co.’s vice president for government and industry affairs, said at the time. “The tax bill was intended to spur economic activity and this will have the opposite economic effect.”

The Tax Foundation estimated that, if fully implemented, the tariff war would offset about half of the benefit of tax reform, reducing US GDP by about 0.79 percent or $196 billion. The group also forecast that wages would fall by 0.51 percent and more than 600,000 jobs would be lost.

A recent poll from Monmouth University found that Americans overwhelmingly oppose Mr. Trump’s tariff war. Almost half of respondents – 47 percent – said that tariffs hurt the US economy compared to 25 percent who think they help. Sixty-two percent believe that US consumers will be stuck with the bill for the tariffs.

Grover Norquist of Americans for Tax Reform agreed, saying, “Tariffs are taxes. They are very disruptive. Trade wars are civil wars and the losers are both Americans.”

Even Republican politicians agree that the tariff war is harmful. Rep. Kevin Brady (R-Texas) said that tax reform “vaulted America back into the most competitive economy” but that “higher tariffs and the uncertainty that comes with trade disputes” are not good for the economy.

President Trump’s approval has already slumped in red states since the onset of the trade war. Farmers, a core Trump constituency, have been particularly hard hit by Trump’s trade policies. The Rust Belt states, home to many factory workers impacted by the tariffs, also show high disapproval for Trump in recent polling.

Even before the tariff taxes took a bite out of tax reform, the law was unpopular due to tradeoffs and flaws in its implementation. Changes to withholding tables led many taxpayers to be surprised by smaller than expected refunds or, worse, by unexpected tax bills that required them to write checks to the IRS. Individual tax revenues increased after tax reform, partly due to higher wages and economic growth, but total federal tax revenue fell by 0.4 percent as corporate tax payments dropped sharply. Thus far, the deficit has increased due to flat tax revenues and increasing federal spending.

With consumers paying more taxes due to President Trump’s tariff war and many seeing scant benefit from tax reform in either paychecks or tax refunds, Mr. Trump has given the Democrats a number of talking points as the nation careens toward the 2020 elections. Unless the president can start claiming some victories in the trade war soon, Republicans might find that businesses are exiting their coalition to support a pro-trade Democratic candidate.

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