Former President Trump trotted through Washington last week leaving a trail of policy proposals behind him. Two revenue proposals are worth noting.

First, in an appeal to corporate executives, Trump indicated a desire to lower the corporate income tax rate from 21 percent to 20 percent. The New York Times reported that he made three arguments in favor of the cut: (1) it’s a “round number,” (2) it improves the competitiveness of US businesses, and (3) it creates jobs.

In conjunction with a broader set of corporate reforms (such as an extension of partial expensing of investment), Trump’s suggestion is a sensible, but modest, reform. His proposed rate cut would moderately improve the US’s ranking among OECD nations; incrementally lower the marginal cost of capital for new investment; and slightly diminish various distortions, including the existing incentive for debt financing. However, it’s unlikely to happen as neither Congressional lawmakers nor the business community have been pushing for a lower corporate rate. In fact, a corporate rate hike is more likely than a cut given how some Congressional Republicans have soured on “big business.”

President Biden has proposed to raise the corporate tax rate to 28 percent. In addition to widening distortions and raising the cost of new investment, the proposed hike would give the US the second highest corporate rate in the OECD. Notably, the ten-year budgetary difference between these two proposals is $1 trillion, given that every 1 percentage point change in the corporate tax rate raises or lowers federal tax revenues about $129 billion over the 10-year budget window.

Second, in a private meeting with House Republicans, Trump again touted his desire to radically increase tariffs on US imports. According to Congressman Thomas Massie (R-KY), “Trump briefly floated the concept of eliminating the income tax and replacing it with tariffs.” Simple math reveals this is infeasible from a budgetary perspective. Basic economics suggests that if the US imposed massive tariffs, imports would slump, deficits would soar, and a recession would be likely. Moreover, exports would likely decline due to expected retaliatory tariffs. Evidence of such can be found in Trump’s 2018 tariffs targeting steel, aluminum, and other imports, which garnered tens of billions of dollars in retaliatory tariffs from China, Canada, Mexico, the European Union, and other nations.

However, the implausibility of swapping the income tax for a massive tariff regime does not mean that a significant increase in reliance on tariffs should be dismissed. In fact, Trump’s recently suggested 10 percent tariff on all imports would raise approximately $310 billion annually, given that total US goods imports in 2023 were $3.1 trillion. What does $310 billion in additional annual revenues buy in Washington? Coincidentally (or not), it is nearly the exact cost of a temporary extension of the expiring individual income tax provisions in the Tax Cuts and Jobs Act of 2017 (TCJA). In other words, while tariffs won’t replace the income tax entirely, it could, as I’ve warned before, offset the revenue loss of an extension of TCJA.

Taken together, the low probability of a small corporate rate cut along with high likelihood of broad-based and potentially high rate tariffs should be viewed with serious concern to the business community and anyone interested in economic prosperity.

The post Trump Talks Taxes and Tariffs appeared first on American Enterprise Institute – AEI.