Trump's threatened tariffs fall far short of paying for tax cuts

The tariffs President Donald Trump threatened against Canada, Mexico and China over the weekend roiled financial markets but they fall far short of duties the U.S. would need to offset the cost of extending his expiring 2017 tax cuts, economists estimate.

Those combined tariffs would raise less than a third of the estimated $4.6 trillion cost of extending Trump's tax cuts over the next 10 years — if the import duties continued for a full decade, according to new projections of tariff revenue by nonpartisan tax and budget policy groups.

Trump held off on 25% tariffs on imports from Canada and Mexico ahead of a Tuesday deadline, saying he would pause the duties for a month, after both countries agreed to address his demands to do more to combat drug trafficking and illegal border crossings into the US. He proceeded with a 10% tariff on goods from China but indicated he hoped Beijing would meet demands he has made through negotiations.

The Committee for a Responsible Federal Budget estimates the tariff on Chinese imports would generate $200 billion over 10 years if maintained. And if the tariffs go into effect on imports from Mexico and Canada, those would generate $1.3 trillion. 

The Tax Foundation projects less revenue, estimating the combined tariffs on China, Mexico and Canada would generate as much as $1.1 trillion dollars over a decade. 

Republicans have promised to extend and expand the 2017 tax cuts while also reducing the deficit. Trump has pointed to revenue from higher tariffs as a way of defraying the cost of tax cuts and has even suggested that tariffs could eventually replace the income tax.

Even much more expansive tariffs Trump promoted during his election campaign — a 60% additional tariff on China and as much as 20% on all other nations — would fall short of the cost of offsetting a tax-cut extension, raising $3.8 trillion over a decade, according to the Tax Foundation.

Trump and congressional Republicans also have promised additional costly tax cuts, including exempting tips, Social Security benefits and overtime pay from the federal income tax, lowering the corporate income tax rate and raising the limit on deductions for state and local taxes, or SALT. The totality of the GOP plan could cost between $5 trillion and $11.2 trillion, according to estimates from the Committee for a Responsible Federal Budget.

GOP lawmakers face a year-end deadline to extend the Trump tax cuts, and while the party broadly agrees that's a priority, there is little consensus about how — or if — to offset the cost of those cuts.

'Just negotiation threats'

Some Republicans have suggested including the tariffs in the legislation, which would allow congressional scorekeepers to count the tariff revenues as an offset for the tax cut, but it would also make it harder to use the tariffs as leverage to extract concessions in standoffs with trading partners, as Trump has demonstrated he's keen to do.

All of the tariff revenue projections only work if no American president over the next 10 years works out a deal to resolve trade disputes and lower the duties, said Erica York, vice president of federal tax policy at the Tax Foundation.

"If they're just negotiation threats, they're not going to raise very much revenue at all," York said. "If we're looking at a three-month period of tariffs, that's going to be a handful of billion dollars over a couple months, so not an offset by any means."

Treasury Secretary Scott Bessent told senators last month part of Trump's strategy would be to use tariffs as an option in negotiations with foreign countries.

Several economists also have raised concerns that duties on imports have greater economic costs than most other forms of taxation.

"Not only do you get the negative economic impact of the tax itself you're imposing, you also invite foreign countries to retaliate," York said. "That compounds the economic harm."