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Business
See other Business Articles

Title: Tariffs Will Wipe Out the Benefits of Tax Reform
Source: Foundation For Economic Education
URL Source: https://fee.org/articles/tariffs-wi ... t-the-benefits-of-tax-reform/#
Published: Jun 19, 2018
Author: Dan Ikenson
Post Date: 2018-06-19 13:37:36 by Deckard
Keywords: None
Views: 957
Comments: 5

Yes, the lowering of the corporate tax rate gave businesses a nice profit bump, but new tariffs will probably cost them more than they saved.

Former White House economist Gary Cohn expressed concerns yesterday that Trump’s tariffs would erode the benefits from tax reform. Since the on-again-off-again 25 percent tariffs on imports from China are—as of 3:23pm, Friday, June 15, 2018—“on again,” let me share this back-of-the-envelope analysis that shows why Cohn’s concerns are justified.

The Numbers Don't Look Good

Certainly, the additional profits expected from the reduction in corporate rates from 35 to 21 percent could be entirely wiped out for the manufacturing sector. In 2017, according to Census Bureau data, the pre-tax profits of the U.S. manufacturing sector were $691 billion. At 35 percent, the taxes on paper would be $242 billion. At 21 percent, the average tax bill is $145 billion. So, roughly speaking, the reduction in rates is estimated to be worth about $97 billion in terms of 2017 profits.

The combined effect of the increased costs and reduced revenues comes to a $241 billion reduction in profits.

Well, in 2017, the value of U.S. goods imports was $2.33 trillion. Commerce Department data show that half of that value was comprised of intermediate goods (raw materials, production inputs, capital equipment)—the purchases of producers, not households. In other words, approximately $1.17 trillion of imports are U.S. costs of production.

If a tariff of, say, 10 percent were imposed on these imports, the cost of production for manufacturers would rise, roughly speaking, by $117 billion. That’s a $117 billion reduction in profits. Meanwhile, assuming foreign governments responded in kind and hit U.S. exports with 10 percent tariffs, manufacturing revenues also would take a hit. U.S. exports of manufactured goods in 2017 amounted to $1.24 trillion. Again, roughly speaking, that 10 percent tariff would reduce U.S. manufacturing revenues by $124 billion. That, too, reduces profits.

The combined effect of the increased costs and reduced revenues comes to a $241 billion reduction in profits (a 35 percent reduction in manufacturing’s 2017 pre-tax profits). So, ceteris paribus, a 10 percent across-the-board tariff would reduce the U.S. manufacturing sector’s profits by about 35 percent. With that kind of “downturn” in profitability, from where would the resources come to make capital investments, build new production facilities and R&D centers, and to offer new employment opportunities?

What It Means in the Real World

Let’s apply this ballpark estimate to the actual situation on the ground. The tariffs Trump has already imposed or announced (steel and China tech products—leaving out aluminum, washers, and solar panels) subject $100 billion of imports to tariffs of 25 percent. The retaliation so far announced (by China, Canada, Mexico, and the EU) is commensurate—it will be approximately 25 percent on $100 billion of U.S. exports. So, at the moment, $200 billion of U.S. trade is in the crosshairs.

We could be up to $800 billion of U.S. trade by year’s end. That’s 20 percent of all U.S. goods trade, by the way.

But a new Trump investigation into the national security implications of auto and auto parts imports could add another $600 billion of trade to the mix—$300 billion of imports hit with 25 percent duties and $300 billion of retaliation. The president wants to get the investigation completed before the election in November, so we could be up to $800 billion of U.S. trade by year’s end. (That’s 20 percent of all U.S. goods trade, by the way.)  

So, 25 percent duties assessed on $800 billion of trade, approximately half of which would be U.S. manufacturing inputs and U.S.-manufactured exports comes out to a combined $100 billion hit on the sector’s profits (25 percent of $400 billion). That eclipses the $97 billion gain from the corporate rate reduction.

While this is all bad news for the economy, I wonder whether the tax-reform advocates who held their noses and excused Trump’s trade transgressions because tax reform would make everything right will start to speak out. Paging Larry Kudlow, Steve Moore, and Art Laffer.

Daniel J. Ikenson

Daniel J. Ikenson

Dan Ikenson is director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies, where he coordinates and conducts research on all manners of international trade and investment policy.


Poster Comment:

About the author:

Dan Ikenson is director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies, where he coordinates and conducts research on all manner of international trade and investment policy. Since joining Cato in 2000, Ikenson has authored dozens of papers on various aspects of trade policy, focusing his research on U.S.-China trade relations; bilateral and multilateral trade agreements and institutions; globalization; U.S. manufacturing issues; trade politics; and trade remedies, such as the antidumping regime.

Ikenson has been involved in international trade since 1990. Before joining the Cato Institute in 2000, he was director of international trade planning for an international accounting and business advisory firm. In 1997 he cofounded and was a principal at an international trade consulting firm in Washington,.and from 1990 to 1997 he was a trade policy and antidumping analyst at a few international trade law practices.

In addition to his many studies and articles, Ikenson is coauthor of the book Antidumping Exposed: The Devilish Details of Unfair Trade Law.

He has testified before congressional committees on a variety of policy matter and has appeared on numerous television news programs and networks, including PBS, CNN, CNBC, Bloomberg TV, MSNBC, ABC News, Fox News, Fox Business News, and NPR. His articles have been published in widely circulated newspapers and magazines, including the Wall Street Journal,the Los Angeles Times, USA Today, the Chicago Tribune, the Washington Times, the Detroit News, Forbes, and National Review.

Ikenson holds a MA in economics from George Washington University. (1 image)

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#1. To: Deckard (#0)

No such thing as free trade!

Its either one sided or fair trade. Why is this so hard to realize?

Why do you want one sided free trade?

Justified  posted on  2018-06-19   13:52:47 ET  Reply   Trace   Private Reply  


#2. To: Deckard (#0)

Tariffs Will Wipe Out the Benefits of Tax Reform

Ah yes but it will add much to government coffers

paraclete  posted on  2018-06-19   22:00:06 ET  Reply   Trace   Private Reply  


#3. To: Justified (#1)

Why do you want one sided free trade?

Because he’d rather see this republic fail if it isn’t an anarchist run country.

I'm the infidel... Allah warned you about. كافر المسلح

GrandIsland  posted on  2018-06-19   22:03:33 ET  Reply   Trace   Private Reply  


#4. To: Deckard, Artist formerly Known as Trump, @realDonaldTrump (#0)

DJ Trump, King of Debt

The Artist formerly Known as Trump, @realDonaldTrump is laughing all the way to the bank.

Who knows how many fake names and offshore accounts he has?

Survey says: More than Mitt.

Hondo68  posted on  2018-06-20   0:02:48 ET  (1 image) Reply   Trace   Private Reply  


#5. To: hondo68 (#4)

Who knows how many fake names and offshore accounts he has?

None. If he had deepstate would have already found it and used it against Trump.

Survey says you a fool! ;)

Justified  posted on  2018-06-20   9:00:08 ET  Reply   Trace   Private Reply  


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