CPA: Across-the-Board 10% Tariff Could Allow Tax Cut, Boost GDP More Than Prices

Revenue from a 10% tariff on all U.S. imports could be offset by a tax cut, and together the two could result in an increase in incomes that would more than offset inflation caused by the tariff hike, according to an analysis released by the Coalition for a Prosperous America on July 24.

The protectionist advocacy group said the tariff also would increase the competitiveness of domestic manufacturing at the expense of imports, leading to more U.S. jobs and capital investment. “The stimulus to the goods-producing sector flows through to the services sector, with the result that the entire U.S. economy expands,” CPA said.

“As a result of the tariff policy, real (inflation-adjusted) gross domestic product (GDP) rises by 2.86% from the pre-tariff level,” CPA said. “Manufacturing output rises by 4.77%. Employment rises by 2.8 million as production of goods and services expands. (All these changes are in addition to the natural growth in the economy over time.) Wages also rise and the total effect is that real household incomes rise by 5.7%, equivalent to $4,252.”

A CPA spokesperson told us those projections could take about six years to fully play out.

Concerns about inflation from the tariff increase are misguided, the report said. Consumer prices would rise a half a percent per year for six years, for a total rise of 3.26% in prices. “This is a one-time price increase, as the increased demand for goods and services raises both output and prices,” the report said.

That’s in line with studies that show consumer prices don’t increase by the full amount of a given tariff increase, CPA said. For example, consumer prices didn’t rise “by anything like” the value of the Section 232 and Section 301 tariffs imposed by former President Donald Trump. That’s because importers substituted non-tariffed products from China for tariffed products, and imports from other countries rose.

An International Trade Commission study cited in the analysis found that price increases are generally smaller than a given tariff increase because “only a minority of the U.S. market in most commodities, and the fact that prices are determined by many factors besides direct costs,” CPA said.

And despite concerns that tariffs have a larger negative impact on the poor, the overall tariff and tax policy could be made progressive by targeting the tax cuts allowed by the tariff increases at lower income taxpayers.

CPA concluded, “Our main concern with the policy is that 10% tariffs may not be sufficient to produce a significant stimulus, in light of other economic headwinds in the U.S., in particular the 20%-25% estimated overvaluation of the U.S. dollar, the large U.S. trade deficit, and the oligopolistic nature of U.S. industry, which will require large, sustained policy changes to reinforce the message to multinational business that the U.S. government intends to fight to rebuild American industry."