September 20, 2024
It was reaffirmed at the Democratic National Convention, which concluded in August, that Kamala Harris would be the presidential nominee for the Democratic party alongside her running mate Minnesota Governor Tim Walz for the vice president position. On the other side of the aisle, Donald Trump is the official nominee for the Republican party, and he has picked Ohio state Senator J. D. Vance to be his VP candidate in the forthcoming November election. Despite the two parties being fundamentally different from one another, they seem to recognize the expedience of an inward-looking trade policy. Take for example, the tariffs introduced by Donald Trump during his first term that were largely kept by the Biden administration, despite pledging on the 2020 campaign trail that he would remove most of them.[1] Included among the Trump tariffs[2] that were maintained under the Biden administration were taxes imposed on washing machines, steel and aluminum, solar panels and capital goods from China and the EU. It is clear from a policy position that both candidates have assumed that tariffs are here to stay no matter who is in the White House.
Biden administration collects its lion’s share of duties from Trump-era tariffs
Washington-based think tank, the Tax Foundation, has found that the Trump tariffs generated about $233bn[3] in duties collections, since they were imposed, through March 2024, of which $144bn (~62%) alone were collected during the Biden administration, while $89bn (~38%) were raised during the Trump administration (as shown on primary Y-axis in figure 1). Revenue collections data show that tariffs contributed to about $290/household on average in increased tax collections between 2018 and 2023 (as shown on secondary Y-axis in figure 1).
Description: Tariff collections under the Biden administration were $144bn (62%) of the total $233bn as of March 2024, significantly more than under the Trump administration, which accounted for 38% ($89bn of total), despite campaign promises that most of these levies would be lifted. These tariffs were borne by American households that paid an additional $290 on average between 2018 and 2023 ($200 in 2018, $194 in 2019, $300 in 2020, $380 in 2021, $376 in 2022 and $303 in 2023). Source: Tax Foundation
Biden’s “targeted” vs. Trump’s “wide-reaching” approach
In addition to keeping most of the Trump tariffs in place, the Biden administration in May doubled down on its trade policy,[4] hiking taxes on ~$18bn of Chinese imports under Section 301 that includes semiconductors, EVs, solar cells and medical equipment. The hikes would result in additional tax receipts to the tune of $3.6bn/annum and would be implemented over the next three years. Under the new terms, starting this year, duties on EVs would quadruple to 100%, while levies on EV batteries would rise to 25% from the current level of 7.5%. Steel and aluminum products would also see similar increases, rising to 25% from 0-7.5%, while tariffs on solar cells and semiconductors (starting 2025) would double to 50%.
It is important to note that tariffs are paid by consumers as a result of direct levies imposed on products imported from foreign countries. The Biden administration has so far maintained that these tariffs will have “no inflationary impact”[5] because they are not “across the board” and target only specific sectors. However, some experts have expressed concern over their impact on the wider economy. According to Sarah Bauerle Danzman, an associate professor of international studies at Indiana University, “While the exact effect of the higher tariffs is uncertain, tariffs do create deadweight loss, so we can expect them to exact some costs on the U.S. economy”.[6]
While the Biden administration has adopted a more targeted approach, the Trump campaign has promised wider reaching proposals with plans to impose a 10% tariff on every imported item, a 60% tariff on all goods imported from China (an increase from 25% imposed under the first term) and a 100% tariff on all imported cars. Many experts have raised concerns over these proposals. The Center for American Progress Action Fund published a report[7] in June claiming that the combination of the 10% (all imports) and 60% (Chinese imports) taxes would lead to a $2,500/annum increase in taxes for an average U.S. household (see figure 2).
Description: The combination of 10% tax on all imported items and a 60% tax on all Chinese products will raise taxes on average households by $2,500/yr, with costs rising significantly for sectors, including materials and equipment by $1,080/yr, autos by $280/yr and electronics by $260/yr, among others. Source: Center for American Progress Fund
During a rally in North Carolina in August,[8] Trump even floated the idea of expanding the tariffs to 20% on some imports. There were no details as to which products would fall into the 10% category and which into 20%, so this study is based on his original pledge of a 10% tariff on all imports.
Are tariffs a tool to fund proposed corporate tax rate cuts?
Trump wants to use the revenues generated from these tariffs to finance the tax cuts he is planning to implement if reelected. His proposal would see the corporate tax rate fall to 15% from 21%. It is seen as an extension of the 2017 Tax Cuts and Jobs Act (TCJA),[9] which allowed for the lowering of individual tax rates to 37% from the previous 39.6%, a doubling of the child tax credit to $2,000, an increase in the standard deduction and reducing the corporate tax rate to 21% from 35%. Kamala Harris, on the other hand, wants to increase the corporate tax rate from 21% to 28%, if elected.
Although the TCJA is set to expire in December 2025, its effects on investments have largely been positive, while receipts have increased to record levels. Total corporate investments rose between 2017 (when the tax reforms were implemented) and fiscal year 2022, at a similar pace to previous years (as shown on primary Y-axis in figure 3). However, although there was a slowdown of corporate investments during the Covid-19 pandemic, they quickly managed to pick up in the following months. Other major areas of investments followed a similar trajectory, with the fastest growth, before and after 2017, occurring around intellectual property. Corporate tax receipts also rose to record levels despite the overall corporate tax rate being reduced to 21% (as shown on secondary Y-axis in figure 3). The National Bureau of Economic Research (NBER) in a study[10] published in March 2024, also found that the 2017 tax overhauls boosted investments, while resulting in a modest increase in American wages.
Description: Corporate investments in all areas have increased since 2017 when the TCJA was introduced, while corporate tax collections have also reached record highs. Chain-type quantity indexes for corporate investments (2017 prices indexed to 100) as shown in Primary Y-axis. Total corporate tax receipts have been shown on secondary Y-axis. Source: Bureau of Economic Analysis (BEA) and Fred.stlouisfed.org
Tax receipts increase in tandem with corporate profits following TCJA implementation
Goldman Sachs analyst Ben Snider[11] in a note published in September found that Trump’s plans to cut the corporate tax rate to 15% would lift the S&P 500’s® earnings per share (EPS) by ~4%, while Harris’ plans to increase the corporate tax rate to 28% would lower the index’s overall earnings by ~5%. Shortly after the 2017 tax cuts were implemented, S&P 500 companies saw ~12% increase in their earnings. Total corporate profits surged to a record ~$2.7tn by Q2 2024 (as shown on primary Y-axis in figure 4), up more than 100% from levels prior to the 2017 tax cuts.
Federal corporate tax revenues on the other hand fell ~2%, ~9% and ~4% at the end of 2018, 2019 and 2020, respectively, (as shown on secondary Y-axis in figure 4) before starting to rise modestly in 2021 to a record ~$470bn by the end of Q2 2024. Total federal tax revenues also reached a record $4.9tn[12] at the end of fiscal year 2022, which is ~48% higher than they were at the time of the 2017 tax overhaul, and ~22% higher than the 2022 projections from the Congressional Budget Office (CBO).[13] It is clear from the data that corporate tax receipts fell initially after the tax cuts were implemented, but as profits and investments started to rise, total tax collections on earnings also increased. In an interview with CNBC earlier this year, JPMorgan Chase CEO, Jamie Dimon,[14] praised Trump’s tax cuts, “He (Trump) grew the economy quite well…trade tax reform worked”.
Description: Corporate profits rose more than 100% from 2017 levels to ~$2.7tn (as shown on primary X-axis), while corporate tax receipts after falling initially in 2018, 2019 and 2020 rose to a record $470bn in Q2 2024 (as shown on primary X-axis). Source: Fred.stlouisfed.org
Tax plans: Cost and revenue analysis
Although the proposed corporate tax rate cut could lure companies to set up shop within the U.S., it would also lead to a fall in federal tax revenues. The Tax Foundation has found that slashing corporate tax rates to 15% from 21% would reduce federal revenue by $673bn over the next ten years on a conventional basis (see figure 5).
Biden’s tax plans are entirely different from what Trump is proposing, with the exception of extending tax cuts for families that make under $400,000/annum. Kamala Harris, as the new nominee, is pushing ahead with Biden’s plans[15] that propose a higher marginal income tax rate of 39.6%, a 25% tax on unrealized capital gains for wealthier families and increasing the corporate tax rate to 28%. The Tax Foundation has found that the proposed increases in taxes would lead to a $2.1tn expansion in revenues over the next ten years (see figure 5). The Harris campaign has promised to pass on revenues generated from higher taxes to average Americans in the form of child and housing tax credits. The plan calls for a $6,000 child tax credit for families with newborns, an expanded credit of $3,600 for children under six years and $3,000 for older children. Harris also announced a first-time homebuyer tax credit of up to $25,000 for downpayments. In total, the child tax credit plan is estimated to cost $1.2tn over the next decade, while housing tax credits would cost roughly $100bn.
Description: Trump’s plans to cut corporate tax rate to 15% would bring in $673bn less money than the revenue baseline over the next ten years, while that of Biden/Harris plan to increase corporate tax to 28% would see revenues expand by $2.1tn above the baseline. Source: Congressional Budget Office , Tax Foundation and Peter G. Peterson Foundation
Hole in finances: To fund a large deficit
Although the 2017 Trump tax cuts led to a projected $1.9tn increase in the deficit over the 2018-2028 period, according to a study by the CBO,[16] it would largely be financed through an increase in coupon-bearing bond auction sizes across all maturities. The U.S. Treasury saw a ~31% increase in total monthly supply as a result of deficit financing following the tax cuts in 2017 (see figure 6). Monthly supply increased by another ~71% following the fiscal response to the Covid-19 pandemic. The past year has seen another bump to support a large budget deficit and to fund SOMA redemptions due to ongoing quantitative tightening (QT).[17] Although Trump has pledged to fund most of the shortfall in fiscal revenues through increases in tariffs, it is doubtful whether it would cover the entire deficit, as the tariffs are expected to account for only about 8% of the $34tn in federal income tax revenue, according to a report[18] by the CBO. In the end, Treasury would be forced to raise bond auction sizes to make up for the lost revenue, which could prove to be very challenging due to already record high debt levels.
The US national debt has already surpassed $35tn (as shown on secondary Y-axis in figure 6) and it is only likely to increase if taxes are cut further. Rating agency, Fitch,[19] had already downgraded the U.S. sovereign debt rating to AA+ from AAA in August last year, citing high debt levels and fiscal deterioration. Although the debt ceiling has been suspended until 2025,[20] the debate on the borrowing limit will be back next year and failing to reach a consensus could lead to dire financial consequences, such as more downgrades and higher borrowing costs.
Description: US Treasury borrowings increased by ~31% following 2017 Tax cuts and by another ~71% during the Covid-19 pandemic. U.S. debt has soared above $35tn (as shown on secondary Y-axis). Source: US Treasury Department and FiscalData.Treasury.Gov
Conclusion: It’s all about taxes!
What was once seen as a thing of the past is now mainstream. Numerous studies have pointed to tariffs being barriers that hinder growth, choke supply chains and result in higher prices for consumers. Come the 2024 U.S. presidential election, protecting local businesses is a national security issue and none of the candidates vying for the top office wants to look weak. Trade data suggests that out of $233bn, about $144bn (~62%) alone was collected in duties under the Biden administration as a result of tariffs that were imposed under his predecessor. In a clear departure from the campaign promise where Biden called for lifting most of the Trump era tariffs, his administration in May 2024 imposed additional levies on ~$18bn of Chinese imports. The move comes on top of the $280bn CHIPS and Science Act[21] that would see $52bn in subsidies to boost local manufacturing of semiconductors and the $433bn Inflation Reduction Act,[22] which is widely seen as a law that discriminates against foreign players or products imported into the U.S. Donald Trump on the other hand has gone a step further and has pledged to impose a 10% tariff on every imported item, a 60% tariff on all goods imported from China and a 100% tariff on all imported cars. The Center for American Progress Action Fund, in a report, claimed that the measures would lead to a $2,500/annum increase in taxes for American households. The International Monetary Fund (IMF)[23] has already warned that trade restrictions could cost the global economy up to 7% of GDP, while the American Action Forum,[24] in a report published in November last year, said that retaliatory tariffs in response to the proposed 10% tax on all imports could shrink the U.S. economy by 0.31%, or $62bn.
Another centerpiece of Trump’s 2024 campaign is the corporate tax rate, which he has promised to bring down further to 15% from the 21% set during his previous administration. Although the 2017 tax cuts resulted in high investments and record corporate profits and corporate tax collections (toward the end of 2022), it also led to a huge fiscal deficit, which was largely financed through a ~31% increase in bond auction sizes across all maturities. And while reducing the corporate tax rate to 15% could lead to ~4% increase in the S&P 500’s EPS, it could create a larger deficit, which would be relatively harder to finance, putting additional pressure on the U.S. Treasury.
On top of proposed corporate tax cuts, Trump has also promised to make tax on tips exempt, something which VP Harris has also incorporated in her tax plan[25], and end taxes on social security benefits, which according to the Committee for a Responsible Federal Budget,[26] would increase the fiscal deficit by $1.8tn by 2035. With debt levels at a record high, the challenge to close the revenue shortfall through bond auctions could lead to higher borrowing costs and further rating downgrades. Trump’s plan would generate ~$673bn less in revenues over the next ten years. The Biden/Harris plan to increase the corporate tax rate to 28% would bring in $2.1tn in additional revenues over the same period, but it would also lead to a ~5% decline in the S&P 500’s EPS. Harris wants to finance her child and housing tax credit plans from the revenues generated from her proposed increase in corporate tax rates. Trump proposes to finance the shortfall in revenues from duties collected through tariffs, which would only account for about 8% of the $34tn in federal income tax revenue. In the absence of a middle ground, the decision as to how the U.S. government is funded comes down to the American voters as they are left with only two options to choose from—higher tariffs and higher taxes or significantly higher tariffs and lower taxes.
Footnotes
[1] Biden Says He Will End Trump’s Tariffs On Chinese-Made Goods, Aide Walks Back Statement (Forbes)
[2] Read the full report on tariffs imposed on products under Sections 201, 232 and 301 (Congressional Research Service)
[3] Americans Are Still Paying for the Trump-Biden Tariffs (Tax Foundation)
[4] Four-Year Review of Actions Taken in the Section 301 Investigation: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation (U.S. Trade Representative)
[5] Biden raises tariffs on $18 billion of Chinese imports: EVs, solar panels, batteries and more (CNBC)
[6] New US tariffs on Chinese electric vehicles, batteries and solar cells could raise consumer prices (Associated Press)
[7] Comparing Trump’s Haphazard $2,500 Tax Increase to Biden’s Targeted Tariffs (Center for American Progress Action Fund)
[8] Railing against inflation, Trump floats 20% tariff that could boost prices, experts say (USA Today)
[9] Remarks by President Trump at Signing of H.R. 1, Tax Cuts and Jobs Bill Act, and H.R. 1370 (National Archives). We have also written in detail on Trump tax cuts in a blog published in April 2021. (Evalueserve)
[10] Read the full report – “Tax Policy and Investment in a Global Economy” (NBER)
[11] S&P 500 Earnings Could Face Major Swings Under Harris Or Trump Tax Plans, Goldman Sachs Warns (Yahoo! Finance)
[12] Revenues in Fiscal Year 2022: An Infographic (Congressional Budget Office)
[13] CBO Budget and Economic Data (Congressional Budget Office)
[14] Jamie Dimon praises Trump, warns MAGA criticism could hurt Biden (CNBC)
[15] What We Know About Kamala Harris’s $5 Trillion Tax Plan So Far (The New York Times)
[16] The Budget and Economic Outlook: 2018 to 2028 (Congressional Budget Office)
[17] To know more on the ongoing QT, read our blog published in April 2024 (Evalueserve)
[18] An Update to the Budget and Economic Outlook: 2024 to 2034 (Congressional Budget Office)
[19] Fitch cuts US credit rating to AA+; Treasury calls it ‘arbitrary’ (Reuters)
[20] Biden signs bipartisan bill that suspends debt limit until 2025, cuts spending (PBS)
[21] Congress passes $280bn Chips and Science Act (Financial Times)
[22] Protectionism and the US Inflation Reduction Act (Citigroup)
[23] IMF warns rekindled ‘love’ for trade tariffs among U.S., China, EU could wipe out up to 7% of global GDP (CNBC)
[24] Trump’s Proposed 10 Percent Tariff: Considering the Impact (American Action Forum)
[25] Trump and Harris both want no taxes on tips. Here’s why policy experts don’t like the idea (CNBC)
[26] Donald Trump’s Suggestion to End Taxation of Social Security Benefits (Committee for a Responsible Federal Budget)
