Tariff Revenue Won’t ‘Pay Down’ the Debt

Blog Post
Wednesday, August 08, 2018

President Trump’s claim this week that his tariffs will enable the government to start "paying down" large amounts of the federal debt is wrong for a very simple reason: It is impossible to reduce debt while you are still adding to it.

Trump tweeted Sunday that “Because of Tariffs we will be able to start paying down large amounts of the $21 Trillion in debt that has been accumulated, much by the Obama Administration, while at the same time reducing taxes for our people.”

The most charitable assumption about this statement is that the president has confused federal deficits and the national debt.

Deficits are what the government borrows each year. The debt is the total amount of money the government already owes as the result of its deficits.

Any additional government revenue could be used to lower projected annual deficits, assuming Congress and the president could resist the temptation to fritter the money away instead.

But in any case, these deficits would have to be reduced to zero before we could even start paying down the debt, let alone reduce it by “large amounts.” And we unfortunately are a long, long way from zero deficits -- and moving fast in the wrong direction.

The administration itself recently acknowledged this in updating its 2019 budget plan.

The update shows the federal deficit rising to $890 billion for the current fiscal year and soaring well past $1 trillion in Fiscal 2019, followed by two more years of trillion-dollar deficits.

Even these estimates are probably low because they are based on the administration’s excessively optimistic economic projections and proposed spending cuts that are unlikely to happen.

The precise fiscal impact of the new tariffs is uncertain. The Treasury Department calculates that they would only bring in $5 billion in additional federal revenue this year. The Washington Post’s Tariff Tracker indicates that the tariffs Trump has announced so far would raise about $21 billion a year.

Such amounts would scarcely dent a trillion-dollar annual deficit.

According to advocates of tariffs, of course, the whole point of having them is to encourage American consumers to shift away from foreign-made products in favor of those that are made in the United States. The more successful the tariffs are in doing that, the less tariff revenue the federal government could expect to receive.

So if the new tariffs were to work as well as the president says they will in supporting U.S. businesses, the government should not be expecting much additional tariff revenue at all.

Meanwhile, the president and Congress are talking about more tax cuts and additional spending that would require even more federal borrowing.

That includes $12 billion in financial support for agriculture that the Trump administration recently suggested to offset trade-war damage in rural areas. With other industries clamoring for similar support, such trade-war-related subsidies alone might well offset all of the income from new tariffs.

Trump has also fogged up the question of who actually pays tariffs. While saying this week that tariffs are “working big time,” he portrayed them as taxes paid to the United States by foreign companies, resulting in “great wealth” for this country.

Tariffs, however, are essentially taxes paid by people and companies in the country that imposes them.

As the U.S. Chamber of Commerce explains: “Tariffs imposed by the United States are nothing more than a tax increase on American consumers and businesses – including manufacturers, farmers, and technology companies – who will all pay more for commonly used products and materials.”

The idea that tariffs are an easy, painless way to reduce the federal debt may be a pleasant fantasy, but it is nothing more than that.

Tariffs are no substitute for the difficult budget choices that elected officials must make and the broad fiscal reforms they must pursue just to cut back on additional government borrowing in the years ahead. Only after that happens can Washington start paying down the debt.