This week on Facing the Future, tax expert Bill Gale of the Brookings Institution discussed the economic and budgetary effects of higher tariffs and a new commentary he co-authored on using earmarked revenues as a deficit reduction strategy. Concord Coalition Executive Director Carolyn Bourdeaux joined the conversation.
With the Federal Reserve Board scheduled to meet next month, Gale previewed the economic situation as the Fed contemplates cutting the federal funds rate for the first time since December of 2024.
“The economy is weaker than it was a year ago, and weaker than it could have been had a variety of the tariff policies not been implemented,” Gale said. He added that the administration’s immigration policies may also be a factor in slower growth. “If we restrict labor supply, if we impose tariffs, every model in the world tells you the economy’s going to slow down. That’s what’s happening. I don’t think we’ve seen the full effects of either of those policies yet, but everything that we’re seeing is consistent with basic modeling,” he said.
“The Fed is in a very tricky position right now,” Gale observed, “because the tariffs are putting pressure on prices, which would normally encourage them to tighten, but the economy is weakening, which normally encourages them to loosen.”
Tariffs have been bringing in a lot of money for the government. According to the Congressional Budget Office (CBO), tariff income could reach $200 billion this fiscal year, which would more than double CBO’s January baseline assumption of $80 billion.
Gale, however, raised a number of downsides to the administration’s higher tariffs. “On an economic basis,” he said “there’s a lot of uncertainty because we’re basically starting a trade war. Those tend not to go so well, and part of the weakness that we’ve seen in the economic performance so far may reflect that. In terms of inflation, so far a lot of companies bought a lot of things before the tariffs went into effect. So they built up their inventories and they’re working them down. We’ll see what happens over time as those inventories dwindle away and they have to restock them with goods that face higher tariffs.”
Gale also questioned the long-term duration of the higher revenues the current tariffs have been bringing in. On the legal front, he noted, “These tariffs have been enacted under laws that allow the president to do that for national security threats. But it’s hard to see how a blanket tariff on the whole world economy is responding to a national security threat, and the U.S. trade courts actually have ruled that much of the tariffs are illegal. [This ruling is on appeal]. So, there’s a lot of uncertainty about them in the legal sphere as well as the economic sphere.”
“On the political front,” Gale continued, “precisely because they can be implemented by the president alone, they can be unimplemented by a future president alone. So there’s political uncertainty too. And I guess the last thing I’d say about tariffs is there’s two ideas behind them: One is that they’re a negotiating tool to get other countries to do what we want them to do, in which case, if they do it, we drop the tariffs. The other is that they’re a permanent revenue source. Obviously, they can’t serve both functions at the same time. The more they serve as one, the less they serve as the other.”
In Gale’s view, “The broader issue here is, does the U.S. want to accept the mantle of leadership? All the America First stuff, and the tariffs, and the kicking out of immigrants, says that the Trump Administration does not want that. There’s a different model where we accept immigrants, where we open borders to trade, where we encourage international cooperation as a global leader.”
With projected annual budget deficits exceeding $2 trillion, Gale has been thinking about politically feasible strategies for bringing in new revenues. One possibility is to target (“earmark”) revenues for specific purposes. “One of the many reasons that people oppose taxes,” he said, “is they feel like the revenue is not going to be used wisely. Why pay higher taxes if they’re just going to waste the money? The idea of earmarking is to say this is what we’re going to do with the money. If you support this use, you should support this tax.” As examples, he cited a value-added tax earmarked for healthcare or an inheritance tax earmarked for children’s programs.
“There are lots of ideas,” he said, “where if we could get people to focus on the use of the money, which people generally support, and then say, look, we have to pay for this program somehow, so we’re going to earmark it. That seems to me like it would be more likely to be a successful path toward tax increases than just saying, ‘Hey, we have to raise your taxes.’”
Hear more on Facing the Future. Concord Coalition Senior Advisor Bob Bixby hosts the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as The Concord Coalition team discusses issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.
