President Trump knows that tax cuts are good. So, why is he hiking taxes, even as the financial markets punish him for it?
That’s the question to ask about the budding trade war the White House has instigated through its announced tariffs on foreign goods. Why did the president, who recently signed a big, beautiful tax cut in the name of economic growth, immediately turn around to raise taxes on American families and manufacturers?
Part of the problem is that even the people who see that high taxes stunt growth (and thus that tax cuts stimulate growth) are often wrong in understanding why. This White House has misunderstood the virtues of tax cuts, and so it’s not that shocking that the president would advance bad tax policy.
First, we need to establish a basic fact: Trump’s trade war is like an international arms race, but instead of nuclear weapons, both sides are trying to build bigger tax hikes on themselves. Tariffs are federal taxes on imports. Foreign producers don’t pay the taxes — by definition, only people and businesses in America pay these taxes. Specifically, American families pay the taxes when we buy foreign-made goods like coffee makers, laptops, or sneakers.
Also, U.S. manufacturers pay these taxes — most U.S. imports, after all, are inputs into U.S. manufacturing. General Motors plants in Michigan use steel fabricated overseas. A tax hike on foreign steel is thus a tax hike on General Motors.
In addition, China is retaliating with its own tax hikes — and this also hurts us. When China raises taxes on soy grown in Illinois, this hurts U.S. soy producers.
The common strain here is that high taxes dampen economic activity. This is why governments should tax as little as they can get away with. Trump knows this, obviously, because he argued correctly that the 2017 tax cuts would spur economic growth.
The root of the confusion here is that the White House never properly understood why and how tax cuts spur economic growth. White House officials and their industry allies spread a simplistic, easy-to-grasp, and completely false story about tax cuts’ wealth-creating effects — that they “put more money in companies,” as Treasury Secretary Steve Mnuchin put it. Republican congressional leaders and White House officials constantly touted the bonuses that profitable U.S. corporations were giving employees as evidence the tax cut was helping the economy. But even if the bonuses are a nice byproduct of a tax cut, this is still wrong.
It is a mistake to equate tax-cutting with “giving away money” or to perceive such gifts as one of its important benefits. This presumes that altruism, gratitude, or good will are necessary for industry to enrich workers or others. It’s just plain bad economics.
“The economic case for corporate tax rate reduction does not involve the hope that corporations will ‘use’ their tax savings to make additional investments, pay higher wages, or hire additional employees,” tax expert Alan Viard at the American Enterprise Institute wrote. The correct way to view it is that greater competition for profits is what ultimately causes economic growth, productivity, higher wages, and higher employment. Taxes stunt competition in many ways. Tariffs are taxes explicitly drawn up in order to reduce competition (from foreign companies). And that means tariffs go straight for the jugular of the nation’s economic engine.
Of course, the pay-it-forward story about taxes — give companies money, and they’ll give it to workers — makes for better headlines. But it’s simplistic, prevents a proper understanding of how taxes harm growth, and leaves a weaker foundation from which to argue against tax hikes.
The result is what we have now: The White House and the Chinese government competing to see who can tax their own people and businesses more. The only way to win this game, it turns out, is not to play.
