Tariffs, Deportations, and Tax Cuts for the Rich

Economists agree: Trump’s proposed policies would be bad for the U.S. economy.

BY JOHN MILLER | January/February 2025

This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org

This article is from the
January/February 2025 issue.

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Economists are nearly unanimous that, if enacted, President-elect Donald Trump’s economic policy proposals would harm the economy. All 39 of the top academic economists surveyed by the Wall Street Journal in September 2024 opposed Trump’s campaign proposal to impose a universal tariff of 20%, just three of them favored making Trump’s 2017 Tax Cuts and Jobs Act permanent, and 23 respondents favored raising the Trump administration’s 21% corporate income tax to 28%. In addition, the business press has warned of the disastrous economic consequences of Trump’s planned massive deportation of undocumented immigrants.

It’s not that economists have all of a sudden decided to agree on how and for whom the economy works. Rather, Trump’s policy proposals are so far-fetched that economists of all stripes, as well as the business press, know that if Trump’s policies are implemented, they will never deliver the robust economic growth he promises.

You don’t need a Ph.D. in economics to know that. It does, however, require trudging through Trump’s claims, which rely on economic misconceptions, a distorted retelling of economic history, and outright deception.

Trump Tariffs: A “Field of Dreams”

Trump is a tariffs man, as he told Kristen Welker, the host of NBC’s “Meet the Press.” They’re “going to make us rich.” And “they cost Americans nothing.” Neither claim is true for Trump’s tariffs.

A tariff is a tax on imports. But foreign producers don’t pay tariffs. U.S. importers do. They hand over the money to pay the tariff to the government. The importers then often raise their prices, shifting much of the economic burden of the tariff onto U.S. consumers.

That’s the way almost every economist sees it. In a September 2024 survey of 50 leading academic economists conducted by the University of Chicago Booth School of Business, all but one agreed that “imposing tariffs results in a substantial portion of the tariffs being borne by consumers of the country that enacts the tariffs, through price increases.” That will surely be the case for the tariffs Trump plans to levy on his first day in office: a 25% tariff on all Canadian and Mexican imports and a 10% tariff on all Chinese imports. In 2024, more U.S. imports came from Mexico, China, and Canada than any other countries, totaling $1 trillion of imports in the first nine months of the year. More than three-quarters of TVs, beer, tomatoes, avocados, and strawberries imported into the United States came from Mexico; three-quarters or more of imported smartphones, video game consoles, and toys came from China; and nearly all the natural gas imported into the United States came from Canada. Not surprisingly, a recent survey conducted by CreditCards.com found that the number-one reason behind increased year-end purchases in 2024 was “fear of rising prices due to tariffs.”

Trump’s earlier campaign proposal of a 60% tariff on Chinese imports, and a 10% across-the-board tariff, would result in widespread price increases. These increases would reduce the purchasing power of the typical middle-income family by $1,700 a year, a 2.7% reduction in their real income, according to the Peterson Institute for International Economics. The economic burden of those tariffs would fall most heavily on low-income households, with a 4.2% reduction in the real income for the poorest 20% of households, but just a 0.9% reduction for the richest 1%. Beyond that, there is little evidence that the Trump tariffs would increase employment or improve the trade position of U.S. manufacturing, especially when countries retaliate by imposing tariffs on U.S. exports. In 2019, Federal Reserve Board researchers found that the 2018 and 2019 tariffs imposed by the then-Trump administration provided only “a small boost in manufacturing employment” and it was more than offset by “larger drags from the effects of rising input costs and retaliatory tariffs.” On top of that, even the conservative Tax Foundation predicts that Trump’s proposed tariffs will slow economic growth, not increase it.

Trump remains convinced that his tariffs are “going to be a positive, not a negative,” as he told the Economics Club of Chicago. As he sees it, his tariffs would not be inflationary because, “All you have to do is build your plant in the United States, and you don’t have any tariffs.” When interviewer John Micklethwait, the editor-in-chief of Bloomberg, objected that moving plants to the United States will take many years, Trump replied, “you make it [the tariff] so high, so horrible, so obnoxious that they’ll come right away.” Impose sky-high tariffs, and they will come. Now that truly is a field of dreams.

Should Trump follow through with his threatened tariffs, a trade war would be far more likely than foreign producers setting up shop in the United States. Mexican President Claudia Sheinbaum has already promised that “For every tariff, there will be a response in kind.” Moreover, there is little reason to believe that the resulting trade war wouldn’t damage the U.S. economy. Following the trade war provoked by Trump’s 2018 and 2019 tariffs, “retaliatory tariffs were more effective in reducing employment than import tariffs were in boosting employment,” as reported in a recent National Bureau of Economic Research Study conducted by economist David Autor and his co-authors.

More of the Same Won’t Work

Renewing Trump’s signature pro-rich tax cut will surely top his tax agenda. Much of his Tax Cuts and Jobs Act, which Congress approved in December 2017, will expire in 2025. That the academic economists surveyed by the Wall Street Journal opposed renewing the tax cut, and many of them wanted to hike Trump’s lowest-ever corporate income tax, is hardly surprising. Spending $4 trillion (including maintaining the corporate income tax cut) over the next decade on a tax bill that strongly favors the super rich and has at best modest economic effects doesn’t make much sense.

Trump’s 2017 tax cut lowered the top income tax rate from 39.6% to 37%, doubled the exemption for the estate tax on inherited wealth, and slashed the 35% corporate income tax rate to 21%. The majority of the benefits (54.6%) of extending the tax cuts went to the richest 10% of taxpayers and nearly a quarter of the benefits (23.2%) went to the top 1%, according to the Tax Policy Center. Trump promised that the “tax cut will be rocket fuel for our economy,” and economic growth “could go to 4%, 5%, and even 6%,” in a 2017 speech to the National Association of Manufacturers. But that never happened. Economic growth rates barely accelerated in the two years immediately after the tax cuts (and before the onset of the Covid-19 pandemic), and job creation slowed. The tax cuts did deliver wage gains but none of those gains went to the 90% lowest-paid workers. Real nonresidential fixed investment (business investment corrected for inflation) picked up in 2018, but by 2019 was growing more slowly than it had in the year prior to the tax cut.

That Trump’s tax cut would have only a modest effect on the economy is consistent with conventional tax analysis. In their book Taxes in America: What Everyone Needs to Know, economists Leonard Burman and Joel Slemrod report that, “economic evidence is good enough for us to say with a lot of confidence what kinds of claims are not true.” (Emphasis in the original.) First on their list is: “It is not true that cutting taxes by itself will guarantee a spurt of economic growth.” The reasoning goes like this. Cutting income taxes has contradictory effects on the labor supply. With lower income taxes, workers can keep more of their income. That motivates some of them to work more hours (the “substitution effect”). But being able to get the same take-home pay in fewer hours motivates others to work fewer hours (the “income effect”). That makes the overall effect of cutting income taxes on the labor supply small and uncertain.

In addition, there is little evidence that lower taxes lead to more savings, and there is virtually no empirical evidence that the estate tax has hindered economic growth. In short, extending Trump’s tax cut would do precious little other than once again shower its benefits on those who need it least. The historical record is quite clear: Lower taxes are not associated with faster growth. The U.S. economy logged its fastest economic growth when income taxes on the rich were high, not low. During the 1960s, the only decade in which the annual economic growth rate averaged 4%, the top income tax rate was as high as 91% and never lower than 70%. During the first two decades of this century, with a far lower top income tax rate (39.6% and then 37%), the U.S. economy grew more slowly than during any of the five decades from 1950 to 2000.

Debunking Trump’s Immigration Economics

At a campaign stop in Texas last fall, Trump pledged that, “Immediately upon taking office, I will launch the largest deportation program in history,” the Texas Tribune reported. Just how much damage his nativist deportation plans will do to the U.S. economy depends on how large a portion of the immigrant population he ends up deporting. Bloomberg Economics estimates that Trump’s deportations will cause economic output to drop between 3% and 7.9% of gross domestic product by 2028. The Peterson Institute for International Economics clocks the probable job losses at between 1% and about 6.5% by 2028.

Trump’s rhetoric about the damaging economic effects of immigration and about the beneficial effect of deporting immigrants has “no basis in social science research,” as conservative economist Benjamin Powell of Texas Tech University’s Free Market Institute put it. That’s certainly true of Trump’s claim at the 2016 Republican National Convention that immigration has “produced lower wages and higher unemployment for our citizens.” Even the most prominent economist among immigration critics, Harvard University’s George Borjas, recognizes that immigration has had a large, positive effect on the U.S. economy. He calculates that immigrant workers (documented and undocumented) add $1.6 trillion to the U.S. economy each year. And the Congressional Budget Office found that GDP over the 2024 to 2034 period would be $8.9 trillion greater because of the surge in immigration.

Also, there is a near consensus among economists that the overall impact of immigration on the wages of native-born workers is positive, especially for workers with more years of education. It is less obvious, however, whether immigrant workers exert a downward pressure on the wages of lower-wage, native-born workers. In most studies the negative effect is not substantial. And one well-known study, conducted by economists Gianmarco Ottaviano and Giovanni Peri, finds a positive impact of immigration on the wages of native-born, low-income workers. These results are probably a head-scratcher for anyone who has taken introductory economics. After all, doesn’t increasing the supply of labor, through immigration, drive down its price (the going wage)?

Well, no. Immigrant workers do add to the supply of labor. But the economic effects of immigration do not stop there. Immigrants largely spend their wages within the U.S. economy. Businesses produce more—and hire more workers—to meet the increased demand. The cost savings from hiring immigrant labor also frees up businesses to expand production and hire more workers overall. Both those effects increase the demand for labor, offsetting the effects of added labor supply.

Economist David Card concludes that, taking these demand-side effects into account, “the overall impacts on native wages are small—far smaller than the effects of other factors like new technology, institutional changes, and recessionary macro conditions that have cumulatively led to several decades of slow wage growth for most U.S. workers.” The Department of Government Efficiency (DOGE) bros, Elon Musk and Vivek Ramaswamy, have lashed out against the insistence of the MAGA base on a mass deportation of immigrants that would send highly-skilled professionals packing. “If you force the world’s best talent to play for the other side, America will lose,” Musk posted on X. “End of story.” But high-skill workers aren’t the only immigrants indispensable to the U.S. economy. So too are low-wage immigrant workers. And if they are deported the United States will lose. (See sidebar: “Deporting Undocumented Workers.”)

David Bacon, a frequent Dollars & Sense author and photographer and former union organizer, argues that the importance of low-wage immigrant workers to the U.S. economy is an impediment to mass deportation. As he explained to The Border Chronicle, Trump’s policies “will make the conditions of life of people without papers so bad they will leave.”

But a massive loss of immigrant workers, no matter how it’s accomplished, would damage large swaths of the U.S. economy.

Bad Moon Rising

Exactly how bad would Trump’s economic policies be? Plenty bad. Bloomberg Economics finds that the combination of Trump’s tariff proposal (-1.3%), renewing his 2017 tax cut (+ 0.3%), and deporting all undocumented immigrants (-7.9%), would reduce the GDP measure of real output by 8.9% in 2028. That’s more than twice the output lost in the Great Recession of 2008–2009.

It doesn’t have to be that way. To prevent this human and economic catastrophe, the 11 million undocumented immigrants should be granted legal status, not deported, so they too can insist on their rights at work. Organizing efforts to boost the minimum wage and pass legislation that makes it easier for all workers to form unions are also imperative, as Bacon emphasizes. In addition, tariffs should be targeted to promote national priorities such as a green industrial policy to combat global warming. And tax cuts, such as the fully-refundable child tax credit, should target those in need.

JOHN MILLER is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.

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