Tuesday, July 23, 2024

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Great Depression 2.0 Looming? Analyzing Donald Trump’s Tariff Obsession

Economists warn that Donald Trump's proposed policy of massive tariffs and deportations could spark hyperinflation.

Donald Trump hush money
Photo: Liam Enea

With the 2024 election looming, former President Donald Trump has reemerged on the political stage with an economic vision that reads like a billionaire’s fever dream. His most recent proposal? Abolish the federal income tax entirely and replace it with towering tariffs on imported goods. At first blush, this may sound like a tax reprieve for hard-working Americans. But a closer examination reveals a regressive ploy to further enrich corporations and the wealthy elite at the expense of the middle class and working poor.

Trump’s tariff-driven tax scheme is similar to the tariffs that exacerbated the Great Depression. His plan is a recipe for runaway inflation that would hammer those who can least afford it. From the grocery aisles to big-box retailers, American consumers would bear the brunt as businesses pass on the costs of his de facto consumption tax.

Trump’s attacks on economic stability extend beyond his tax cuts. His draconian immigration plan to deport millions of undocumented workers would create labor shortages in agriculture, hospitality, construction, and more—further stoking inflationary pressures. This approach threatens to dismantle the economic progress achieved under the Biden administration, reversing gains in job growth and inflation reduction. 

Skyrocketing Prices: The Immediate Effect of Trump’s Tariffs

A key aspect of Donald Trump’s economic agenda is a blanket 10% tariff on all goods entering the U.S., with an insane 60% tariff on Chinese imports (think smartphones, TVs, and laptops). Echoing the disastrous Smoot-Hawley Tariff that deepened the Great Depression, Donald Trump’s economic platform centers on sweeping tariffs that could cripple American consumers and businesses. 

While Trump’s team touts this policy as a silver bullet for reviving domestic manufacturing and safeguarding American jobs—worthy goals in their own right—imposing excessive tariffs is like performing open-heart surgery with a spoon. Such a blunt, heavy-handed approach overlooks the complex dynamics and potential unintended consequences that could ripple across the economy.

At their core, tariffs function as consumption taxes paid by American businesses and consumers, raising the sticker price on everything from clothing and electronics to cars and groceries. While Trump casts his plan as “America First” economics, it is in fact a regressive tax hike that would hammer lower and middle-income families the hardest, as these households spend a much larger share of their income on consumer goods compared to the wealthy.

consumer spending as a percentage of after tax income by decile

Consider the real-world impact: A 10% tax on all imports would translate to immediate price increases across retailer aisles and online checkout carts from California to Maine. And that’s before factoring in Trump’s 60% tariff on Chinese imports. For millions of cash-strapped Americans already feeling the squeeze from inflation, these additional costs would decimate disposable incomes.

Economists estimate that Trump’s tariff scheme would siphon over $1,700 annually from a typical middle-class household’s budget, while the poorest 50% of Americans would see 3.5% of their income wiped out. This regressive tax policy mirrors the Republican Party’s disastrous embrace of tariff hikes during the 1930s, which choked off trade, invited retaliation, and ultimately compounded the economic calamity afflicting ordinary Americans.

Trump’s proposed tariffs aim to fund an extension of his tax cuts, a move that would further disadvantage the middle and working classes. These tax cuts have already disproportionately benefited corporations and wealthy elites, widening the gap while offering little relief to ordinary Americans. This extension would deepen economic inequality, prioritizing the affluent over the broader public.

If the tax cuts are extended in 2025, households in the top 1% income tier will receive over $60,000 in annual tax cuts on average according to the Tax Policy Center, dwarfing the average tax cut of under $500 for the bottom 60% of households. Measured against after-tax income, these regressive policies hand the top 5% significantly more tax relief of working and middle-class families. 

Trump tax cuts 2025, tax change per quintile

Working families are stuck bearing the costs while the privileged few reap the gains, which is an inversion of Trump’s so-called “America First” economic policy that is supposed to revitalize the working class. This latest plan exposes the former president’s economic nationalism as little more than craven plutocracy wrapped in populist garb.

Tariffs and Deportations Risk Massive Inflation Spike

Further complicating the situation is Trump’s plan to deport around 11 million undocumented immigrants, many of whom work in low-wage sectors such as agriculture, food processing, and manufacturing. These low-wage jobs are notoriously hard to fill with American workers, who are often unwilling to accept the same wages. Removing this essential workforce risks crippling these industries and exacerbating the nation’s existing labor shortage.

Purging the nation’s workforce of nearly 6.8 million undocumented immigrants—over half of the estimated 11 million currently residing in the United States—would deliver a crippling blow to vital sectors of the economy. Industries like agriculture, hospitality, and construction—heavily reliant on this labor force—would face severe worker shortages. This abrupt exodus would drive up operational costs as companies scramble to fill vacancies, inevitably passing these heightened expenses onto consumers in the form of inflated prices. 

Compounding this economic strain are the lingering effects of former President Trump’s tax cuts, near zero interest rates, and his administration’s catastrophic mishandling of the COVID-19 pandemic, which battered supply chains and fueled rampant inflation. The Biden administration has worked diligently to rectify these errors, implementing policies to stabilize the economy and reduce inflation. Deporting 6.8 million productive workers would undermine this progress, causing labor shortages and driving up production costs, ultimately reversing the gains made under Biden’s leadership to get the country back on track.

Additionally, Donald Trump’s claim that deporting 10 million immigrants would open up jobs for Americans is an economically illiterate fantasy rejected by experts across the ideological spectrum. The notion that removing millions of workers would free up employment opportunities is based on the thoroughly debunked “lump of labor” fallacy—the mistaken belief that economies only contain a fixed number of jobs.

Economists have long discarded such simplistic thinking, recognizing that immigrant populations actually grow labor demand through consumer spending, entrepreneurship, and expanding markets. Instead of viewing jobs as finite slices of a fixed pie to be hoarded, the evidence shows that immigrants actually create new employment opportunities. 

Replacing Income Taxes with Tariffs

In a recent closed-door meeting with Republican lawmakers at the Capitol Hill Club, Donald Trump pitched an “all tariff policy.” His plan would completely eliminate federal income taxes and replace them with tariffs on imported goods. According to a report by CNBC, Trump believes that by dramatically increasing tariffs, the government can offset the loss of revenue from income taxes. 

Nobel Prize-winning economist Paul Krugman forcefully pushed back against the proposal. Krugman estimated that such a policy would require cripplingly high average tariff rates of 133% to generate sufficient revenue. As you can see below, replacing income taxes with tariffs isn’t feasible, and is a laughably bad idea. 

United States government revenue vs. United States imports

With imports currently around 14% of GDP and income tax revenues about 8% of GDP, a 57% tariff might initially seem adequate for replacement. However, Krugman argued that tariff hikes spawn a vicious cycle by driving up consumer costs and thus depressing import volumes—requiring even higher rates to offset the diminishing tax base. Brendan Duke of the progressive Center for American Progress estimated middle-class families would see a $5,000 tax hike under Trump’s scheme because of inflated consumer prices.

GOP Policies Lead to Recession, Dems Clean up the Mess

A troubling pattern has emerged over the past three decades—Republican economic policy characterized by deregulation, tax cuts tilted toward the wealthy, and an embrace of low interest rates has repeatedly catalyzed overheated, unsustainable economic expansion culminating in recession. Each time, Democratic administrations have been left to clean up the fallout and get the economy back on track.

The early 1990s recession unfolded under George H.W. Bush, driven significantly by his refusal to act on soaring oil prices, prioritizing the interests of his friends in the oil industry over the American public. Despite urgings from economists, Congress, and his own energy secretary to sell oil from the Strategic Petroleum Reserve to curb speculative price surges, Bush chose inaction, exacerbating the economic downturn. In stark contrast, President Biden has deftly used these reserves to significantly reduce the cost of gas, earning praise from The Economist as a “master oil trader.”

His son’s two terms saw the creation and collapse of the housing bubble, triggering the Great Recession—the worst economic disaster since the Great Depression. This catastrophe stemmed from GOP policies favoring short-term gains over long-term stability. Bush inherited a budget surplus, yet left office with over a trillion-dollar deficit, saddling Obama with massive fiscal challenges. The exorbitant costs of the Iraq and Afghanistan wars further escalated spending and destabilized the economy.

budget deficit/surplus by Presidential administration, from Clinton to Trump

Donald Trump amplified these reckless strategies. His tax cut did little for the middle class but boosted corporate stock buybacks and ballooned federal deficits by $1.9 trillion. His trade wars failed to bring back jobs, instead harming American farmers and manufacturers with retaliatory tariffs. The pandemic only magnified the economic vulnerabilities created by Trump’s economic policies.

In each of these episodes, Democratic successors were tasked with rescuing the nation from crises years in the making. Clinton’s tenure produced budget surpluses and stable growth after cleaning up George H.W. Bush’s mess. Obama righted the ship through stimulus and reinvigorated oversight following the Great Recession. Now, Biden has fostered robust job gains despite inheriting the Trump administration’s policy disarray and COVID-battered economy.

The pattern could hardly be clearer—reckless Republican policies sow the seeds of the next preventable downturn, which Democrats are tasked with remedying. For working families whipsawed by these cycles, the costs of enabling future repetitions should give voters pause.

Donald Trump’s Economic Plan: A 10% Minimum Price Hike for Americans

Donald Trump’s economic agenda represents a clear and present danger to the financial well-being of working and middle-class Americans. His proposal to replace income taxes with tariffs on imports would function as a regressive tax hike, disproportionately burdening those who can least afford it. Furthermore, his plan to deport millions of undocumented workers would exacerbate labor shortages and spike inflation, undermining the progress made under the Biden administration. 

In recent history, Republican trickle-down economics and deregulation have consistently catalyzed financial crises, leaving Democratic administrations to clean up the mess. For voters prioritizing economic security and upward mobility, Trump’s policies offer a treacherous path littered with past failures. The health of the nation’s finances hangs in the balance of rejecting these misguided, plutocratic schemes that threaten to concentrate even more wealth at the very top while impoverishing working families.