Stagflation

Presidential candidate and convicted felon Donald Trump promised to raise tariffs to pave the way for the elimination of all income taxes. The proposal was universally condemned by America’s most respected economists.

To be sure, eliminating income taxes will resonate with Trump’s populist base. But it will be a formula to lock the US economy in the grip of stagflation.

Trump could hardly be called economically literate. Nor could his first term in office be described as a fiscal success.

In his four years at the White House, Trump cut taxes for the rich. As a result, America’s debt rose by a staggering $8.4 trillion. The Trump presidency accounts for a quarter of total American debt.

Replacing income taxes with tariffs makes no sense at all. It will raise the prices of all goods with imported content for American consumers. It will force Americans to pay for costlier but inferior products produced at home.

The Trump plan will precipitate a trade war with all the other nations, causing the fragile supply and value chains to collapse. The spike in prices will exhaust domestic purchasing power. Because of this, it will not lead to the reinvigoration of American manufacturing.

Those who make the most income pay more taxes under the present scheme. If Trump replaces income taxes with tariffs, the richest Americans will benefit most. Middle class consumers will be harmed severely.

There is nothing that will convince us that revenue from tariffs will be enough to offset revenue from income taxes. A trade war, coming as a reaction to US protectionism, will definitely curtail the volume of trade. This means there will progressively be lesser imported goods on which higher tariffs could be imposed. The final result is lesser trade and lesser tariff revenue.

US manufacturers will not likely benefit from a tariff war. They will lose access to foreign markets retaliating against high US tariffs. Domestic consumers, burdened by higher tariff-driven prices at home, will not likely increase their consumption. The result is crippling stagflation – a condition where prices continue to rise while production remains stagnant.

Stagflation will increase poverty rates in the US. It