Since the tariff manion started, we have been repeatedly asked: “Are rates good for the economy?” The answer is: “of course not” (except in some national defense scenarios). Simply put, rates are only taxes.
And research into all known tax heights that higher taxes reduce growth. This applies to income taxes, wealth tax, capital gain tax, corporate profits, rates, vessels, etc. This is because taxes reduce and disrupt incentives. They are a necessary evil to support government activities, but make no mistake, taxes reduce growth. And the greater and more extensive the tax, the greater this economic damage.
The only good argument for rates is that they protect important industrial facilities, especially in situations of national security, such as a large pandemic or a war. But these benefits are difficult to quantify and easily proclaim.
US imports a total of around $ 3 trillion, while the GDP is $ 30 trillion. So an average import rate of 20 percent (versus 3 percent for the past six years) represents $ 600 billion in potential tariff -controlled tax revenues (assuming no imports). This is a federal shortage of $ 2.1 trillion. Hence President Donald Trump’s attempt to reduce budget deficits through “large, beautiful” rates. But the reality is that the tariff income is far behind this number, due to a certain decrease in import.
Representing the ever-changing rate proposals of the Trump administration to increase the tax of 1,700-base point in tax compared to around 10 percent of the economy. That is a large tax increase in a fairly wide part of the economy. An extra care, especially in April, was the unnecessary uncertainty caused by Trump’s chaotic rates. The uncertainty about the exact size of the tax increases has led to some companies and consumers ‘pausing’. However, the recognition of the so -called Taco (Trump Always Chicken) trade seems to have filled the extreme reactive stock market.
The only good argument for rates is that they protect important industrial facilities, especially in situations of national security, such as a large pandemic or a war.
We would also be confronted with enormous tax -uncertainty (with regard to increases in personal, business, capital gains and wealth tax) and associated negative effects on growth, the Democrats had won. The real tragedy is that the Trump administration could have avoided any tax increases and was simple to eliminate wasteful federal expenditures.
Based on the best (non -political driven) analysis that we have found, an increase in the average rate compared to the 2024 level of around $ 3 per $ 100 from import to $ 20 per $ 100 of imports would reduce GDP growth by 150 to 200 basic points per year. While a few will win, most of them suffer from higher rates. The real GDP growth of the US will fall 0.75 to 1 percent if the average rate rises to $ 20 per $ 100 imported goods. But because this estimate is a linear extrapolation that goes much further than the reach of the analyzed data, the prediction error is high. The actual impact will be much less if people adapt, although it will be serious sand in the accelerations of the economy in the short term.
The impact of rates on price levels and inflation will be nuanced. Research suggests that approximately 65 percent of the average rate increase of 17 percentage points will be passed on in the form of higher prices of imported goods. This will initially increase the average prices by around 110 basic points (a cost increase of 17 percent, of which 65 percent is passed on for 10 percent of the economy). But after that it will not have an inflatory impact, because inflation is about the speed of prices, not their level. So if inflation had been 2 percent without the rise in rates, this would jump to 3 percent due to higher rates before it falls back to 2 percent. This indicates that the constant adverse impact on GDP is a much more substantial care than the impact on inflation.
They are a necessary evil to support government activities, but make no mistake, taxes reduce growth.
It is important to remember that just like people adapt and enter a downpour, so people will also adapt to higher rates over time. These changes will lower the average rate paid and reduce the import, which reduces the impact on tax revenues, real GDP and prices over time. We suspect that these effects will be about half of the figures discussed above after two to three years.
A final consideration of rates is worth mentioning. While we investigated rates all over the world prior to the announcement of the Trump, we were honestly surprised how high average rates were in a so -called free trade world. For example, it was 5 percent in the EU. So far the unobstructed current of goods and services around the world. It is possible that Trump fights a border store to win a war. That is, to improve free trade, he increases trade barriers – fuel with fire. But this is a very dangerous strategy, because border conflicts can quickly escalate in a complete war.
But if raising rates means that most countries (including the US) lower the rates and trade restrictions, this will be a major economic victory. From mid -June the only major trade agreement that the administration was concluded with China so far. The announced agreement freezes the rate for Chinese import to the US by 55 percent, while China imposes a rate of 10 percent on US imports on China. The deal also offers rare mineral stocks of the earth and stores student fairs. See what happens in Vietnam, the Philippines, Thailand and Malaysia, because these are “back doors” for high rates on China. Ultimately, we expect that the average rate will increase from around $ 3 per $ 100 to around $ 5 per $ 100 of input. This increase of 2 percent on 10 percent of the economy will unnecessarily reduce GDP, but with a minimum amount.
Dr. Peter Linneman is the director and founder of Linneman Associates (www.linnemanassociates.com), professor Emeritus at the Wharton School of Business, University of Pennsylvania, author of “Real Estate Financing and Investments: Risks and Opportunities,” and co-autor of “De Longe-Age Rebot”. Follow Dr. Linneman on x: @p_linneman
Read CPE’s number of August 2025.
#rates #difficult #argument