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PRINT EDITION
Trump's mix of tariffs, taxes could prove toxic for U.S. workers
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By BARRIE MCKENNA
  
  

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Monday, July 16, 2018 – Page B1

OTTAWA -- U.S. President Donald Trump famously promised in his inaugural address that he would take on the world to improve the lot of American workers and families.

"We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs," he vowed. "Protection will lead to great prosperity and strength."

He's been good to his protectionist word, slapping tariffs on tens of billions of dollars of imports in the past two months and threatening hundreds of billions more.

But don't count on Mr. Trump delivering prosperity to the victims of globalization spread across Middle America.

New research by economists at New York University's Stern School of Business suggests that the Trump administration's mix of import tariffs and tax breaks skewed to wealthier Americans will produce the worst of all outcomes for U.S. workers.

"The worst policy mix is a regressive tax system with a high tariff," economists Spencer Lyon and Michael Waugh conclude in a working paper for the U.S. National Bureau of Economic Research.

Indeed, the two economists concluded that the higher the tariff, the worse off people are in terms of household income.

"We find no evidence that an import tariff is an effective approach to dealing with the costs of trade," according to the study, Redistributing the Gains from Trade Through Progressive Taxation.

Quite the opposite. Mr. Lyon and Mr. Spencer found that making the tax system more progressive - taxing people at higher rates as their income rises - is a good form of "social insurance" that mitigates losses suffered by pockets of the population as a result of globalization.

A more regressive tax regime is exactly what Mr. Trump and the Republicans delivered last year.

Under the plan, most households saw their taxes go lower. But the benefits were highly concentrated in the hands of the wealthiest Americans.

The Washington-based Tax Policy Center estimated that Americans got an average tax break of US$1,610 in 2018. It was not spread evenly. The after-tax income boost for people in the bottom 20 per cent of earners was 0.4 per cent compared to 3.5 per cent for the top 1 per cent.

The tax reform package also included huge tax breaks for companies. In theory, if these incentives encourage companies to hire, invest and expand, it will boost overall economic growth.

Again, new research by economists at the Federal Reserve Bank of San Francisco casts doubt on that rosy scenario.

The problem is that the tax breaks are being introduced into an economy that is already growing at a healthy clip: 2.3 per cent in 2017 and likely more than 3 per cent this year.

Many economists predicted that the tax cuts would boost GDP by as much as a percentage-point per year. But San Francisco Fed economists Tim Mahedy and Daniel Wilson found that there could be little or no boost at all. That's because when the economy is already hot, there is less excess labour, factory capacity and other resources to throw into action.

"The effects of fiscal stimulus on overall economic activity are much smaller during expansions than during downturns," the authors conclude. "This suggests these forecasts may be overly optimistic."

The actual boost from the tax cuts could be as small as zero, they say.

All of this suggests that the main elements of Mr. Trump's economic plan - taxes and tariffs - get failing grades in terms of delivering results to the people he claims to want to help.

Mr. Trump's version of inequality in America - as laid out in his inaugural address - is that "Washington flourished, but the people did not share in its wealth."

The irony is that as Mr. Trump wages trade warfare with the world, there probably isn't a better place to be than Washington if you're a trade lawyer, lobbyist or political consultant. Mr. Trump has been a boon for the influence business as exporters and importers alike scurry to limit the damage with every wave of tariffs and counter-tariffs.

Washington, it seems, is doing better than ever.

Everyone else? Not so much.


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