Republicans Can’t Pay for Their Tax Cuts with Fantasy Revenue Sources

Last week, the House of Representatives passed a sprawling tax proposal — affectionately (and cringingly) dubbed the One Big Beautiful Bill — offering trillions in tax relief over the next decade, mainly by extending the 2017 Tax Cuts and Jobs Act. Unlike in 2017, however, there’s a twist: White House officials are selling the bill to deficit-wary holdouts in Congress by claiming that President Donald Trump’s new tariffs will provide a steady stream of federal revenue to offset much of the OBBB’s estimated 10-year cost.

It’s not happening. And the president’s latest threat of a new 25 percent tariff on iPhones and 50percent tariffs on all European goods, which would theoretically fill Treasury’s coffers further, helps show why tariffs won’t cover the tax bill’s cost.

First and most obviously, the tariffs are not hardwired into law but instead implemented unilaterally under Section 301 of the Trade Act of 1974, Section 232 of the Trade Expansion Act of 1962, and — most recently and significantly — the International Emergency Economic Powers Act (IEEPA). These statutes arguably give the president broad discretion to impose tariffs, but only while he occupies the Oval Office. When another administration takes power in 2029 — Trump is constitutionally barred from a third term — the next president could unwind these tariffs as quickly as Trump imposed them. Given the public reaction and market turmoil, it’s a reasonable expectation, especially if Democrats win the White House.

Relying on the revenue before 2029 is also a major risk. As of today, there are seven legal challenges to tariffs that Trump imposed this year under IEEPA, which many legal scholars believe was either not intended for blanket tariffs or is an impermissible delegation of Congress’s constitutional authority to regulate trade. Because IEEPA underlies Trump’s biggest, broadest tariffs (including his blanket “Liberation Day” taxes), a single court ruling against them or the law would mean trillions less in revenue. And even if a court refused to enjoin the tariffs while judicial proceedings are ongoing, recent precedent — a 2019 challenge to Trump’s Section 232 tariffs on Turkish steel — indicates that a final ruling could come in as little as 18 months.

Other threats to the tariffs’ revenue generation come from the administration itself. Trump’s latest threats against Apple and the European Union show the speed and unpredictability of U.S. trade policy today, and tariffs can depart just as quickly as they arrive. The market’s muted reaction on Friday probably stems from disbelief that he’ll follow through with something so economically damaging.

New trade deals with Britain and China, in fact, each lowered certain U.S. tariffs and promised additional liberalization in the months ahead as bilateral negotiations continue. The same discussions are also reportedly underway with dozens of other countries, each one likely to include similar or larger tariff reductions and carveouts. Previous Trump trade agreements, such as his 2020 “Phase One” deal with China, also reduced tariffs or exempted entire countries therefrom, and even bigger moves could come if financial markets resume their tariff-related skittishness. If tariffs are a bargaining chip, they can’t be counted on for reliable revenue.

hen there are product exclusions, which are already widespread and often granted to politically powerful companies. Fentanyl-related tariffs on imports from Canada and Mexico — the United States’ two largest trading partners — have been suspended for goods that qualify for the U.S.-Mexico-Canada Agreement. Consumer electronics have so far been exempted from the Liberation Day tariffs — even ones from China. These moves alone cover hundreds of billions of dollars in annual imports into the United States. Trump’s first term also brought major tariff carveouts: According to one recent paper, exclusions probably reduced the value of Chinese imports subject to U.S. tariffs by roughly $100 billion between 2018 and 2022.

Finally, there are broader forces that will shrink federal revenue even further. The tariffs will reduce economic growth by raising input costs, reducing business investment, disrupting supply chains and prompting foreign retaliation. Many economists, therefore, project that the tariffs’ drag will offset any increases in GDP owed to tax cuts. Proponents of Trump’s tax bill are fond of touting dynamic scoring — the idea that tax cuts will stimulate economic activity, thereby boosting future government revenue — yet they ignore that Trump’s tariffs will have the exact opposite effect.

This is assuming the tariffs get paid. High and variable tariffs will also encourage private parties to develop creative ways to reduce or evade these taxes by rearranging their supply chains, exploiting legal loopholes, undervaluing imports, smuggling and engaging in other illicit transshipment. According to a 2004 paper in the Journal of Political Economy, every one‐​percentage‐​point increase in the tariff rate is associated with a 3 percent increase in evasion — a response so intense, the authors speculate, that “tax increases may even produce a reduction rather than an increase in tax revenues.” More recently, economists with Goldman-Sachs estimate that similar moves during the 2018–2019 trade war with China reduced U.S. tariff revenue by $15 billion, and they expect even larger losses this time around.

Reasonable minds can differ on the direction of future U.S. tax or trade policy. But Congress should pursue both with honesty and pay for its tax plans by closing loopholes and cutting federal spending, not turning to fantasy sources of revenue.