No, You Can’t Just Compare Tariff Rates and Income-Tax Rates
Alittle while back, John Lott had a very confused piece in the New York Post. In it, he made the following claim:
Distortions increase as tax rates do.
Before Trump’s policies, the average US tariff rate stood at just 2.5% — tiny compared to the 43.4% average top personal income tax rate (including federal and state taxes) or the 27.5% average total corporate tax rate.
If we understand a tariff as a tax like any other, higher tariffs could in fact reduce the overall economic burden on American individuals and companies — an outcome that Trump has often touted as his ultimate goal.
This sounds plausible. It sounds like something an economist would say.
But it’s absolutely wrong.
No one corrected him on this. Even economists who pushed back on Lott missed it or ignored it. Don Boudreaux granted “tariffs might well have a role to play as part of the mix of taxes to raise revenue.” David Henderson wrote:
We do know that the deadweight loss, which is the overall loss from the tax minus the gain to the government, is proportional to the square of the tax rate. For example, doubling a tax rate quadruples the deadweight loss. So, it could be true that reducing the top marginal tax rate on income from its current 37 percent to, say, 35 percent, and replacing it with a 5 percent tax on imports could reduce overall deadweight loss.
No. This isn’t possible. Someone needs to refute this logic outright.
Today’s post has two parts. The first part covers the basic intuition, and the second will be the actual math. Putting it in an explicit model will show us the errors and why it’s helpful to be comfortable writing down some math here and there.