The Myth-Busting Economist by Larry Malone

Debunking Trump’s ‘ERS’

The president recently rolled out another “Concept of a Plan” in a post to his Truth Social Network. This CoP would replace the Internal Revenue Service with the External Revenue Service. In the president’s mind, the IRS vanishes and we all enjoy the same privileges as Musk, Zuckerberg and Bezos (aka the New American Oligarchs) because we won’t have to pay taxes! The federal government would instead be funded by tariff revenues paid by our friends in countries around the world.

With many of us knee deep in filing our taxes, it’s a good time to subject this Concept of a Plan to myth-busting scrutiny.

In my last column, we saw that federal government revenue was $5,036 billion (a shade over $5 trillion) in 2023, with about 40 percent of that revenue coming from income taxes. Tariffs produced about $80 billion, or just 1.6 percent of all federal revenue. A big lift will be needed if tariffs are going to produce enough revenue to cover 40 percent of the federal budget. In dollar terms, that would be almost $2 trillion.

Will the rest of the world give us $2 trillion each year? Not voluntarily, especially given the current state of our relationships with our global BFFs. Canadians are booing the National Anthem at NHL games and turning boxes of Corn Flakes upside down in grocery stores to identify them as Made in America.

But that won’t matter if the president is being truthful when he says that “foreigners” pay the tariffs. Is he being truthful? NO, and to see why, we’ll need to revisit how tariffs work.

Suppose you love Molson Beer, brewed in Canada since 1786. Let’s say a six pack purchased at WalMart cost $10.00 on January 1. The president slapped a 25 percent tariff on items produced in Canada in early February. When your six pack now travels to the WalMart distribution center in Richfield Springs, U.S. Customs collects a $2.50 tariff “tax” from Molson. This is the case even though Molson was acquired by Coors, an American business, 20 years ago. Molson/Coors then increases the price by $2.50, and YOU pay $12.50 if you buy the six pack. So YOU pay the tariff.

Is it possible that tariff revenue will add up to the $2 trillion collected from income taxes? No chance, because even Molson lovers will switch to cheaper beer.

This is already happening with Canadian lovers of Jack Daniels, produced in Lynchburg, Tennessee. When Trump imposed 25 percent tariffs on Canadian stuff, Canada retaliated with a 25 percent tariff on American stuff imported by Canada. Why wouldn’t you retaliate, as a country? And that’s why both sides lose in trade wars: consumers in both countries are unwilling to pay higher prices and businesses in both countries lose sales.

That’s happening with Jack Daniels—shipments to Canada have stopped, and Canadians have switched to other whiskey brands. Sales are down, production has slowed, and layoffs are coming in Lynchburg, Tennessee (population 6,748).

When you start a global trade war, as our president has done, the outcome is not pretty. Here’s what happens, in eight steps:

1) You put tariffs on imported things that we love.

2) Our partners retaliate and put tariffs on our stuff.

3) You pay the tariffs in higher prices, and then you stop buying tariffed items.

4) Your income doesn’t change, but prices are rising, so inflation increases.

5) Layoffs come as spending drops across the nation.

6) Spending drops further because unemployed people spend even less.

7) Unemployment rises on all fronts, and the economy slides into a recession.

The recession, and high unemployment, then bring one more decisive effect:

8) Unemployed workers compete for scarce jobs, and wages and salaries FALL because workers are willing to work for less if they can find a job.

This is what the president meant when he said, “Yes, yes, there will be a period of adjustment.” But he’ll make his fellow oligarchs happy, because their workers will work for less, which will boost their profits. The surge in corporate earnings will then make the stock market rise, Making America Great Again. Hmmm…it’s all beginning to make sense.

Larry Malone is professor emeritus of economics at Hartwick College.