Tariffs: The Real Economic Impact According to Art Laffer and Steve Moore

Inflation and Economic Indicators

• 📊 Commodities (CRB index) and 10-year Treasury break-evens have remained largely flat year-to-date, suggesting a calm inflation environment.
• 📈 Gold shows a recent rise, but this is attributed more to an uncertainty premium than an inflation premium.
• 📉 Current inflation measures are described as tame, generally in the 2.5% to 3% range, which is slightly higher than desired but not catastrophic.

The Problem with Tariffs

• ⚠️ Tariffs are essentially taxes, and while import prices may rise, the theory suggests export prices could fall, leading to no net inflation.
• 📉 Historically, tariffs have not significantly raised prices and have often been deflationary and recessionary.
• 🎯 The primary concern with tariffs is their negative impact on the real economy, not necessarily their effect on inflation.

Fiscal Policy and Government Spending

• 💰 The core issue impacting the economy is not deficits, but rather government spending.
• 💸 A proposed 10% across-the-board tariff could generate significant revenue, potentially offsetting a reduction in the corporate tax rate to 15% or indexing capital gains.
• 🚫 However, there's a risk that any new revenue generated by tariffs would simply be spent by Congress, rather than leading to tax cuts.

Tax Policy and Economic Growth

• 📉 The best way to raise revenues is by reducing marginal tax rates, as lower tax rates can lead to higher revenues, as seen in historical examples like the JFK and Reagan administrations.
• ⚖️ If President Trump aims to improve upon Reagan's economic policies, he should focus on lowering the highest income tax rate to below 28%.
• 🏦 There is a strong argument for legally tying any new tariff revenue to a corresponding reduction in income taxes, particularly for higher brackets.