Nobel laureate Paul Krugman said that while Trump touted the sweeping tariffs as a win for U.S. consumers, only the wealthiest Americans would benefit from rising trade barriers.
In a column on Tuesday, the economist took aim at Trump's recent idea of replacing the U.S. income tax with higher import tariffs.
Leaving aside the huge gap between the revenue sources provided by the two, even a simpler policy of maximizing tariffs and cutting income taxes by the same amount would still be bad for most Americans, Krugman wrote.
“The net effect will be negative for 80% of the population, especially the bottom 60%, but extremely beneficial for the top 1%,” he said, citing data from the Peterson Institute for International Economics.
In this scenario, low- and middle-income consumers would see their after-tax incomes fall and receive little benefit from the tax cuts, while the wealthiest Americans would benefit.
Krugman gave two reasons:
First, income tax is paid primarily by the country's wealthiest people, while about half of the population pays no such tax at all; instead, they bear the burden of other taxes.
Second, when tariffs impose higher costs on importers, those companies either withdraw their products or raise prices. Both actions are inflationary and can even drive up prices for U.S.-made products, as research by the Tax Foundation has shown.
Because low-income households spend a larger share of their income than wealthier ones, they will be hit harder by rising prices.
"If Trump is elected, who will pay for the tariffs he will almost certainly impose? Not foreigners, by and large. All indications are that the burden will fall on Americans, primarily the working class and the poor," Krugman argued.
Trump has stressed the need to impose a 10% tariff on all imported goods.
If Trump's words are taken as they are, rising trade barriers would raise inflation by 1.1 percentage points, Jan Hatzius of Goldman Sachs wrote on Tuesday. Higher prices would also hit consumption, lowering U.S. GDP by 0.5%.
Another Nobel Prize-winning economist, Joseph Stiglitz, recently expressed similar concerns about surging inflation.
That would undermine the potential for a rate cut by the Federal Reserve, expectations that have helped propel Wall Street stocks to new highs this year.
Hatzius expects the Fed could turn hawkish again and raise rates by as much as 130 basis points, which would be equivalent to about five 25 basis point hikes.
“US inflation will rise sharply, the hit to European growth will be even greater, and the evidence of monetary policy divergence between Europe and the US will become stronger,” he concluded.
The article is forwarded from: Jinshi Data
