President Joe Biden’s strategic approach to rebuilding the country’s industrial base with targeted tariffs and national investment stands in stark contrast to Trump’s arbitrary, imprecise tariff and tax cut-only approach.
Both President Joe Biden and former President Donald Trump have touted trade policy proposals they say will help rebuild the country’s industrial base. But the difference between their approaches could not be clearer.
The Biden administration’s strategy of coupling federal investment with strategic tariffs has already yielded enormous investments, including unprecedented growth in factory construction and a surge in manufacturing employment, which now stands above prepandemic levels. The administration’s strategy is creating quality jobs in states across the country and demonstrates what is possible when all the tools for boosting American competitiveness are employed together, including national investment, regulation, procurement, and trade.
Biden’s recently announced tariffs, for example, were specifically targeted to protect key industries of the future—including semiconductors and clean energy technologies—from China’s predatory export policies and were the result of a calculated, strategic review process that stands in stark contrast to the chaotic, knee-jerk approach to trade policy demonstrated by former President Donald Trump. It is no wonder that allies from North America, Europe, and Latin America have or are expected to follow suit and announce similar actions against China to those that President Joe Biden already announced.
Trump is doubling down on the brash, imprecise approach from his first term that sullied alliances and delivered little in terms of new manufacturing or job creation. But this time, Trump’s plan would rely on far larger and even less targeted tariffs that would raise taxes for families and contribute to inflation. New analysis from the Center for American Progress Action Fund finds:
- The combination of his 10 percent tax on all imports and a 60 percent tax on all imports from China would raise taxes for a typical family by $2,500 each year. This includes a $260 tax on electronics, $160 tax on clothing, a $120 tax on oil, and $110 tax on food.
- The tax revenue from Trump’s taxes on imports would help finance Trump’s proposals to extend his expiring tax cuts. This would cut taxes for the wealthy while raising taxes for everyone else: The net tax cut for the top 0.1 percent of Americans would be $325,000 while a middle-income family would receive a net tax increase of $1,600 even after extending the expiring 2017 tax cuts.
- Trump’s tariff proposals would create a one-time inflationary burst that could add up to 2.5 percentage points to the inflation rate according to Wall Street analysts.
- Trump’s latest idea to replace all income taxes with tariffs is mathematically impossible, but even if it were feasible, it would dramatically increase income inequality and raise taxes for the bottom 90 percent of households. It would raise taxes for middle-income households by $5,100 to $8,300 while cutting taxes for the top 0.1 percent by at least $1.5 million annually.
A smart, pragmatic approach to making things in America
The Biden administration has taken a nuanced, targeted approach to handling the challenge that China’s nonmarket practices present. It is no secret that the U.S. relationship with China will be one of this generation’s defining foreign and economic policy challenges. There are few historical parallels of great powers as deeply integrated as the United States and China. But that economic integration—both bilaterally and through third-country markets—means that rash, imprecise actions that may sound forceful on the campaign trail are likely to result in collateral damage that could be avoided with more sophisticated, targeted actions.
As an example, China’s vast overcapacity in sectors such as steel and aluminum—and its willingness to exploit the global trading system to maintain its market dominance—has resulted in a series of “China shocks” that hollowed out communities through manufacturing job losses.
The Trump campaign’s imprecise, flawed approach is to counter China’s nonmarket practices with high tariffs on all goods imported from China. It would result in higher prices paid by Americans for all items coming from China,—not just those of strategic value or those that have been unfairly dumped in the U.S. market.
The Biden administration’s strategy is different. It focuses trade remedy actions on precisely those goods where it is in the national interest to maintain or build industrial competitiveness and then to align those actions with significant investment in American manufacturing. Moreover, the tariffs are just one part of a larger reindustrialization strategy designed to rebuild the country’s productive capacity and sustain American competitiveness well into the future.
The Biden approach was exemplified clearly a few weeks ago, when the president announced increases in Section 301 tariffs on select Chinese goods, including steel and aluminum, solar cells, semiconductors, electric vehicles, and medical products—all goods where domestic production is expected to increase dramatically as a result of investments made through the Infrastructure Investment and Jobs Act (IIJA); the CHIPS and Science Act; and the Inflation Reduction Act (IRA). In industries such as steel and aluminum, federal investments are also backstopped with Buy America procurement policies and other policies that are driving investment in domestic industries.
The results of the Biden administration’s trade approach speak for themselves: The investment agenda has helped spur the creation of 800,000 new manufacturing jobs, pushing the total number of manufacturing jobs above prepandemic levels. New factory construction has doubled after adjusting for inflation. Both of these metrics—manufacturing job creation and factory construction—fell during the Trump administration.
Trump seems to be resorting to bellicose rhetoric to cover up the near complete failure of his trade policy to deliver results. A Peterson Institute study, for example, found that Trump’s trade deal with China delivered none of the extra $200 billion of U.S. exports that it had promised. By contrast, under President Biden, the U.S. trade deficit with China has fallen to its lowest level in a decade. Put simply, Trump’s go-to solutions for any economic problem—tax cuts and tariffs—did not lead to a manufacturing renaissance, as he claimed it would.
The Trump campaign’s tariff plans would amount to a $2,500 tax increase for a typical family—and, based on his track record, would not increase manufacturing investment
Trump’s proposed across-the-board tariff on all U.S. imports—which would tax imports from allies and adversaries alike—would amount to a $1,500 tax increase in 2026 for a family in the middle of the income distribution, according to a previous CAPAF analysis. That number did not include the 60 percent tariff on all Chinese imports that Trump has proposed, which would be an additional $1,000 tax increase for a typical family.
Altogether, Trump’s tariff plan amounts to a $2,500 tax increase for a typical family.
Based on projected import data for 2026, it is possible to estimate how Trump’s import taxes would raise taxes for a typical household:
- The tax on electronics would be $260
- The tax on clothing would be $160
- The tax on toys and other recreational items would be $140
- The tax on imported oil and petroleum products would be $120
- The tax on pharmaceutical drugs would be $120
- The tax on food would be $110
This estimate is similar to that of economists Kim Clausing and Mary Lovely, who estimate a 2.7 percent reduction in average after-tax income ($1,700) for the middle 20 percent of households, with differences in the allocation of the tax between household income and GDP driving most of the difference between these two numbers.*
Trump’s latest unworkable proposal is a $5,100 to $8,300 middle-class tax increase
Trump recently went a step further in in a closed-door meeting of Republican lawmakers, where he reportedly floated an “all tariff policy” where import tax revenue would enable to the U.S. to eliminate the income tax.
No tariff on the $3 trillion of goods imports entering the country each year could raise enough revenue to replace the $2 trillion the individual income tax raises annually. The tariff tax rate would have to be so high that it would cause the volume of imports to drop dramatically. Economist Paul Krugman estimated that replacing income taxes entirely would require a 133 percent tax rate on imports, and even that number included favorable assumptions, such as taxing service imports and limited behavioral response.
Nevertheless, an analysis that ignores the proposal’s mathematical impossibility shows that it would be one of the most regressive tax changes ever proposed. The income tax code is progressive and generally requires higher income Americans to pay a greater share of their income than lower-income Americans. Tariffs, on the other hand, are one of the least progressive sources of revenue meaning that the tax burden as a share of income is even higher for low-income families. And this is a lower bound for the regressivity of the proposal since it follows the Treasury Department assumption that producers—not consumers—pay the tariff.
The net effect of this swap—implausibly assuming that the new tariffs raised as much revenue as the income tax—is that it would raise taxes for each income group in the bottom 90 percent of families (those earning under $220,000 for a family of two) while cutting the taxes for the top 10 percent. The result would be a 25 percent reduction in the income of the bottom 20 percent of households and 20 percent increase in the income of the top 1 percent.
Another way to see the proposal’s regressivity is that it would create a net $5,100 to $8,300 tax increase for the middle 20 percent of households depending on the analytic assumption about whether U.S. producers pay the tariff ($5,100) or U.S. consumers pay it through higher prices ($8,300). The top 1 percent, on the other hand, would receive a net tax cut of at least $290,000, and the top 0.1 percent would receive a net tax increase of at least $1.5 million.**
While we do not have the data that would allow us to calculate the net tax cut for the highest income families—the roughly 1,500 families in the top 0.001 percent of families with annual reported incomes above $75 million in 2024—they pay an estimated average of $41 million in income taxes that Trump’s proposal would wipe away. While the very wealthiest pay a low income tax rate as a share of a more expansive definition of income, they likely consume a very low share of their annual income. The tax increase from the tariff is, therefore, likely much smaller than the $41 million average income tax cut.
While the sheer impracticality of Trump‘s scheme may cause some to discount it, it nevertheless reveals Trump’s tax and trade policy goals. His other proposals to use tariffs to offset tax cuts for the wealthy—while less extreme—are steps in this direction and would still cost middle-class families thousands of dollars.
Trump would use taxes on imports to help finance tax cuts tilted to the wealthy and corporations
These two import taxes would raise $2.7 trillion over 10 years, according to Clausing and Lovely. Taken on its own, this would make it the second-largest tax increase, as a share of the economy, in about 75 years.***
But it is important to place this tax increase on Americans families in the context of Trump’s larger tax plan: Trump has also proposed cutting taxes for the wealthy and corporations. This includes extending major portions of his 2017 tax cuts, including the individual tax cuts (a cost of roughly $3.9 trillion over 10 years) as well as reverse budget gimmicks involving business taxes used to reduce the cost of his tax law (roughly $800 billion).
In other words, Trump’s proposed tariffs would help offset the cost of his proposed tax cut extension by making middle- and working-class Americans pay more for groceries, gas, and clothes. He may couch his policies as a plan to rebuild American manufacturing, but in reality, he would be pushing a shift from income taxes to far-more regressive consumption taxes, increasing the burden for working families. Clausing and Lovely showed that this would be a net tax increase for every income group outside of the top 20 percent of households, with the largest net tax increase for the bottom 20 percent.
Moreover, Trump has called for other policies that would benefit the wealthy at the cost of working families. He has proposed eliminating the Affordable Care Act, which would repeal key taxes on the wealthy, paid for by cutting low- and middle-income Americans’ health care.
Putting the pieces of his tax plan together shows that a middle-income family could expect to experience a net $1,600 tax increase as a result of Trump’s plan to extend the individual portions of the 2017 tax law; repeal the Affordable Care Act’s taxes on the wealthy; and enact broad-based tariffs. The 120,000 households in the top 0.1 percent—a group making more than $4.5 million in 2026—on the other hand, would receive a net $325,000 tax cut each from these provisions using similar assumptions to those made by Clausing and Lovely.****
In contrast, President Biden, has stated that he will not extend the expiring tax cuts for households making more than $400,000 and that he would pay for extending the expiring tax cuts for households making under that amount through tax increases on the wealthy and corporations.
Trump’s tariff plans would add up to 2.5 percentage points to the inflation rate
Several Wall Street analysts have estimated the effects of Trump’s tariff plans on overall consumer prices and inflation. All of these analyses suggest that these plans would produce a one-time inflationary burst, which are just one piece of Trump’s larger inflationary agenda.
For example:
- The Capital Group has estimated that Trump’s 10 percent across-the-board tariff and 60 percent China tariffs would lead to a 2.5 percent increase in prices in 2025. It predicts that the across-the-board tariff alone would trigger a resurgence in inflation (as measured by the Consumer Price Index) to between 3 percent and 4 percent by the end of 2025.
- Bloomberg Economics similarly estimated that both sets of Trump-proposed tariffs would ultimately raise consumer prices by 2.5 percentage points, pushing up the inflation rate (as measured by core Personal Consumption Expenditure inflation) up to 3.7 percent by end of 2025. This is compared to expected inflation of 2.1 percent in 2025 according to a Bloomberg survey of economists.
- Goldman Sachs has estimated that each percentage point increase in the overall U.S. tariff rate increases core consumer prices by 0.1 percent. Ed Gresser at the Progressive Policy Institute estimated that Trump’s proposed tariffs would increase the U.S. tariff rate by about 12 percentage points, suggesting a 1.2 percent increase in consumer prices when combined with the Goldman estimate.
- Even a former chief economist of the Trump White House Council of Economic Advisers, Casey Mulligan, estimated that just the across-the-board tariff would add 1 percentage point to inflation. He also admitted “there’s going to be a cost to that in the system, and then the consumer is paying more.”
It is important to note that all of these analyses assume a one-time inflationary burst and not a permanent increase in the inflation rate. Nevertheless, American families would continue to pay those higher prices each year even after the tariffs are no longer reflected in the annual inflation rate.
Conclusion
The contrast between the candidates’ trade policies could not be clearer: President Biden’s combination of strategic tariffs and investments in manufacturing is leading to an industrial renaissance, creating good paying jobs for Americans across the country. Former President Trump’s wanton, untargeted tariff—and-tax-cut approach would double down on trade policies that have already proven ineffective while raising taxes for families squeezed by inflation.
Methodology: The $2,500 tax increase
The authors used the same methodology as in our previous analysis to calculate the tax increase from the 10 percent across-the-board tariff and the 60 percent tariff on Chinese goods projecting the analysis to 2026 to make it comparable to the tax cut from extending the expiring portions of the Tax Cuts and Jobs Act. The analysis assumes that the 60 percent tariff on Chinese goods is essentially a 50 percent tariff in addition to the 10 percent across-the-board tariff.
As in CAPAF’s previous analysis, the authors followed the methods used by from tax modelers at the U.S. Treasury Department and the Tax Policy Center to assume no behavioral response to tax policy changes for the purposes of estimating costs, as opposed to applying a revenue estimate approach that would incorporate those responses. Trump’s additional tariff on Chinese goods could elicit more avoidance than the across-the-board tariff if Chinese producers route goods through other countries, but that behavior would have costs for American consumers as well. Moreover, Clausing and Lovely argue that multiplying the tax increase by the number of imports is a lower bound of the tariffs’ burden on consumers because domestic producers will use the tariffs to raise their own prices.
*Authors’ note: Clausing and Lovely calculate a similar tax burden to consumers ($500 billion or 1.8 percent of GDP), though the dollar figure is somewhat smaller because it is for 2023 as opposed to 2026. Their analysis mostly focuses on after-tax income so they multiply the consumer burden equal to 1.8 percent of GDP by total household income from the U.S. Treasury Department’s Office of Tax Analysis, which is smaller than overall GDP. This is somewhat more conservative assumption. Clausing and Lovely also distribute the tax to income groups based on consumption excluding housing, pensions, and personal insurance, which somewhat reduces the share of the tax increase that goes to the middle quintile.
**The $8,000 figure uses the same methodology as the $2,500 calculation. The $5,000 figure as well as tax cuts for the top 1 percent and top 0.1 percent were calculated using the Treasury Department’s distribution of current customs and excise taxes, which assume producers pay the tax. Tax cuts for the top 1 percent top 0.1 percent using a similar assumption that consumers pay the tax as the $8,000 figure would be even higher.
***Authors’ note: Clausing and Lovely calculate that the revenue effect (not the consumer burden) would be $242 billion 2023, which is 0.83 percent of GDP. Jerry Templaski from the U.S. Treasury Department’s Office of Tax Analysis estimates revenue effects of major tax bills as a share of GDP from 1940 to 2006. The 0.83 percent of GDP revenue increase from Trump’s tariffs is larger than every “full-year” tax increase recorded in Templaski’s analysis after the Revenue Act of 1951 until 1968. After 1968, Templaski provides two-year average and four-year average revenue effects. The four-year average revenue effect is larger than every tax increase from 1968 to 2006 except for the Tax Equity and Fiscal Responsibility Act of 1982. The two-year revenue effect of the tariffs is larger than that bill’s, but smaller than the Revenue and Expenditure Control Act of 1968’s which has no four-year effect because it was one-year legislation. Therefore, the tariffs would be the second largest since 1951 whether measured as two-year or four-year averages. CBO tables current through February 2024 indicate no subsequent tax increases after Templaski’s analysis that are larger as a share of GDP.
****Authors’ note: Clausing and Lovely assume that the burden of the tariff for the top 1 percent as a share of income is half of that for the top quintile, as a whole. We assume the same about the top 0.1 percent. We use their method for calculating the tax as a share of after-tax income but distribute the full static tax increase instead of multiplying the consumer burden as a share of GDP by household income.
To read the full article as published by the Center For American Progress Action Fund, click here.