When former President Donald J. Trump met with House Republicans last month, he outlined a set of policies central to his economic agenda: cutting income taxes while dramatically increasing tariffs on foreign goods.
Mr. Trump told Republicans he would “love to raise tariffs” and cut Americans’ income taxes, potentially to zero, said Representative Marjorie Taylor Greene, Republican of Georgia.
“Everybody in the room was applauding,” Greene said. “He said, ‘If you want to vote on something today, vote for a tax cut for Americans.’”
Tariffs and tax cuts were central to Mr. Trump’s economic thinking while he was in the White House. If he wins the November election, he promises a much more aggressive approach, which could include a 10% blanket tax on nearly all imports and a 60% tariff on Chinese goods.
Mr. Trump and his supporters argue that combining tariffs with tax cuts would revitalize American business and industry, boost jobs and benefit the American working class. They also see tariffs on foreign goods as a lucrative source of revenue, which could be used to offset a drop in tax revenue.
Some economists have a different view, arguing that the tax cuts associated with higher tariffs could backfire by widening the gap between rich and poor. Businesses often pass the cost of tariffs on to consumers in the form of higher prices. As a result, economists say, low-income households would be hit hardest by tariffs because they spend more of their income on goods. Income taxes tend to fall more heavily on wealthier Americans because many low-income workers don’t earn enough to pay federal income taxes.
Kimberly Clausing, an economist at the Peterson Institute for International Economics who worked at the Treasury under Biden, said combining tax cuts and tariffs would dramatically increase income inequality and “would hurt the very voters Trump is counting on to put him in the White House.”
The income tax “has the effect of reducing income inequality in our country by imposing higher taxes on the wealthiest,” she said. “A tariff will never do that.”
Robert Lighthizer, who served as Mr. Trump’s chief trade negotiator and continues to advise his campaign on trade issues, said in an interview that the tariffs were neither inflationary nor regressive. To the extent that tariffs increase output and create more good-paying manufacturing jobs, he said, “they’re probably deflationary.”
Mr. Lighthizer said studies showing that tariffs were paid by American consumers were “fundamentally wrong,” saying that tariffs are very often paid by foreign producers and importers.
He also said a tax cut could be structured to benefit middle-class Americans more. Even if one accepts the argument that consumers are paying for the tariffs or that the tariffs are inflationary, Lighthizer said, “you could very easily get a tax cut for middle-class people that would more than offset the small increase.”
“A tax and tariff regime can be progressive,” he said. “It will change the relationship between importers and American manufacturers. It will create jobs.”
People who were at the Capitol with Mr. Trump in June described his remarks as an off-the-cuff remark rather than a firm policy proposal. Still, the idea appears to be gaining traction within the Republican Party, where even politicians traditionally skeptical of tariffs have shown signs of supporting them if the revenues are used to fund new tax cuts.
Representative Thomas Massie, a Kentucky Republican known as a libertarian, described Mr. Trump’s proposal as vague but “intriguing” after the meeting last month.
Some Republican senators said they wanted to know more about Mr. Trump’s plans. “I’m in favor of higher tariffs,” said Missouri Senator Josh Hawley. “Tariffs raise revenue, so why not use them to cut taxes? I’d start with workers.”
Mr. Trump’s proposal to impose tariffs on most foreign goods would have been anathema to many Republicans in previous decades, when the party was more staunchly in favor of “free but fair” trade. Tariffs can protect American manufacturers from foreign competition and have been shown to boost American industrial output. But some economists say they come at a high cost, relative to the number of jobs they create.
The Republican Party, however, has moved sharply toward a platform that reflects Mr. Trump’s views. In a video posted on his campaign website, Mr. Trump described “a radical overhaul of our tax and trade policies that work for America” as “the heart of my vision.” His choice of Senator J.D. Vance of Ohio as his Republican vice presidential nominee this week is another sign of the party’s direction. Mr. Vance has harshly criticized Chinese trade practices and called for protecting American manufacturers from “all competition.”
In a statement, Republican National Committee spokeswoman Anna Kelly said Mr. Trump had “put America first by implementing tariffs while simultaneously keeping inflation and consumer prices low.”
“President Trump’s policies have grown the economy, and he will again cut taxes, impose tariffs on foreign producers, bring jobs back to the United States, and put America first from day one,” she said.
At the heart of Mr. Trump’s tax plan is an extension of the tax cuts he enacted in 2017. Many of them — including lowering individual income tax rates and increasing the standard deduction — are set to expire at the end of next year, setting the stage for a high-stakes legislative battle in Washington. While low- and middle-income Americans benefit from the tax cuts, the gains continue to disproportionately benefit the wealthy, according to an analysis by the Tax Policy Center, a Washington think tank that studies tax issues.
Republicans have broadly rallied behind extending the expiring provisions. Mr. Trump and some of his economic advisers are also considering tax cuts beyond the 2017 law, including reducing the corporate tax rate to 21 percent and suspending the payroll taxes that businesses and employees pay to fund Social Security and Medicare.
Stephen Moore, Trump’s economic adviser, is ambivalent about raising tariffs. But if the revenues are used to pay for cutting or eliminating income taxes, he said, the tradeoff could be worth it.
“I’m not a fan of tariffs, but if it was a generalized tariff and you used that revenue to reduce taxes that hurt growth, I think it could make sense,” he said.
Michael Stumo, executive director of the Coalition for a Prosperous America, which advocates for more protectionist trade policies, said the debate over swapping some taxes for tariffs was “full of potential.”
“We’ve seen a lot more intriguing and thoughtful commentary on this proposal than I’ve seen before from the old guard,” he said. “Clearly there’s a significant wing of the Republican Party that advocates tax cuts, and if you’re financing that through tariffs, that’s a very different debate.”
In its early days, the U.S. government was largely funded by tariffs. But starting with the Civil War, the government introduced other taxes to raise more revenue for the state, says Douglas A. Irwin, an economic historian at Dartmouth College. The income tax was introduced in 1913 in part to counter the growing income inequality of the Gilded Age.
Imposing a 10% tariff on most foreign goods, as Mr. Trump has suggested, could generate as much as $2.5 trillion over 10 years, according to an estimate by the nonpartisan Committee for a Responsible Federal Budget. That could help plug the budget hole created by extending the 2017 tax cuts, which the Congressional Budget Office estimates could cost more than $4 trillion over 10 years.
But a 10 percent tax on all goods would not be enough to replace the roughly $2 trillion in income taxes the government collects each year. A study by Clausing and Maurice Obstfeld, also of the Peterson Institute, found that the maximum revenue the United States could raise from tariffs would be about $780 billion, less than 40 percent of what income taxes currently bring in.
It could also trigger a trade war, which could prompt Mr. Trump to again use tariff revenues to compensate farmers and other businesses that suffer losses. During Mr. Trump’s first term, his tariffs prompted retaliation from foreign governments, which themselves imposed taxes on American exports. American farmers in particular were hit hard by the retaliation, prompting the Trump administration to give them $23 billion to compensate for their losses.
Ms. Clausing and Mr. Obstfeld also calculated what would happen if the United States imposed enough tariffs to raise the maximum level of revenue, $780 billion, and then cut income taxes by a similar amount for all income groups. They found that the result would be a net 8.5 percent reduction in after-tax income for the bottom 20 percent of Americans, compared with an 11.6 percent increase for the top 1 percent.