Exporting Oligarchy Through Tariffs

You have to give Donald Trump credit for one thing: for all his inconsistency on many issues, he believes deeply in high tariffs. He has been preaching that gospel for at least four decades, convinced that tariffs are the key to America’s future prosperity. Shortly after promising to “tariff and tax foreign countries to enrich our citizens” during his second inaugural address, Trump declared a “national emergency” to justify a flurry of executive orders. The culmination of this policy came on April 2 (“Liberation Day”), when he announced a 10 per cent baseline tax on all imports and higher levies for dozens of countries that run merchandise trade surpluses with the United States. In the case of China, which retaliated in kind, Trump hiked US tariffs to a staggering 145 per cent.

Following an ominous spike in Treasury yields, Trump announced a 90-day pause. While some top figures in his administration described this reversal as a way to test other countries’ willingness to negotiate, Trump himself claimed that the tariffs would generate trillions of dollars in revenues if made permanent. “There is a chance that the money from tariffs could be so great that it would replace” the income tax, he told Fox News.

Quixotic view 

Trump is driven by a quixotic view of American economic history. As he tells it, the US has never been as prosperous as it was under President William McKinley (1897-1901), when imports were subject to heavy tariffs, and the federal government, before the introduction of income tax, was a fraction of its current size. Yet in 1913, “for reasons unknown to mankind,” he complains, “they established the income tax so that citizens, rather than foreign countries, would start paying the money necessary to run our government.” In Trump’s view, this change contributed to economic instability, including the Great Depression, which supposedly could have been avoided if McKinley’s tariff policy had continued.

Thus, underpinning Trump’s economic policy is a deep-seated conviction that the establishment of progressive income taxation was a mistake. He is openly advocating the elimination of the one federal tax that the wealthy are supposed to pay annually. In expressing this radical ambition, he echoes Milton Friedman, who also argued that the federal income tax – with a top marginal rate that averaged 78 per cent between 1930 and 1980–was a major drag on US growth.

While Trump is unlikely to succeed in abolishing the income tax within the next four years, the administration’s actions are already reshaping federal tax policy, including by gutting the Internal Revenue Service. As of May, some 20,000 employees had accepted voluntary separation offers under a programme designed to shrink the agency’s workforce, which is expected to decline by nearly one-third this year – and some reports suggest that there could be deeper cuts, reducing the IRS workforce by half.The consequences of these cuts will be profound. Wealthy individuals, whose income often flows through complex business structures, will be far more likely to underreport earnings when oversight is limited. 

But working- and middle-class Americans, whose wages are typically reported directly by employers, will have no such option. A weakened IRS disproportionately benefits the wealthiest by making tax evasion great again. How, then, does the administration intend to respond to the rising deficit that will result from this loss of revenue? With further budget cuts, of course. Social programmes for the most disadvantaged, such as Medicaid and Medicare, will be the first on the chopping block. And over time, such policies will exacerbate economic inequalities and drive further concentration of wealth.

We are already witnessing a dramatic rise in the share of wealth owned by the super-wealthy. According to my calculations, based on data from Forbes and the US Federal Reserve, it took four decades (1982-2023) for the share of wealth owned by the top 0.00001 percent (19 households today) to grow from 0.1 per cent to 1.2 per cent. But in just one year, 2024, this share jumped to 1.8 per cent – representing about $2.6 trillion. That is the biggest one-year increase on record, and Trump wasn’t even in office.

The international implications of these US tax and trade policies are no less profound. After decades of financial integration, decisions made in Washington inevitably reverberate globally. Nearly 50 per cent of shares in US-listed companies are now held by foreign investors – a dramatic increase from just 5 per cent in the 1980s. When US corporate taxes are cut, as congressional Republicans hope to do again this year, the gains, whether from higher dividends or higher stock valuations, go not only to American shareholders but also to the wealthiest individuals worldwide.

Gobal standard

That means the debate over tariffs and income taxes is no longer a purely domestic issue. As US income taxation comes under threat, and as the effects of US policies are exported abroad, the concentration of wealth could accelerate globally. But it is not too late to act. The best response that other countries can mount is not to escalate a tariff war, which would benefit no one. Rather, it is to target US multinationals and their owners directly. The world needs tariffs not for US exports, but for oligarchs.

To that end, other countries should make market access to foreign multinationals (and their main owners) conditional on their paying a minimum amount of tax. Any country can do this on its own; but the larger the coalition, the greater the chance of establishing a new global standard. If billionaires refuse to pay taxes, market access for the firms they own should be denied. Trump’s desire to turn the clock back to the late nineteenth century spells doom for the US and would accelerate the trend toward fragmentation, yawning inequality, and the erosion of public trust worldwide. Twenty-first-century challenges demand forward-looking solutions that align economic integration with fiscal fairness. The current chaos offers a critical opportunity to develop alternatives.

(Zucman is a professor of Economics at the Paris School of Economics and École normale supérieure, France) 

-Project Syndicate