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Kent Smetters, faculty director of the Penn Wharton Budget Model, is challenging the narrative that tariffs are a tool for protecting domestic industry. In a recent interview with Fortune<\/em>, Smetters held forth on what he said was his long-held view that broad-based tariffs are a \u201cdirty VAT\u201d (value-added tax)\u2014a policy he believes is significantly more damaging to the U.S. economy than traditional tax increases.<\/p>\n While economists generally view a broad-based, flat VAT as an efficient method for raising government revenue, Smetters distinguishes tariffs as a \u201cdirty\u201d variation because they are far less uniform. A standard VAT applies broadly, distorting decisions primarily between spending now versus saving for later. Tariffs, however, target specific goods, causing consumers and businesses to shift behavior in inefficient ways to avoid the tax.<\/p>\n Even more, Smetters said, despite the tariffs being pitched as a deficit-reduction tool that will bring in revenue that makes a material difference on the United States\u2019 $38.6 trillion national debt, he sees it another way. <\/p>\n \u201cWe have a lot of debt, and we are going to be floating more and more debt along our current baseline,\u201d Smetters said, adding he sees a future ahead in which investors demand a higher return to keep investing in the U.S., and a \u201cfeedback effect\u201d that will just keep driving the debt higher, far out into the distance.<\/p>\n The Supreme Court has been weighing the legality of many of Trump\u2019s tariffs since hearing arguments in November, with several Trump-appointed justices having sharp wording on the issue. Their decision may come down as soon as Friday. <\/p>\n A central flaw in the tariff strategy, according to Smetters, is the misunderstanding of what America actually imports. He notes 40% of imports are not final goods destined for store shelves, but intermediate inputs used by U.S. companies to manufacture their own products. Consequently, tariffs act as a tax on American producers, raising their costs and making them less competitive globally.<\/p>\n \u201cThe idea that this is pro-American is actually just the opposite,\u201d Smetters said. \u201cIt hurts American manufacturers.\u201d He cited the example of companies like Deere, arguing the U.S. economy benefits when such firms focus on high-margin intellectual property rather than producing low-margin components like screws or steel strips. By taxing those inputs, the policy effectively penalizes domestic production.<\/p>\n Deere has repeatedly quantified tariffs as a major cost item, revealing roughly half a billion-dollars worth of costs for the full 2025 fiscal year and projecting a $1.2 billion hit for 2026. Management has described tariffs (on metals and specific imported components) as causing \u201cmargin pressures\u201d and weaker operating profits, even when revenue has held up. To Smetters\u2019 point, Deere has evaluated and renegotiated supply contracts and considered shifting some sourcing and production footprints to reduce tariff exposure and input?cost increases.<\/p>\n Americans shouldn\u2019t want Deere to be sourcing steel and screws, he argued. <\/p>\n \u201cThat\u2019s really low-margin stuff,\u201d he said. \u201cWe want them to focus on the really high-margin intellectual property that they do.\u201d He added he thinks this is \u201creally missing\u201d from the wider discourse.<\/p>\n Smetters shared Penn Wharton Budget Model projections that show, while the immediate impact of tariffs might seem manageable\u2014potentially reducing GDP by only 0.1% in the first year\u2014the long-term outlook is grim. Smetters projected a GDP reduction of roughly 2.5% over 30 years, considering the impact on the debt this dirty tax would add through escalating debt interest payments.<\/p>\n The primary driver of this decline is this \u201cmassive feedback effect\u201d on U.S. debt. As American companies become less efficient and the government floats more debt, Smetters explained global investors will demand a higher return (or risk premium) to hold U.S. Treasuries. In that sense, the tariffs problem is really a national debt problem.<\/p>\n \u201cThink about U.S. Treasury bonds,\u201d he said, predicting investors in the U.S. will demand a higher return to invest. \u201cWhat happens if the private market now has to pay a higher return to attract investments because it has higher costs?\u201d <\/p>\n The only result, he said, is Treasuries will pay a higher yield to investors over a longer and longer time. The U.S. runs a real risk of turning into Japan, a favorite doomsday prediction from macro analysts such as Societe Generale\u2019s Albert Edwards, which has been paying upward of 25% of its revenue on interest payments since its stock-market bubble popped in the early 1990s. The U.S. is due to pay $1 trillion in interest payments next year, he noted, \u201cand climbing.\u201d<\/p>\n To illustrate the inefficiency of tariffs, Smetters compared them to a hypothetical hike in the corporate income tax, which is typically considered the least efficient way to raise revenue. He estimates that to raise the same amount of revenue as the proposed tariffs, the U.S. would need to raise the corporate tax rate from 21% to 29%. However, the economic damage caused by the tariffs would be \u201c2.5 times worse\u201d than that corporate tax hike.<\/p>\n Smetters clarified that he\u2019s not saying that he\u2019s in favor of raising the corporate income tax revenue\u2014he\u2019s not advocating for any policy in particular in general\u2014but essentially he\u2019s surprised that Trump has found a new form of the most inefficient tax increase possible. \u201cWell, Trump just found a new one. It\u2019s even more inefficient than that.\u201d<\/p>\n Smetters noted a \u201cdestination-based\u201d tax proposed in 2016 could have achieved similar revenue goals more efficiently. However, that proposal was effectively killed by major retailers, including Walmart, who feared it would raise their import costs. Instead, the U.S. is left with what Smetters calls a \u201cdirty\u201d alternative\u2014a sales tax disguised as trade policy that risks hindering the very growth it promises to protect.<\/p>\n<\/div>\n #Trumps #tariffs #dirty #tax #trillion #national #debt #crisis #worse<\/p>\n","protected":false},"excerpt":{"rendered":" Kent Smetters, faculty directo… <\/p>\n","protected":false},"author":1,"featured_media":23280,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[2],"tags":[359,575,11978,1108,860,490,491,227,1628,496,131],"_links":{"self":[{"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/posts\/23279"}],"collection":[{"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/microvibenews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=23279"}],"version-history":[{"count":0,"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/posts\/23279\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/microvibenews.com\/index.php?rest_route=\/wp\/v2\/media\/23280"}],"wp:attachment":[{"href":"https:\/\/microvibenews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=23279"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/microvibenews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=23279"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/microvibenews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=23279"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\nThe \u2018corporate tax\u2019 in disguise<\/h2>\n
Long-term debt spiral<\/h2>\n
Worse than a corporate tax hike<\/h2>\n