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Written by: Tim Pierotti
There has been no shortage of debate and analysis regarding our new tariff regime, but one vital part of the story has been largely ignored. The President and his Commerce Secretary Howard Lutnick have been very clear that they intend for the taxes collected “externally” to replace some of the taxes collected internally. In other words, the goal is to replace progressive taxes (higher rates for higher income) with regressive taxes (lower income people pay more taxes as a percentage of income). This is not a political comment. The very rightward leaning Heritage Foundation wrote,
“Tariffs are just taxes on Americans by another name. However, some Americans shoulder a larger burden under protectionism than others. Unlike our progressive income tax, taxes on imports (tariffs) are regressive and take a bigger percentage of income from poor families. Lower-income individuals and families thus may bear a significant burden from tariffs, while those of more comfortable means are not as affected.”
Think back to the pandemic era stimulus checks sent out to Americans under a specific income level in 2021. PCE (Personal Consumption Expenditures) in the first quarter of 2021 grew an explosive 30%! The lesson learned from that experience is that when you give cash to people with no savings, they spend it. The risk that we see is that the opposite dynamic. According to recent estimates from The Budget Lab at Yale, Americans in the bottom quartile of income distribution will soon incur over $2000 of annual cost of living increases.
Consumer confidence has taken a significant hit over the last couple of months and the impact of tariffs has not even materialized yet. Barring a policy reversal from the Trump administration, it is hard for us to envision an economic scenario that does not involve a recession when such a large cost of living shock is looming for working class Americans.
Related: The Mill Is Never Coming Back