Wharton professor and Penn Wharton Budget Model faculty director Kent Smetters said that tariffs will not reduce the federal deficit in the long term at a National Association for Business Economics event on Oct. 13.
During the talk, Smetters detailed that his research has determined that tariffs damage the economy and will not reduce the deficit. He compared the tariffs to a value-added tax, a form of consumption tax placed on a product or service whenever value is added at each stage of the supply chain.
“One way you can think about a tariff is that it’s like a dirty VAT along with closing off international capital,” Smetters said at the event.
The Trump administration has sought to use tariffs as a tool to reduce the federal deficit, citing a Congressional Budget Office analysis that estimated that tariffs implemented through August would “reduce total deficits by $4.0 trillion altogether.” In a post on his social media platform Truth Social, 1968 Wharton graduate and president Donald Trump called his tariff strategy “incredible.”
While the tariffs are projected to raise significant revenue, some think they hurt the health of the United States economy overall. An April PWBM report supervised by Smetters found that the tariffs would reduce long-run GDP by approximately 6% and wages by 5%, twice as much as a revenue-equivalent hike in the corporate income tax rate from 21% to 36%.
Smetters called tariffs an “extraordinarily inefficient” effort to reduce the deficit.
“Governments have to sell this explosive growth of debt into a more narrow capital market, and that means even lower prices, higher returns,” he added at the event. “That’s really where you get the most negative effects over time.”
Last year, a PWBM analysis found that Trump’s campaign tax and spending proposals would increase primary deficits by $5.8 trillion over the next decade, despite their potential to generate trillions of dollars in revenue.
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“While new import taxes and tariffs could raise several trillion dollars in new revenue over the next decade, they could also lead to revenue losses due to potential retaliatory actions from other governments and other economic dynamics,” the analysis read.
Critics of Trump’s plan have noted that the biggest impact of tariffs on the economy will likely be an increase in consumer prices. The Digital Data Design Institute’s Pricing Lab, a Harvard University data collection source which tracks the impact of the tariffs, has estimated that retail prices of imports are up 4.4%.
In April, Wharton finance Professor Emeritus Jeremy Siegel called Trump’s tariff plan the “biggest policy mistake in 95 years.” Siegel also stated that the tariffs will result in higher inflation and slower growth.
