Carey Mott is a researcher at Columbia University. Previously, he was with the Yale Program on Financial Stability and the Federal Reserve Bank of New York.
With *checks calendar* 70 days left for foreign leaders to cut deals with Trump (or not), you might expect US policymakers to prepare a Plan B in case, you know, fundamentally reshaping the global economy doesn’t work out as intended. But aside from the occasional snark on C-SPAN, Congress has been surprisingly quiet — why?
This isn’t the first time US policymakers have stayed mum on tariffs. Long before the US constitution permitted direct taxes on individuals, it allowed indirect taxes on commerce.
Throughout the 1800s, Congress thought to amend the constitution and replace tariffs with an income tax. One of the more intriguing explanations for their failure to do so comes from historian Robin Einhorn, who argues that taxing income or property would have entailed a national debate about taxing slavery, too. Slaves were, after all, property that produced income. That wasn’t a conversation the US was ready for, and so Congress relied on tariff income from 1817 until America’s Civil War.
It’s only been a few weeks since ‘Liberation Day’, but the fact that a Republican-dominated Congress has little to say about the highest duty as a share of the economy since America’s protectionist era begs the question — are policymakers OK with tariffs because they’re avoiding another hard discussion? If so, about what?
The most logical answer is a growing fear that executive-imposed tariffs are the only way to raise much-needed government revenue when Congress is perennially stalled. If we can’t cut entitlements or raise taxes, maybe we have to rely on tariffs?
Hopefully, America drops its protectionist measures altogether. But in case it doesn’t, let’s be clear: a tariff is just an inefficient, regressive tax, primarily burdening American consumers. Former Treasury secretary Larry Summers claims (without providing much in the way of workings) that it may cost a family of four $300,000. Others say it’s a more sober $1,000–3,000 per person. But most agree that, if the tariffs are fully reactivated, they’ll constitute one of the largest tax hikes since Congress passed the Sixteenth Amendment in 1913 and ended the tariff era — or so we thought.
So, sure, a broad universal tariff that exempted free-trade partners and critical imports could provide additional government revenue. And whether or not it actually materialises, Republicans are sure to use “tariff revenue” to justify an extension, come December, to Trump’s first tax bill, the Tax Cuts and Jobs Act (TCJA) of 2017 — a sweeping series of tax cuts.
But has tariff chaos created policy space for a more radical re-engineering of America’s revenue machine? Many of the 2017 cuts were promoted in then-House Speaker Paul Ryan’s 2016 blueprint, “A Better Way,” the result of eight years of Ways and Means Committee meetings. But the final TCJA (which ended up costing three times as much as Ryan’s blueprint) was remarkable for what it didn’t include: the destination-based cash flow tax, or Dbcft — the wonkiest, and most controversial, part of the Ryan’s blueprint.
The core idea is a basic border-adjusted tax, which taxes goods consumed domestically and exempts exports. So, if a corporation ships spark plugs to Mexico where they’re used to assemble cars, the profit the company makes on the spark plugs it exports isn’t taxed. In other words, tax where a good is consumed, not where it’s produced. Critics offer many reasons why border-adjusted taxes might not work for America, but the Dbcft has a twist.
Rather than taxing profit, or revenue less expenses, the US would levy the tax on corporations’ cash inflows net of outflows, with the hopes that businesses stop hoarding cash and start investing more. To its proponents, this “cash flow” design solves the main shortcoming of other protectionist measures (like tariffs), which is that they’re fundamentally anti-production.
When Republicans swept The White House and Congress in 2016, Ryan and House Ways and Means Committee Chair Kevin Brady went on a roadshow to win political support for the tax. The tax burden was expected to be a wash. But as one economist at the non-partisan Tax Foundationput it, the Dbcft was “ahead of its time, wasn’t well understood, and was sold in a way that wasn’t right for the political environment.” The tax was broadly protectionist, but our approach to global trade wasn’t (yet).
Back then, exporters didn’t mind the Dbcft, but large retailers who stock imported goods, like Walmart, lobbied hardest against it. What sunk the tax in 2017 was the fact that American companies saw it as too much like a tariff. Today, some enterprising Republicans may try selling the Dbcft again — because it seems so much better than tariffs.
Why would the Dbcft fare better in 2025 than it did in 2017? Well, as companies begin striking bilateral deals with The White House, the inevitable corruption that follows may have business lobbying for a level playing field. (After all, it was rampant corruption during the protectionist 19th century that helped motivate a blanket income tax.) But the root of business’s pushback is burrowed in the fact that, in 2017, the alternative to new taxes was… no taxes. Now, the alternative to new taxes is basically:
Faced with a predictable, fair Dbcft or a discretionary, ever-changing tariff that complicates capital investment, importers may join exporters in supporting the tax (at least, those companies that survive).
Of course, there were other reasons the Dbcft failed to make the TCJA. Despite Peter Navarro’s support for it, Trump opposed it, saying it was too complicated. Trump also hates Europe’s value-added taxes (VATs), which operate in a similar way. But is he above imposing a VAT of his own? Indeed, most of America’s trade partners border-adjust their taxes, so levying such a tax would be more “reciprocal” than imposing 10 per cent baseline tariffs, including on free-trade partners.
There remain sticking points, too. One consequence of a border-adjusted tax is that US exports, rendered tax-free under the Dbcft, would become cheaper — which should, all else equal, strengthen the dollar. But I imagine Robert Lucas would have a field day with this. We’re no longer launching policy from some general equilibrium — today, ceteris paribus is as meaningless as lorem ipsum. At any rate, if businesses are lobbying Trump on pro-investment tax policy, he might just learn to live with a strong dollar. In the meantime, if baseline tariffs drive consumer prices higher, one of the main arguments against border-adjusted taxes — that they’re inflationary — falls away.
Congress may be silent on tariffs for a lack of new ideas, but as the president’s trade policy sows discord in red states, some orthodox Republicans may dig in the dustbin for old ideas. The longer the Liberation Day hangover lasts, the more businesses will beg for stability — and the more palatable the Dbcft becomes.
Now, if only someone could get the president alone for a minute to explain it in a simple way.
