OPINION:
Congress should support President Trump by passing a “big, beautiful” tax bill now.
After posting strong 2.8% growth in 2024, gross domestic product fell 0.3% in the first quarter. This doesn’t have to herald a recession, but tax relief is needed to avert risks.
The disappointing winter performance was caused by retailers, manufacturers and private individuals stocking up on imported consumer goods and business supplies ahead of the April 2 “Liberation Day” tariffs.
Exports also grew, but increased foreign purchases were a potential subtraction from GDP. Many were stashed in business inventories, which count positively as investment in computing GDP, but the net impact of the import surge still subtracted 2.6% from GDP.
Put another way, if businesses and consumers had not rushed to buy capital goods, new cars and appliances before tariffs boosted sticker prices, GDP would have grown about 2.3%, roughly in line with growth over the past two years.
Business investments in equipment and software were particularly robust.
Increased duties on autos, steel, aluminum, Mexico and Canada, a potential 145% tariff on most Chinese imports and a 10% tariff on most other foreign goods would raise the average tax on imports by 20 percentage points.
That’s a $700 billion excise tax, more than 2% of GDP, and a mammoth fiscal brake.
Add in the multiplier effects of unemployed workers and other hesitant consumers cutting back, and the tariffs could further slice growth.
If continued, those could easily lead to a recession. Specifically, economic forecasters in January were expecting 2% growth for this year. Instead, owing to the tariffs, GDP could contract by three-tenths of a percentage point.
However, U.S. importers will significantly lower the tax take from the tariffs by shifting purchases from high-tariffed jurisdictions, such as China, given its political and security risks, to lower-tariffed countries such as Vietnam and Mexico and domestic suppliers.
The 145% tariff on Chinese goods, even if permanently lowered to 30%, would significantly raise prices for many everyday products. Adequate alternative manufacturing capacity elsewhere in the U.S. or other countries can’t be found quickly.
Inflation will accelerate, and store shelves will be bare for some items. The potpourri found on Amazon will shrink.
Importantly, U.S. manufacturers will run expired inventories of some imported components as supply chains seize up.
This mix of mitigating and aggravating effects is difficult to put into econometric models. Just as large corporations can’t offer earning guidance until the tariff picture clarifies, economic projections of the impacts of Mr. Trump’s tariffs should be taken with a lump of salt.
Major unknowns include the scope of new trade agreements the administration is negotiating with major trading partners. If those slash tariffs and accomplish genuine progress on nontariff barriers, the gains may prove worth the near-term upheaval. However, little will have been accomplished if those only derail reinstatement of the higher reciprocal tariffs temporarily suspended on April 9 and secure commitments to purchase more U.S. energy and other commodities and continue endless negotiations on tougher issues.
Near-shoring, friend-shoring and reshoring manufacturing will accelerate, and the economy will need a fiscal boost.
Mr. Trump’s most significant challenge is sequencing. He can raise tariffs quickly, but Congress takes months to cut taxes.
Simply extending the provisions of the 2017 Tax Cuts and Jobs Act that expire at the end of this year would keep fiscal policy unchanged. It wouldn’t mitigate the effects of Mr. Trump’s bigger taxes on imports.
To avert the drag on growth from Mr. Trump’s trade war, we need additional tax cuts of about $300 billion, about 1% of GDP. That would compensate for the boost to federal revenue from the recent tariffs without adding to the deficit.
The reconciliation process for writing a tax bill in Congress forces Republicans to plan in about 10-year intervals and in terms of grand spending reforms and issues such as inequality, for example, tax breaks for tips, overtime and Social Security benefits. In the long run, however, we are all dead.
Tax relief is needed immediately. At a minimum, any new benefits should be retroactive to April 1.
Cutting interest rates won’t pack the necessary punch, and Mr. Trump should stop hectoring Federal Reserve Chairman Jerome Powell.
Consumers need more disposable income to deal with the inflationary effects of the tariffs on everyday items, and businesses need the opportunity to keep more after-tax profits to finance the reengineering of supply chains and the expansion of domestic manufacturing.
So far, we haven’t seen many layoffs.
The April jobs report was encouraging, but as inventories that piled up during the pre-tariff import surge dissipate and businesses adjust to whatever more permanent trade policy regime emerges, unemployment will rise. The first quarter pause in growth could be the precursor of a tough recession or a long period of halting, slow growth coupled with rising prices.
To avoid stagflation, Congress needs to cut income taxes now.
• Peter Morici is an economist, an emeritus business professor at the University of Maryland and a national columnist.
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