US: Trump tariffs unlikely to be (successfully) merged with 1H tax plans

• Post-election reporting (e.g. here, here, here) suggests that the Trump economic team is considering attempting to implement its tariff plans through Congress, as a component of a 1H otherwise-tax-focused budget reconciliation package.

• The most likely ‘candidate’ tariff type for inclusion in such a package would be President-elect Donald Trump’s threatened 10-20% ‘universal’ tariff.
• There are certainly reasons to take this plan seriously, as including said-tariff into a congressionally-approved measure would:
  • Preemptively resolve any legal challenges potentially implied in the use of the International Emergency Economic Powers Act (IEEPA) ‘against the whole world’ (when the provision was initially envisioned as a more targeted tool).
  • Help offset the cost of extending of the Tax Cuts & Jobs Act (TCJA), reducing the corporate tax rate, and other Trump 2.0 fiscal plans.
    • (Estimated cost: “The cost of extending the 2017 tax cuts […] has expanded to $4.6 trillion, according to new estimates from [the Congressional Budget Office]” (Source)
    • Potential offset, per the Tax Foundation:
      • “[A] 10 percent universal tariff would generate $2.7 trillion […] and a 20 percent universal tariff would generate $4.5 trillion of customs duty revenues”.
      • Though “the dynamic scores are smaller: $1.7 trillion for the 10 percent tariff and $2.8 trillion for the 20 percent tariff”.)
  • Signal (both to China / international counterparts and to domestic US producers) that they are set in stone / will not be easily reversed.

• At this early stage, however, we are skeptical that this route (merging tariff and tax plans) will indeed be (successfully) taken, for the following reasons:
  • First, it is worth noting that while ‘pay-fors’ may be attractive to the Trump administration, they are not required under the budget reconciliation rule. In other words, there is no ‘need’ for the Trump team to operate this complex merger:
    • “[The] Byrd Rule […] bars reconciliation legislation from including provisions that increase the deficit outside of the budget window” (Source)…
      • But this requirement can be sidestepped as long as deficit-increasing provisions (in this case tax cuts) sunset before the end of the budget window is reached.
    • This is precisely how Republicans passed the initial TJCA package:
      • “Republicans decided it would be all right to go into debt up to $1.5 trillion to fund the tax cut […]The official estimate […] came in at $1.46 trillion.” (Source)
  • Second, we expect that while some on the president-elect’s team would find the tie-up attractive, (many) House representatives and Senators will balk at the prospect of being forced to vote for a policy (tariffs) that is:
    • Politically-contentious (incl. because inflationary); and
    • Goes against (some of their) pro-business beliefs.
  • Third, while legislating expansive tariff plans would have the ‘benefit’ of anchoring them, the flipside of this feature would also be to make it much harder for the Trump executive team (and the president himself) to modify/adjust them at will once passed into law.
    • For instance, while we (have long) believe(d) the incoming administration will feel perfectly comfortable imposing tariffs at or higher than 10% on China and the EU, President-elect Trump may feel uncomfortable at the idea of not being able to negotiate his own tariffs down at will with partners such as India, the UK, or Japan.

• In conclusion, at this stage, we would instead expect:
  • ‘Clean’ (i.e. standalone) passage of tax plans via reconciliation in Congress,
  • with a ‘promise’ of tariff revenue,
  • implemented via executive action.