The fact that everyone is surprised that the new administration will actually pursue what it perceives is in the national interest underscores the fact that nobody took what politicians said seriously anymore — until now. Whether you are for or against the new U.S. administration, people are playing for keeps again.
The Overton window has been opened to its maximum extent. Action is immediate. Trump can say something previously considered outrageous such as "We want to buy Greenland" and Greenland can say "We don't want to be bought" or "We're for sale" as it chooses. There is now nothing a priori illegitimate about that exchange though many, especially the most refined pundits are shocked and even offended by such directness. This is perhaps why so many bien pensants shudder at the sight of DJT. He is redolent of all the bareness they spent so much time leaving behind.
Yet for all that, it signifies that in Trump's world, one ought to take things at face value. If you shout "open borders" you should mean it seriously, not just metaphorically. Yelling "death to Israel" means exactly that with all the attendant consequences. If you don't mean exactly that, say what you do mean.
One of the subtle goals of this new impolitesse is to restore meaning to language. For years the left has neutered words through Doublespeak. Undocumented migrants were illegal aliens, reproductive choice a name for abortion, gender-affirming care a euphemism for castration. Now the wheel has turned and abortion is now called abortion.
In this spirit, we are bound to accept that a 25% tariff was imposed on most goods from Canada, with an exception for energy products (oil, natural gas, and electricity, which face a 10% tariff) and a 25% tariff on most Mexican imports in response to what the U.S. calls inadequate border security and the influx of drugs, particularly fentanyl, from these countries is for real. Canada's 25% retaliatory tariffs on U.S. goods and Mexico's somewhat lower response must also be regarded as also being in earnest. Let's consider these actions in a serious light and think about their effects.
Income tax and tariffs are to some extent, rival policy strategies. They are different ways of raising the money for government. They have different effects on industrial architecture, income distribution, and economic growth, but they do basically the same thing: fund the state.
The question of which is better is both an empirical one and a value choice. Tariffs are associated with domestic industry protection and fixing trade imbalances while tax policy is better suited to income redistribution and social goals. Politicians might use tariffs to reduce taxes but it would hardly make sense to raise both.
Reports suggest that DJT plans to establish an "External Revenue Service" aimed at collecting tariffs, duties, and other revenue from foreign sources while announcing that he will slash the IRS. So the implied part of Trump's tariff strategy is that it will be offset by a reduction in income taxes. It is part of a sequence. As the Straits Times put it:
A few days ago, [Trump] he mused to reporters that income taxes might wither away, as tariffs become the main sustenance for America’s US$6.8 trillion (S$9.3 trillion) annual federal budget. Mainstream economists are largely sceptical of Mr Trump’s faith in tariffs as a game-changing tool for raising revenue or as an effective way of nurturing the return of domestic industries that have withered under global competition.
Justin Trudeau, for ideological reasons, would likely be unable to follow suit, forfeiting the tax tool that is so useful in redistributing income. In a trade war, Trudeau's party would bear a double burden while Trump can try to offset one with the other because they are not part of a wider Trudeau strategy, simply a reaction to an external one.
Trump's gambit may not work on its own terms. ABC News writes that "experts cast doubt on whether the lost revenue could be replaced with tariffs." But it is not a goal in isolation, rather a component of a real shift, part of a bigger picture. As already noted, experience should have taught observers to take Trump seriously. He actually wants to change how things work.
What would a world with no or a much lower federal income tax look like for Americans? For an average family, the effective federal income tax rate might be around 15% including Social Security and Medicare (though some put it closer to 18%). A reduced income tax has the potential to partially mitigate the effects of tariffs and possibly lead to higher growth, though by how much is hard to say. But even more disposable income is not the final goal, rather probably part of an overall strategy to bypass and neutralize what the administration team really sees as fundamental constraints to transformative growth:
- A lack of system integrity, including open borders;
- The debasement of currency; and
- The balkanization of the Federal Government into satrapies and self-referential factions.
Getting those under control is the administration's probable focus of operations, its perceived center of gravity. After decades of political spin, this strategic seriousness may come as a shock. Many of those who voted for Trump's second term didn't expect much more than the same old, same old: a repeat of the first term, augmented by a little. But the transition and first days have both elated and alarmed populist supporters into realizing that perhaps real change is being attempted, that new minds are in charge, that we are in a 1776, 1860, or 1945 moment.
But the elation is tempered with fear, as it must also have been for those who lived in the hallowed past, which is now safely admirable in retrospect but while events were then unfolding held so many dangers yet unforeseen. There is an eagerness to go on but wariness too. Many things can go right and an equal number can go wrong when change sweeps through the fundamentals instead of rearranging the superficials. For better or worse, the action is now taking place among the cornerstones. Whether you are outraged or delighted, perhaps even both at once, things are once more consequential.
