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Trump's plan to hike tariffs instead of raising taxes could cause the 'mother of all stagflations,' policymakers warn

Donald Trump with a microphone.
Bill Pugliano/Getty Images
  • Trump's idea to replace the US income tax with tariffs notched criticism from two Treasury secretaries.

  • "This is a prescription for the mother of all stagflations," Larry Summers told Bloomberg TV.

  • The current secretary, Janet Yellen, said it would make life unaffordable for Americans.

Janet Yellen and Larry Summers haven't always agreed on everything, but a new tax proposal from the Trump campaign earned a strong rebuttal from both the current secretary of the Treasury and the former one.

The idea, floated by former President Donald Trump to Republicans last week, would slash income taxes by raising tariffs on imports. While the proposal is said to have gained quick support from those present at the meeting, it has since been blasted as a surefire way to worsen inflation and dent US competitiveness.

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"This is a prescription for the mother of all stagflations," Summers told Bloomberg TV on Friday, calling it the worst policy proposed in US history.

The chief concern is that tariff revenue provides nowhere near as much income to the government as taxes do, with income tax responsible for close to half of US revenue last year. To eliminate individual taxes, tariffs would need to climb well over 100%, Yellen, the current Treasury secretary, told ABC News.

When import levies rise, that typically causes foreign traders to raise prices or pull their products. When that happens, supply falls, and domestic products appreciate, according to the nonpartisan think tank Tax Foundation.

"The impact would be to make life unaffordable for working-class Americans," Yellen said. "That would harm American businesses."

But to Summers, that's the least of it. He compared the moment to the Smoot-Hawley Tariff Act, an infamous 1930s bill that's blamed for worsening the Great Depression.

"If you replaced half of income-tax revenues with tariffs, those would be tariffs six times Smoot-Hawley levels," he said, adding that Trump had proposed replacing the entire system.

This could cause enormous damage to US exporters and consumers and send the world spiraling into "economic warfare" as countries responded, Summers added.

But to the GOP donor and billionaire investor Kyle Bass, Trump's idea is probably hyperbole, as it's just not feasible. Talking on CNBC, he pointed out that last year's import volume amounted to $3.8 trillion, while tax revenue is estimated to reach $5.4 trillion this year.

"There is just no way to run an import-tariff scheme to get you to $5.4 trillion," the Hayman Capital chief investment officer said.

Still, chances are high that a Trump White House would unleash tariffs in one form or another. The former president has made import duties a fundamental component of his trade policy, and not only to relieve income tax.

He's additionally discussed applying a universal 10% tariff rate on all US imports and raising it up to 60% for Chinese goods. Trump has argued that this will end the exploitation of US trade and give domestic producers an edge.

Read the original article on Business Insider