US General Tariff and Capital Tax Effects

Motivation is offered for the scenario in which a large country, such as the US, imposing a general tariff, would make its citizens worse off. Notwithstanding revenue gains toward fiscal balance, standard theory anticipates contracting welfare. Incorporating monetary policy effects sees the potential for negative effects larger than the standard dead-weight efficiency losses if the monetary response is restrictive enough to target inflation. A global model is then used to simulate the effects a US general tariff, demonstrating that, while trading partners would be hurt by the tariff, the US economy would also contract, unless its own monetary policy were sufficiently expansionary to sustain the value of financial assets. Nonetheless, the tariff effects are also shown to be dwarfed by those of a proposed capital income tax break, which redirects investment to the US and would yield larger domestic gains and larger, more punitive, foreign losses. If trading partners retaliate in kind there is no welfare equilibrium under which the US adopts a general tariff only, though, under most criteria, the combination of tariffs and capital income tax relief turns out to be a dominant strategy for both the US and other regions.