Donald Trump recently floated the idea of abolishing the income tax system. The presidential candidate introduced a protectionist idea instead: higher tariffs.
The popular idea does not mathematically work. The government would need tariffs of 70% to offset income lost from the replaced income tax. Furthermore, tariffs that big would cause other countries to react. They would introduce tariffs that big. This would result in a sharp drop in U.S. exports. The plan would hurt U.S. firms that depend on sales to other countries.
Profits for conglomerates like P&G (PG), J&J (JNJ), Colgate (CL), and 3M (MMM) would likely fall. Domestic sales would fall, too. Companies would pass import tariffs to consumers. As a result, it would accelerate inflation and decrease demand. That would slow the economy, which is already fragile.
After U.S. trading partners hike tariffs in response, the U.S. would need to increase government spending. Its impact on inflation is likely stimulatory.
Tariffs are a form of regressive taxation. The people in the lower class of society would end up paying more taxes. Conversely, the rich who have tax deferral or minimization schemes would pay less tax.
The world will watch the U.S. elections in November closely. The winner will have an impact on domestic and global markets.
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