This could be the largest US tax rise in half a century

Across the world, markets are plunging as they respond to the global tariffs Donald Trump unleashed from the White House rose garden last night – with the president’s top economist describing the falls as ‘short-term bumps’. The pound passed $1.30 for the first time in six months while stocks in Tokyo fell 4 per cent. On opening, the FTSE 100 fell nearly 2 per cent, despite the slightly more favourable 10 per cent levy we face compared to the 20 per cent Trump hit Europe with. How bad could these ‘bumps’ get for the US though?

Trump returned to office promising tax cuts.

Trump returned to office promising tax cuts. But however he may spin his new protectionist tariffs, many are clear that in fact they are huge tax rises. Analysts from JP Morgan this morning described the measures as ‘the largest tax increases since 1968’ – bringing in $400 billion in extra revenue. Those costs – ultimately paid by American consumers – could add 1.5 percentage points to inflation in the US, the bank said. What’s more, real disposable personal income growth (a main measure of living standards) could be pushed into ‘negative territory’. In other words, Trump’s new taxes on goods imports are likely to make the average American poorer. 

Recession fears are mounting too with the Atlanta Fed consistently forecasting GDP contraction for a number of weeks now. Borrowing costs have collapsed too as investors get out of stocks and into safe haven assets. Ten-year UK gilts have fallen sharply with even faster falls in Asia and Australia. European stocks have particularly suffered too as fears of an American recession becoming contagious begin to mount.

The aim of all this, as Kate Andrews writes this morning, seems to be about undoing the trade deficits the US has with many countries. Far from America retreating from its empire as some has suggested, the tariff calculations seem to be driven by the fear of the growing power of Asian economies and US reliance on them. These tax rises will be hugely painful for American people and businesses. But Trump seems to think it’s worth it.

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