Shafaat Khan from Syracuse University will present “Tariff Tax Cut: Tariffs as Revenue” (joint with George Alessandria, Jiaxiaomei Ding, and Carter Mix).

Abstract: We study the aggregate effects of a permanent change in tariffs on the US and rest of the world when tariff revenue is used for fiscal reform. Our model combines a standard international model of fiscal policy and a dynamic model of firm entry, exporter dynamics, and tariffs that allows for uncertainty and transitions. We consider both unilateral and cooperative changes in tariffs, and study cases where tariff revenue is (1) rebated lump sum to households, or used to (2) reduce labor taxes, (3) reduce capital taxes, or (4) subsidize investment. We find that with a lump sum rebate, the optimal tariff is negative, even without foreign retaliation, as tariffs worsen existing distortions from markups and taxes. The optimal tariff can be positive when revenue finances a fiscal reform. It is highest (18 percent) when there is no foreign retaliation and revenue is used to subsidize investment, as investment subsidies directly offset the effect of tariffs on investment prices. Estimates of the optimal tariff based on the long run of the model are 50 percent higher than those including the transition and the welfare gains are overstated by more than 100 percent. We also study the Dynamic Tariff Laffer Curve. With gradual substitution toward domestic goods, an increase in tariffs yields more revenue in the short run than in the long run. The tariff that maximizes the present value of tariff revenue is less than half the tariff that maximizes first quarter revenue.