Tad DeHaven
As the economic damage from the president’s tariff fanaticism continues, the Trump administration is reportedly considering using tariff revenue to finance a planned US Sovereign Wealth Fund (SWF). The federal government having an investment fund is a bad idea, and financing it with tax increases on American businesses and consumers would add insult to injury. Moreover, tariff revenue can’t remotely pay for everything the administration claims it can.
A US SWF makes no fiscal or economic sense (see here and here for more).
Beyond that, an SWF raises political concerns. Government-controlled investments would invite corruption, cronyism, and political interference. It could become a slush fund, vulnerable to manipulation by the current and future administrations. Trump’s record of bullying businesses is well established, and Democrats could later use it to push a progressive agenda.
Taxing American businesses and consumers via tariffs to fund an SWF would transfer resources and returns from the private sector to the government. That’s bad enough, but the administration suffers from the delusion that tariffs are a magic bullet capable of achieving multiple ends.
Speaking at a recent event, Treasury Secretary Scott Bessent brought up the administration’s three-legged tariff stool:
One, [tariffs are] a good source of revenues. Two, it protects our important industries and their employees. And three, [Trump has] added a third leg to the stool and uses it for negotiating.
How can tariffs be a good source of revenue if they’re a negotiating tool? One day, Trump says tariffs are being imposed. The next day, he says they’re not. The day after that, he says some are, and some aren’t. Unpredictability begets revenue instability—not to mention economic instability.
Similarly, how can tariffs be a good source of revenue if the goal is also to protect domestic industries? US industries will receive protection if tariffs drive up the price of goods from foreign competitors, causing Americans to switch to domestic producers. But, in that event, the reduction in imports would reduce the government’s tariff revenues.
This is, as Scott Lincicome and Adam Michel explain in more depth, “economic schizophrenia.”
Tariffs are regressive; thus, mass tariff hikes would hit lower-income families the hardest. Bessent claims price increases would be mitigated by using tariff revenues to pay for income tax cuts benefitting the bottom 50 percent of taxpayers. National Economic Council Director Kevin Hassett likewise claims that “everybody can be better off” by replacing income tax revenue with tariff revenue.
The best that can be said here is that the administration is at least admitting tariffs will result in higher prices for Americans. Otherwise, the notion that tariff revenue can replace income tax revenue is a fantasy. (For a detailed evisceration, see here.) The bottom line is that even if the math did add up (it doesn’t), the consequences would make the past three weeks look like an economic boom.
Only in an alternate reality can tariffs fund a sovereign wealth fund, replace income tax revenue, reduce the federal debt, lower the price of groceries, combat inflation, etc. In the real world, the Trump administration’s confused, incoherent approach to economic policy is proving to be the equivalent of shooting oneself in the foot.