Candice Horbacz
A recent analysis published in The Wall Street Journal by Stephen Miran, former chair of the White House Council of Economic Advisers, posited that the tariffs implemented by the Trump administration represented an improvement in tax policy. Miran’s central argument suggested that the burden tariffs place on imported goods is effectively neutralized by full expensing provisions, allowing businesses to immediately deduct the full cost of certain investments. He concluded that, under current policy, intermediate goods are "largely untariffed" due to this offsetting mechanism. However, a detailed economic assessment reveals that this assertion is mistaken, as tariffs continue to impose a significant burden on investment, often exceeding the benefits conferred by full expensing.
Unpacking the Economic Debate: Tariffs, Expensing, and the Cost of Capital
The debate ignited by Miran’s piece highlights a critical tension in modern economic policy: the interplay between tax incentives for investment and trade barriers. Full expensing is a tax policy that permits businesses to immediately deduct the full cost of qualifying investments in new or improved technology, equipment, or buildings. This accelerates tax savings, reduces the effective tax rate on new investments to zero, and is designed to alleviate a bias in the tax code against capital investment. By incentivizing companies to invest more, full expensing aims to boost worker productivity, raise wages, and create jobs over the long term.
Conversely, tariffs are taxes imposed by one country on goods imported from another. Historically used to protect domestic industries, generate revenue, or exert geopolitical pressure, tariffs directly increase the acquisition cost of imported goods for businesses and consumers. During the Trump administration, a series of broad-based tariffs were imposed on a wide range of goods, including critical intermediate goods (inputs used in production) and capital goods (such as machinery). These tariffs were part of a broader "America First" economic strategy aimed at reshaping global trade relationships and reducing trade deficits.
The core contention arises from how these two policies interact. While full expensing seeks to lower the after-tax cost of investment by reducing the taxable income base, tariffs raise the initial acquisition cost of imported capital and inputs. Miran’s argument implies that the immediate tax deduction from expensing effectively cancels out the increased cost from tariffs, rendering them negligible for businesses. This perspective, however, overlooks fundamental aspects of how these costs are borne and calculated within a firm’s financial structure.
The Implementation Landscape: Trump-Era Policies
To understand the full scope of this interaction, it is crucial to revisit the specific policies enacted or proposed during the Trump administration. The "One Big Beautiful Bill Act" (OBBBA), for instance, introduced permanent 100 percent bonus depreciation for short-lived assets, reinstated expensing for research and development expenses, and provided temporary bonus depreciation for manufacturing structures. These provisions were designed to significantly reduce the income tax burden on new investment, aiming to stimulate domestic capital formation.
Concurrently, the administration aggressively utilized tariffs as a trade policy tool. Beginning in 2018, tariffs were imposed on steel and aluminum imports under Section 232 of the Trade Expansion Act of 1962, citing national security concerns. This was followed by more extensive tariffs on a wide array of Chinese goods under Section 301 of the Trade Act of 1974, in response to alleged unfair trade practices and intellectual property theft. These tariffs, ranging from 10% to 25% on various categories of goods, significantly impacted global supply chains and the cost structure for many U.S. businesses reliant on imported components and machinery.
The intent behind these policies was distinct: expensing aimed to make domestic investment more attractive by reducing the tax on returns, while tariffs aimed to alter trade flows and protect domestic industries by making imports more expensive. The question, then, is whether the positive incentive of expensing could truly offset the negative disincentive of tariffs when applied to the same imported capital goods or inputs.
The Algebraic Reality: Tariffs Persist as a Burden
Economists employ the "user cost of capital" (UCC) formulation to measure the minimum pre-tax return an investment must generate to cover taxes, depreciation, and the return demanded by shareholders. This framework provides a robust method for analyzing how various tax and trade policies affect investment decisions.
The standard user cost of capital formula is represented as:
$c = (r + delta) frac(1 – uz + t(1 – uphi))(1 – u)$
Here, c is the pre-tax return or cost of capital.
- (r + δ) represents the sum of the returns demanded by shareholders (or lenders) and the cost of replacing the asset (economic depreciation).
- (1 – u) accounts for the corporate tax on cash flows, where u is the corporate income tax rate.
- (1 – uz + t(1 – uφ)) modifies the acquisition cost based on deductions, credits, or taxes.
- (1 – uz) is the tax value of depreciation deductions, where z is the present value of these deductions.
- t is the tariff rate paid on imported capital assets.
- (1 – uφ) is a term that accounts for the basis adjustment for tariffs, where φ is the corporate tax rate times the value of depreciation deductions (uz).
In general, the cost of capital (c) is higher with a corporate income tax (u) and tariffs (t), and lower with more generous depreciation deductions (z). Miran’s argument hinges on the idea that under full expensing, z equals 1, effectively neutralizing the u term in the tax value of depreciation. However, this interpretation overlooks how tariffs fundamentally alter the initial cost.
A more revealing algebraic rearrangement separates the tariff and business income tax components:
$c = (r + delta) frac(1 + t)(1 – u) (1 – uz)$
This formulation clearly shows that the tariff term, (1 + t), directly increases the entire cost of capital. Crucially, this increase occurs regardless of how generous depreciation allowances (z) are. Even in the most favorable scenario of full expensing (z = 1), where the corporate tax term effectively cancels out for the investment itself, the tariff term stubbornly remains. In this specific case, the cost of capital simplifies to:
$c = (r + delta) (1 + t)$
This equation unequivocally demonstrates that even with full expensing, the cost of capital for imported goods remains burdened by the tariff rate. A 10 percent tariff, for example, directly increases the cost of investment by 10 percent, irrespective of the expensing provision. Miran’s suggestion that tariffs are "largely untariffed" under expensing is therefore fundamentally flawed because the tariff is an upfront cost increment that is not fully offset by a future tax deduction, even if that deduction is immediate. The tariff increases the base on which the deduction is taken, but it doesn’t eliminate the initial increase in acquisition cost.
Tariffs Versus Corporate Tax: A Disproportionate Impact
Miran’s other argument suggested that imported investment might be "better off" under expensing and tariffs than it was prior to these policies. This perspective likely overstates the benefit of expensing or understates the burden of tariffs, or both. The disproportionate impact of tariffs compared to corporate income tax rates, especially on quickly depreciating machinery, is a key factor often overlooked.
Unlike the corporate income tax, which applies to the net returns generated by an investment, tariffs apply to the entire acquisition cost of the imported good. This distinction means that tariffs at seemingly low statutory rates can impose a much higher effective tax rate on investment than the corporate income tax itself.
Consider a hypothetical firm with a 5 percent discount rate importing a machine that depreciated economically at 20 percent per year. Prior to the OBBBA and its full expensing provisions, the present value of depreciation deductions (z) in this scenario might have been around 80 percent. Under this older regime, with a statutory corporate income tax rate of 21 percent, the effective tax rate on the asset would have been approximately 21 percent.
With the introduction of OBBBA, the machine would qualify for full expensing, causing its effective tax rate to drop to zero from the corporate income tax perspective. However, if a 10 percent tariff is then applied to this machine, the scenario changes dramatically. Plugging these values into the user cost of capital formula yields a significantly higher cost of capital. Even though the tariff rate (10 percent) is less than half the corporate tax rate (21 percent), the effective tax rate on the investment can surge to 33.3 percent. This demonstrates that the combined effect of expensing and tariffs can leave the investment far more burdened than it was under the prior regime, despite the benefits of full expensing.
| Policy Scenario | Statutory Corporate Rate | Statutory Tariff Rate | Depreciation (z) | Effective Tax Rate |
|---|---|---|---|---|
| Prior Law | 21% | 0% | 80% | 21% |
| OBBBA (Without Tariff) | 21% | 0% | 100% | 0% |
| OBBBA (With Tariff) | 21% | 10% | 100% | 33.3% |
Source: Authors’ calculations, adapted from original article.
This example, while simplified, powerfully illustrates that the burden of tariffs is not easily offset. The magnitude of this burden is influenced by both the statutory tariff rate and the depreciation rate of the asset. For imported assets that typically qualify for bonus depreciation, such as computer equipment and machinery, depreciation rates are often high, and the Trump-era tariffs were frequently 10 percent or more. This means the negative impact of tariffs can be substantial, especially for industries heavily reliant on imported capital and intermediate goods. Furthermore, it’s important to note that prior to OBBBA, short-lived investments already benefited from some level of bonus depreciation (e.g., 40% in 2025 and 20% in 2026 as per the original article’s context), meaning the jump to 100% expensing provided a benefit, but perhaps not as dramatic as comparing it to a baseline of zero bonus depreciation.
Beyond Expensed Assets: The Pervasive Reach of Tariffs
Miran’s argument also implicitly assumes that all capital assets affected by tariffs qualify for expensing. This is not the case. A significant portion of the capital stock, particularly structures, does not qualify for immediate expensing. Non-manufacturing structures, such as residential properties or commercial buildings, typically undergo lengthy depreciation schedules rather than immediate expensing.
While these structures themselves are generally not directly imported, the intermediate goods and materials used in their construction frequently are. For example, lumber, steel, and other building materials sourced from international markets are often subject to import duties. When tariffs are applied to these inputs, the cost of constructing non-expensed structures indirectly increases. In such scenarios, businesses face the double disadvantage of higher acquisition costs due to tariffs without any offsetting benefit from immediate tax deductions through expensing. This ripple effect means that tariffs can raise costs across a broader spectrum of the economy, affecting sectors that are not directly engaged in manufacturing or high-tech investments.
Broader Economic Implications and Policy Considerations
The sustained burden of tariffs, even in the presence of expensing, carries significant implications for the broader economy:
- Supply Chain Disruptions and Costs: Tariffs force companies to either absorb higher costs, pass them on to consumers, or reconfigure their supply chains. Reshoring or nearshoring production can be costly and time-consuming, leading to inefficiencies and reduced competitiveness. Many businesses, particularly small and medium-sized enterprises, may lack the resources to adapt quickly, leading to reduced investment and growth.
- Inflationary Pressure: Increased costs for imported inputs and capital goods often translate into higher prices for final products, contributing to inflationary pressures across the economy. Consumers ultimately bear a significant portion of the tariff burden through higher retail prices.
- Reduced Competitiveness: U.S. manufacturers relying on imported components can find themselves at a disadvantage compared to international competitors who do not face similar tariff-induced cost increases. This can stifle innovation and hinder export growth.
- Uncertainty and Investment Deterrence: The unpredictability of tariff policies can create an environment of uncertainty, discouraging long-term investment. Businesses prefer stable and predictable regulatory and tax environments to plan their capital expenditures.
- Impact on Specific Industries: Industries heavily dependent on specific imported materials, such as automotive, electronics, and construction, often experience the most direct and severe impacts. For example, the steel and aluminum tariffs directly increased costs for countless downstream manufacturers.
Leading economic organizations and business groups have frequently voiced concerns about the cumulative impact of tariffs. The U.S. Chamber of Commerce, for instance, has repeatedly highlighted the negative effects on American businesses, farmers, and consumers, arguing that tariffs act as a tax on domestic entities. Many economists, across the political spectrum, generally concur that while tariffs can sometimes be used as leverage in trade negotiations, their sustained application as a broad-based economic policy tool tends to be detrimental to overall economic efficiency and growth.
Conclusion: A Clear Path Forward
While Stephen Miran’s analysis aimed to find a silver lining in the Trump administration’s tariff policies, the economic reality, as demonstrated through the user cost of capital framework, is that full expensing does not neutralize the burden of tariffs on investment. Tariffs unequivocally raise the acquisition cost of imported goods, and this increase persists even when businesses can immediately deduct those costs from their taxable income. Furthermore, the impact of tariffs can be disproportionately high compared to corporate income taxes, and their reach extends to capital assets that do not qualify for expensing, amplifying their negative effects across the economy.
The combined effect of tariffs and expensing, while perhaps improving the tax treatment of purely domestic investments, creates a distorted playing field for those reliant on global supply chains. For businesses navigating a complex economic landscape, the added cost of tariffs remains a significant hurdle to investment, innovation, and growth.
The path to decreasing the cost of capital in the U.S. and fostering a more robust investment environment is straightforward and much simpler than attempting to offset tariffs with complex tax incentives: repeal the tariffs. Removing these import taxes would directly lower acquisition costs for businesses, stimulate investment, reduce inflationary pressures, and enhance the competitiveness of American industries in the global marketplace. This approach would align with the fundamental goal of tax policy to encourage productive investment, rather than imposing artificial barriers to economic activity.
