Under the US Constitution, Congress is supposed to set tariff rates. But our government stopped paying attention to the Constitution long ago, so we also need to think about the implications of the president’s views on tariffs. Here’s Fortune magazine:
Still, Trump blames the VAT for the U.S. trade deficit with the European Union, which hit $236 billion in 2024, according to the Census Bureau, second only to China.
“A VAT tax is a tariff,” Trump told reporters Thursday.
That’s not true. A tariff is a tax on imports, while the VAT is simply a tax on all domestic consumption, regardless of where the good or service is produced. In the end, the only major difference between a value-added tax and a sales tax is the way in which it’s collected.
So what might have led the president to make a statement that conflicts with reality? It might be related to an equation that seems to cause all sorts of confusion:
GDP = C + I + G + (X – M)
Because imports (M) show up in this equation with a minus sign, many people wrongly assume that imports tend to reduce GDP. Not so, imports have no direct effect on GDP, as they also show up as a positive in either consumption or investment (if the imported product is a capital good.)
A VAT is a tax on all consumption, regardless of where the product is produced. There are two ways to collect a consumption tax. In America, we collect the tax at the point of purchase. In Europe, the tax is applied to both domestic production of consumer goods, and also to consumer goods imported from elsewhere. Because the VAT does not discriminate between domestic and foreign production, it is not a tariff.
The sky is not green, it’s blue. And a value added tax is not a tariff. President Trump once suggested that ‘tariff’ is the most beautiful word in the dictionary, hence you might expect him to know what a tariff actually is.
You can argue that the president should have a lot of power in order to “get things done.” You can argue that a president cannot be expected to understand basic economic principles. But you cannot argue both points at once.
In my view, tariff is one of our ugliest words, associated with ignorance, xenophobia, statism and nationalism.
