Finally, I am able to say something about tariffs I wasn't able to say last year. I'll tell you why at the end of the thread.

In my view, the case for tariffs is overdetermined. There's national security reasons (you need self-sufficiency in war equipment), financial stability reasons (you don't want the net foreign asset position exploding), and an underdiscussed reason - tax policy.

There are two centuries of research on optimal tariffs. Tariffs are interesting because--unlike labor or capital taxes--foreigners bear, in the long run, a material portion of the burden of the tax. https://www.richmondfed.org/~/media/richmondfedorg/publications/research/economic_review/1987/pdf/er730402.pdf…

That means that when raising tariffs from low levels, overall national welfare including revenue increases. Eventually, the domestic share of distortions outweighs the benefit of revenue--the point at which this happens is called the "optimal tariff."

Using traditional elasticity estimates, I calculated that in the long run foreigners will bear about 70% of the burden of U.S. tariffs. My read of the literature is that the optimal tariff is somewhere between 10% and 40%. https://www.federalreserve.gov/newsevents/speech/miran20251215a.htm…

I touched on this in my 2024 paper on trade. Because I cited the Handbook of International Economics chapter on the subject, and one of its authors is French, Le Monde asked them to respond to me after my CEA nomination https://www.lemonde.fr/en/opinion/article/2025/01/23/a-very-bad-idea-two-economists-respond-to-white-house-citing-them-on-20-tariffs_6737351_23.html…

They offered the standard response: optimal tariffs work in theory but not in practice, because retaliation erodes the benefit of the revenue. However, I always expected that there wouldn't be much retaliation.

Indeed, POTUS and the entire administration warned against it. At @Hudson Institute I emphasized that retaliation would make it more difficult to maintain the defense umbrella. https://www.whitehouse.gov/briefings-statements/2025/04/cea-chairman-steve-miran-hudson-institute-event-remarks/…

The net result was very little retaliation against our tariffs. In fact, the President negotiated trade deals that involve our trading partners lowering their trade barriers and comitting to invest in the U.S. - effectively NEGATIVE retaliation!

That negative retaliation wasn't factored into anyone's models and is still underappreciated in discussions of tariffs. But it's completely eroded the standard objection to optimal tariffs, and with that objection gone, economists must now take the theory seriously.

Within the overall taxation system, that means you can use tariff revenue to preserve or reduce low marginal tax rates on other activity. We know the distortions or deadweight loss of tariffs are convex: going from 30% to 40% is way worse than going from 10% to 20%.

Since optimal tariff rates are materially above near-zero levels at the start of year last year, raising tariffs toward optimal creates *negative* deadweight loss. Using that revenue to reduce highly distortionary income and capital taxes further reduces overall deadweight loss.

The net effect is a big improvement in the tax system, and that's effectively what happened with using tariff revenue to offset costs of OBBA's reforms. Research shows that lifetime marginal tax rates are already quite high (!!) so the gains here are big. https://eml.berkeley.edu/~auerbach/Marginal_Net_Taxation_of_Americans__Labor_Supply___Feb_2026.pdf…

You can compare across the different types of tax rates because as long as you know you're starting below optimal tariff rates, you know incremental tariff change to overall national welfare is positive, whereas it's highly negative for the income and capital taxes due to their efficiency costs and this would be true with any standard set of elasticities that yield a positive optimal tariff rate.

There's one other major point in the piece. And that's the full expensing embedded in OBBA. It interacts with the tariffs such that for most intermediate goods, they're effectively untariffed; you can get equipment surcharges refunded through the corporate tax code.

That comports with standard economic wisdom that intermediate inputs should be untaxed, while final goods should. https://www.jstor.org/stable/1910538

Finally, why couldn't I say this last year? As I said, the case for tariffs is overdetermined--there are natsec, financial stability, and tax reasons for doing tariffs. I find all of these persusasive.

However, the statutory justification for the tariffs last year was the national emergency of trade deficits via IEEPA.

Given IEEPA was litigated, it would have interfered with the legal case if I had said that tariffs were good for revenue and tax purposes, *even if* that's not actually the reason we gave in law for the tariffs. So I couldn't speak about revenue and taxation on the matter.

But, all the economics is valid. And I think tariffs will be with us for good, because just as the Biden Administration saw the wisdom of keeping the tariffs from the President's first term, subsequent administrations will as well with the new tariffs.