Miran makes case tariffs boost welfare via $4 trillion revenue

Raising tariffs from near-zero levels before January 2025 toward 10% to 40% is welfare-enhancing, former CEA Chair Stephen Miran argued, with the Congressional Budget Office estimating $4 trillion in tariff revenue over a decade.

"Every tax distorts economic behavior. A tax on income discourages work, while a tax on investment discourages saving," Miran, senior strategist at Hudson Bay Capital Management and former CEA chair and Fed governor, wrote in a Wall Street Journal op-ed. "Two centuries of optimal-tariff research show that tariffs are unique in that foreigners bear a material portion of the tax burden."

Miran cited research indicating that in the long run, foreign exporters bear 70% of the tariff burden by reducing prices to retain market share. The CBO estimate is tied to rates established under the One Big Beautiful Bill Act of 2025, which uses tariff revenue to fund tax cuts on domestic workers and businesses, including full expensing of equipment. The median lifetime marginal rate on income stands at 39%, according to research cited in the op-ed. The trade-off is particularly efficient because deadweight loss accelerates with higher tax rates — moving from 40% to 50% carries a much higher cost than jumping from 10% to 20%.

The op-ed pushes back against the standard criticism that optimal tariffs only work in theory because retaliatory measures erode their benefits. Miran argued retaliation has been minimal, noting the administration warned allies that retaliation would make it harder to sustain the U.S. defense umbrella and that America's consumer demand gives it leverage. The previous tariff escalation in 2018-2019 reduced bilateral trade flows by an estimated 15% to 20% over 18 months, according to Census Bureau data, though Miran contends the current dynamic differs because trading partners have lowered their own barriers in response.

The Tax Trade-Off

From an optimal tax perspective, the trade-off embedded in the One Big Beautiful Bill Act represents a significant improvement, Miran wrote. By using tariff revenue to reduce highly distortionary taxes on capital and labor, the policy shifts part of the tax burden to foreign producers. Miran also noted that because the 2025 tax cut incorporated full expensing of equipment, intermediate goods are largely untariffed, as economists have long advocated. A company importing a component subject to a tariff can deduct that cost on its tax return, neutralizing the levy's impact on domestic production costs.

The implications extend beyond tax policy into financial markets. Lower marginal tax rates on capital and labor could boost corporate earnings and disposable income, supporting equity valuations. The S&P 500 has historically gained an average of 3% in the three months following major tax cuts, according to CFRA Research. At the same time, sustained tariffs risk pressuring import-heavy sectors such as retail and consumer discretionary, where companies have thinner margins to absorb higher input costs. The U.S. dollar has strengthened 4% against a basket of major currencies since the tariff increases took effect, partly reflecting the reduced trade deficit and capital inflows tied to tariff revenue. The 10-year Treasury yield has remained range-bound between 4.2% and 4.5% as the growth boost from tax cuts offsets inflation concerns from tariffs.

The op-ed concludes that tariffs have earned a permanent place in the U.S. tax system. If the administration maintains current tariff rates, the trade-off could reshape how economists and policymakers view tariffs — not as a temporary negotiating tool but as a structural component of federal revenue. The next test will come when trade data for the second half of 2026 is published, offering the first comprehensive look at whether the predicted welfare gains are materializing.

This article is for informational purposes only and does not constitute investment advice.