As such, policy makers should consider how to structure a tax system so the damage is smaller rather than larger. And I’ve written columns explaining which taxes do the most harm and which taxes do the least harm.
One obvious conclusion is that a tax should never be so onerous that the government actually loses revenue. In other words, it’s not a good idea to be on the downward-sloping side of the Laffer Curve.
Today, let’s investigate trade taxes and the Laffer Curve. And we’ll start with these charts showing revenue-maximizing Laffer Curves and welfare-maximizing Laffer Curves (a key distinction) for trade taxes on goods from both the European Union and China.
The charts come from a new study by Professors Pau Pujolas and Jack Rossbach.
Here’s some of what they wrote.
This paper quantifies the fiscal and welfare limits of protectionism by computing the tariff Laffer curve for the United States during the 2025 trade war. We find that tariff revenues peak at rates between 20 and 30 percent, while welfare peaks between 0 and 10 percent. The gap between these two peaks defines the Trade-Off zone where the United States can raise revenue only at the cost of welfare. …U.S. welfare, in contrast, is sharply sensitive to retaliation: if all trading partners match U.S. tariff rate increases, U.S. welfare gains vanish entirely and turn into large welfare losses above single-digit tariff rates.
Now let’s look at some research published by the Centre for Economic Policy Research and VoxEU.
Authored by Simon Evenett and Marc-Andreas Muendler, it concludes that trade taxes are not an unlimited source of loot for Donald Trump.
Here are some excerpts.
A side effect of taxes is that they discourage the economic activity that they are assessed on. Tariffs are taxes on imports and no different: they shrink trade. …Senior members of the new US administration, including President Trump himself, have claimed that import tariffs can be raised to levels that can finance significant tax cuts. …Ever since Arthur Laffer produced his famous curve on a napkin, economists have known that – if raising revenue is the sole objective – the tax rate that maximises revenue is finite. A zero tax collects, by definition, no revenue for the government. Too high a tax and the taxed subjects give up entirely on the economic activity being taxed, and tax revenue is back to zero. …The relevant empirical question is: at what import tax rate do tariff revenues max out? …We considered a wide range of cases, where each dollar of import taxes collected reduces the trade deficit by 25 to 90 cents. …When every dollar of tariff revenue collected results in the trade deficit falling 50 cents or more (the dark orange curve in the figure), the total additional revenues never exceed $300 billion. The more import tariffs reduce the trade deficit, the smaller the additional revenues collected by the federal government. …There is no case in the figure where import tariff hikes could raise an extra $600 billion in government revenues.
Here are the authors’ estimates of potential revenue from trade taxes.
For what it’s worth, I’m not specifically embracing the details of these studies.
I find the Evenett-Muendler results to be utterly implausible, for example, because they think the government would still collect revenues with trade taxes of more than 100 percent.
But I’m not worried about the details. I have two simple goals.
To show that economists widely agree that the Laffer Curve exists and that revenues can actually decline if politicians get too greedy.
To show that Donald Trump is wildly wrong to think that revenues from trade taxes would be sufficient to eliminate the income tax.
The data supports both of those goals. Now I need to make progress on the third goal, which is to educate people on the benefits of free trade.
