There Is No Low-Tax Case for Tariffs

In a recent piece for The Wall Street Journal, former White House Council of Economic Advisers chair Stephen Miran makes the case that Trump’s tariffs are an improvement for taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy. One of his arguments is that expensing neutralizes the burden tariffs place on imported goods. According to Miran, tariffs don’t really make imported business equipment and inputs more expensive, since businesses can simply deduct those costs from their taxes under full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.. Thus, he concludes, “effectively, intermediate goods are largely untariffed” under current policy.

This argument is mistaken.

In 2025, the Trump administration implemented several policies that impacted the cost of investment in the US. The One Big Beautiful Bill Act (OBBBA) introduced permanent 100 percent bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco for short-lived assets, reintroduced expensing for research and development expenses, and introduced a temporary bonus depreciation for manufacturing structures. These provisions allow firms to fully and immediately deduct their investment costs, eliminating the income tax burden on new investment.

At the same time, however, the Trump administration imposed large, broad-based tariffs on goods imports, including intermediate goods (inputs used in production of the final product) and capital goods (like machinery). In contrast to expensing, tariffs raise the cost of investment by increasing the acquisition cost.

As we will demonstrate algebraically below, tariffs still burden investment regardless of whether the underlying asset is expensed. Nor is it necessarily the case that expensing itself would sufficiently offset the effects of the tariffs, as the burden of tariffs can exceed the benefit of expensing even at low statutory rates. Full expensing and the repeal of tariffs would leave investment less burdened overall than is currently the case.

The impact the aforementioned policies have on investment can be demonstrated with the standard user cost of capital formulation, which measures the minimum required pre-tax return on investment that covers taxes, depreciation, and the return demanded by shareholders:

The pre-tax return or cost, c, is equal to the sum of the returns demanded by shareholders (or lenders) and the cost of replacing the asset or economic depreciation, (r + δ), grossed up by the corporate tax on cash flows (1-u). The acquisition cost is modified by any deductions or credits received or taxes paid when it purchases the asset: (1-uz + t (1-ƒ)). The first portion of this term, (1-uz), is the tax value of depreciation deductions. The second portion, t (1-ƒ), is the tariffs paid on imported capital assets, t, reduced by the basis adjustment (1-ƒ) where ƒ is equal to the corporate tax rate times the value of depreciation deductions, uz.

Generally speaking, the cost of capital is higher in the presence of a corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax., u, and tariffs, t, and lower when the value of depreciation deductions, z, is higher.

Tariffs Burden Investment Whether or Not the Investment Is Expensed

In some of Miran’s comments, he seems to suggest that expensing cushions the blow from tariffs because tariffs are deductible in line with the rest of the capital asset. If so, he is only looking at part of the equation.

Tariffs raise the cost of investment, whether an asset is expensed or not. While counterintuitive, the basis adjustment for tariffs only means that the same share of the returns is taxed with and without the tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters., and the cost of the investment rises proportionally with the tariff rate: a 10 percent tariff raises the cost of an investment by 10 percent.

One can see this a little more clearly by rearranging the formula to separate the tariff and the business income tax:

Under this equivalent formulation, the tariff term, (1+t), increases the entire cost of capital, and does so regardless of how generous depreciation, z, is. And even under the most favorable case, full expensing (z = 1), the corporate tax term cancels out, but the tariff term remains, and the cost of capital is:

Therefore, even in the presence of full expensing, the cost of capital is still burdened by the tariff.

Even at Low Statutory Rates, the Burden of Tariffs Can Exceed the Benefit of Expensing

In other commentary, Miran suggests he meant that imported investment is better off under expensing and tariffs than it was prior to them. If so, he is either overstating the benefit of expensing or understating the burden tariffs place on investment—or both.

Tariffs have a much larger impact on the cost of investment than the corporate tax, especially on quickly depreciating machinery. A notable difference between the corporate income tax and tariffs is that tariffs apply to the entire investment, while the corporate income tax only applies to the net returns. What this means in practice is that tariffs at lower rates can place higher effective tax rates on investment than the corporate income tax.

Consider, for example, a firm with a 5 percent discount rate that imported a machine that was depreciated in line with its decline in value (at 20 percent per year) prior to the OBBBA. The present value of depreciation deductions in this scenario equals 80 percent:

Under the prior regime, the asset faced an effective tax rate equal to the statutory corporate income tax rate of 21 percent. After the introduction of OBBBA, the machine can now be expensed, and the effective rate drops to zero.

Suppose, then, that a 10 percent tariff is applied to this machine. Plugging that into the cost of capital formula above yields a cost of capital (c) of 27.5 percent. Even though the tariff rate is less than half the corporate tax rate, the effective tax rate on the investment rises to 33.3 percent, as shown below. This is much higher than its effective tax rate prior to the introduction of expensing.

Table 1. Tax Rates on Hypothetical Imported Investment Under OBBBA and Tariffs

Prior LawOBBBA (Without Tariff)OBBBA (With Tariff)

Statutory Corporate Rate21%21%21%

Statutory Tariff Rate0%0%10%

Depreciation (z)80%100%100%

Effective Tax Rate21%0%33.3%

Source: Authors’ calculations.

Of course, this is a simple example, but it is unlikely to overstate the net change in the cost of capital. The burden of tariffs depends on the tariff’s statutory tax rate and depreciation rate of the asset. However, imported assets that qualify for bonus depreciation, like computer equipment and machinery, generally have high depreciation rates, and Trump’s tariffs are generally at least 10 percent.

Furthermore, expensing reduced the cost of capital less than this example suggests. Prior to the OBBBA, short-lived investment still qualified for 40 percent bonus depreciation in 2025 and 20 percent bonus depreciation in 2026. Even if bonus depreciation were to have fully phased out as scheduled prior to the OBBBA, depreciation under the Modified Accelerated Cost RecoveryCost recovery refers to how the tax system permits businesses to recover the cost of investments through depreciation or amortization. Depreciation and amortization deductions affect taxable income, effective tax rates, and investment decisions. System (MACRS) used for tax purposes is slightly more accelerated than economic depreciation (decline in market value of the asset). Either way, the value of z under prior law is higher than this example suggests.

Tariffs Also Burden Assets That Get No Expensing at All

Miran’s arguments rest on the idea that expensing, in some way, offsets the burden placed on imported capital goods and intermediate goods. However, much of the capital stock is not expensed, but can still be exposed to tariffs. Non-manufacturing structures (such as residential property) do not qualify for expensing. Although these structures are not directly imported, intermediate goods used to produce them are. For example, lumber used for construction may face import duties. The more expensive lumber will indirectly increase the cost of residential structure investment with no offsetting benefit from expensing.

Thus, while Miran thinks expensing can neutralize tariffs, as we have seen, that isn’t the case. There is, however, another way to decrease the cost of capital in the US. And it’s much simpler: repeal the tariffs.