Kent Smetters, faculty director of the Penn Wharton Budget Model, challenges the narrative that tariffs are a tool to protect domestic industry. In a recent interview with luck, In what he said, Smetters put forward his long-held view that broad-based tariffs are a “dirty VAT” (value-added tax) — a policy he believes is more harmful to the U.S. economy than traditional tax increases.
While economists see a broad-based, flat VAT as an effective method for raising government revenue, tax collectors have singled out the tariffs as a “dirty” distinction because they are so little equal. A standard VAT is widely applied, mainly distorting decisions between spending now and saving for later. Tariffs, however, target specific goods, causing consumers and businesses to change behavior in ways that make it impossible to avoid the tax.
What’s more, Smetters said, while tariffs are pitched as a deficit-reduction tool that would bring in revenue that would make a material difference to the United States’ $38.6 trillion national debt, he sees it another way.
“We have a lot of debt, and we’re adding more and more debt to our current baseline,” Smetters said, adding that he sees a future in which investors demand higher returns to continue investing in the U.S., and a “feedback effect” that will drive debt higher, going forward.
As the Supreme Court weighs the legality of several of Trump’s tariffs after hearing arguments in November, several Trump-appointed judges have had harsh words on the issue. Their decision may come by Friday.
A central flaw in the tariff strategy, according to Smetters, is a misunderstanding of what the US actually imports. He notes that 40% of imports are not final goods for store shelves, but intermediate inputs used by American companies to manufacture their own products. Consequently, tariffs act as a tax on US producers, raising their costs and making them less competitive globally.
“The idea that it’s pro-American is actually quite the opposite,” Smetters said. “It hurts American manufacturers.” He cited the example of companies like Deere, arguing that the U.S. economy benefits when such firms focus on high-margin intellectual property rather than producing low-margin components such as screws or steel strips. By taxing those inputs, the policy effectively penalizes domestic production.
Deere has repeatedly revised fees as a major cost item, revealing nearly half a billion dollars worth of costs for the entire 2025 fiscal year and projecting a $1.2 billion hit for 2026. Management described as tariffs (on metals and certain imported components) and “weak margins even as margins increased. At Smetters’ point, Deere has evaluated and renegotiated supply agreements and considered moving some sourcing and manufacturing footprints to reduce tariff exposure and input-cost increases.”
Americans didn’t want Deere sourcing steel and screws, he argued.
“It’s really low-margin stuff,” he said. “We want them to focus on the really high-margin intellectual property that they do.” He added that he thought it was “really missing” from the wider debate.
Smetters shared Penn Wharton Budget Model estimates that while the immediate impact of the tariffs appears manageable — potentially reducing GDP by only 0.1% in the first year — the long-term outlook is grim. Smetters predicts a reduction in GDP of about 2.5% over 30 years, considering the impact this waste tax would have on debt that would be added through increased debt interest payments.
The primary driver of this decline is this “large feedback effect” on US debt. As U.S. companies become less efficient and the government issues more debt, Smetters said global investors will demand higher returns (or risk premiums) for holding U.S. Treasuries. In that sense, the tariff problem is actually a national debt problem.
“Think about US Treasury bonds,” he said, predicting that investors in the US would demand a higher return on investment. “What if the private market now has to pay higher returns to attract investment because of higher costs?”
The only result, he said, is that Treasuries will pay investors higher yields for longer and longer periods. The US is in real danger of turning into Japan – the favorite doomsday prediction of macro analysts such as Albert Edwards of Societe Generale – which has been paying upwards of 25% of its revenue in interest payments since the stock-market bubble popped in the early 1990s. The U.S. will pay $1 trillion in interest payments next year, he said, “and climbing.”
To illustrate the ineffectiveness of tariffs, Smetters compared them to a hypothetical increase in the corporate income tax, which is generally considered the least efficient way to raise revenue. He estimates that to raise the same amount of revenue as the proposed tariffs, the US corporate tax rate would have to rise from 21% to 29%. However, the economic damage from the tariffs would be “2.5 times worse” than that corporate tax increase.
Smetters made it clear that he’s not in favor of raising corporate income tax revenue — he’s not advocating any policy in particular — but essentially he’s surprised that Trump has found a new form of the most unworkable tax increase: “Well, Trump just found a new one. It’s even more unworkable than that.”
Smetters noted that a “destination-based” tax proposed in 2016 could achieve the same revenue goals more effectively. However, that proposal was effectively killed by major retailers, including Walmart, who feared it would increase their import costs. Instead, the U.S. has what Smetters calls the “dirty” option — a sales tax disguised as a trade policy that risks stifling the growth it promises to protect.
This story was originally featured on Fortune.com
