The Supreme Court could rule as soon as Friday on the legality of tariffs imposed during the Trump administration, as a leading economist argues the levies are a uniquely damaging form of taxation that will exacerbate the national debt.
Kent Smetters, faculty director of the Penn Wharton Budget Model at the University of Pennsylvania, contends that tariffs function as a “dirty VAT,” or value-added tax, and are more harmful to the U.S. Economy than even traditional tax increases. Even as a standard VAT is broad-based, tariffs target specific goods, leading to inefficient economic behavior as consumers and businesses attempt to avoid the tax, according to Smetters.
“We have a lot of debt, and we are going to be floating more and more debt along our current baseline,” Smetters said, projecting a future where investors demand higher returns on U.S. Treasury bonds, creating a “feedback effect” that drives the debt higher. He estimates the U.S. Is on track to pay $1 trillion in interest payments next year, a figure he says is “and climbing.”
Smetters’s analysis challenges the argument that tariffs are a tool for protecting domestic industry and reducing the federal deficit. He points out that approximately 40% of U.S. Imports are intermediate inputs used by American companies in their manufacturing processes. Tariffs effectively act as a tax on American producers, increasing their costs and diminishing their global competitiveness.
“The idea that this is pro-American is actually just the opposite,” Smetters said. “It hurts American manufacturers.” He specifically cited Deere & Company as an example, noting the agricultural equipment manufacturer has quantified the cost of tariffs at roughly $500 million for the 2025 fiscal year, with a projected $1.2 billion impact in 2026. Deere management has attributed tariffs to “margin pressures” and weaker operating profits, despite stable revenue, and has been forced to evaluate and renegotiate supply contracts to mitigate the costs.
Smetters argued that the U.S. Economy benefits when companies like Deere focus on high-margin intellectual property rather than producing low-margin components. He believes taxing those inputs penalizes domestic production and misses the point of American manufacturing strength.
The Penn Wharton Budget Model projects that while the immediate impact of tariffs may be limited—potentially reducing GDP by 0.1% in the first year—the long-term consequences are significant. Smetters projects a GDP reduction of roughly 2.5% over 30 years, driven by the escalating costs of servicing the national debt. He argues that as American companies become less efficient due to tariffs and the government increases borrowing, investors will demand higher returns on U.S. Treasuries.
To illustrate the inefficiency of tariffs, Smetters compared them to a hypothetical increase in the corporate income tax rate. He estimates that raising the corporate tax rate from 21% to 29% would generate the same revenue as the current tariffs, but the economic damage from the tariffs would be “2.5 times worse.” He clarified he is not advocating for a corporate tax increase, but highlighting the relative harm of tariffs.
Smetters noted that a “destination-based” tax proposed in 2016 could have achieved similar revenue goals more efficiently, but was opposed by major retailers like Walmart, who feared increased import costs. The U.S. Is now left with what Smetters calls a “dirty” alternative—a sales tax disguised as trade policy.
