In a recent contribution to The Wall Street Journal, former White House Council of Economic Advisers chair Stephen Miran presented an intriguing, albeit mathematically flawed, defense of the Trump administration’s trade policy. Miran argued that the administration’s aggressive tariff regime is not merely a protectionist tool but a functional improvement to the U.S. tax landscape. His central thesis rests on a bold claim: that because businesses can utilize "full expensing" to deduct the costs of capital investment, the burden of tariffs on imported business equipment and intermediate inputs is effectively neutralized.
According to Miran, since firms can deduct the acquisition cost of machinery and equipment immediately under current tax provisions, the tariff—which raises the upfront price of these goods—is effectively offset by the tax deduction. Consequently, he posits that “intermediate goods are largely untariffed” under current policy. However, a rigorous economic analysis reveals this argument to be a misunderstanding of how the user cost of capital functions. While expensing is a vital tool for encouraging investment, it is not a panacea for the distortions created by tariffs.
The 2025 Policy Shift: A Dual-Track Approach
To understand the current economic environment, one must look at the structural changes introduced in 2025. The Trump administration enacted the "One Big Beautiful Bill Act" (OBBBA), a legislative centerpiece designed to aggressively lower the tax burden on domestic investment.
The OBBBA introduced three critical components:
- Permanent 100 percent bonus depreciation for short-lived assets.
- Restored expensing for research and development (R&D) expenditures.
- Temporary bonus depreciation specifically for manufacturing structures.
These measures were designed to move the U.S. tax code toward a neutral system where the tax burden on new investment is minimized. By allowing firms to deduct investment costs immediately, the tax code avoids penalizing capital formation. Simultaneously, however, the administration implemented broad-based tariffs on a wide array of imports, ranging from raw industrial inputs to finished capital goods. While the OBBBA was intended to stimulate investment, the tariffs were designed to restrict it. Economically, these two policies pull in opposite directions: expensing reduces the user cost of capital, while tariffs raise the acquisition cost, thereby inflating the total investment cost.
The Mechanics of the User Cost of Capital
To determine whether Miran’s "neutralization" theory holds water, we must turn to the standard user cost of capital formulation—a metric economists use to calculate the minimum pre-tax return an investment must generate to cover taxes, depreciation, and shareholder demands.
The pre-tax return ($c$) is defined by the following components:
- Shareholder/Lender returns ($r$) and economic depreciation ($delta$): The baseline cost of capital.
- Corporate tax on cash flows ($1-u$): The "gross-up" factor accounting for tax drag.
- Acquisition cost modifications ($1-uz + t(1-phi’)$): The adjustments for tax deductions ($uz$) and tariffs ($t$).
When we examine the math, the error in Miran’s logic becomes apparent. The tariff ($t$) acts as a tax on the gross cost of the asset, while the depreciation deduction ($uz$) acts as a tax shield. Crucially, the tariff is applied to the total purchase price, whereas the corporate tax benefit is applied only to the net return. Even in the most optimistic scenario—full expensing ($z=1$)—the tariff remains a persistent, additive burden on the investment.
The Tariff Burden: A Mathematical Reality
Miran suggests that because tariffs are deductible in line with the capital asset, the "sting" is removed. This reflects a misunderstanding of the basis adjustment. While the tariff is indeed part of the depreciable basis, it does not disappear. Rearranging the formula to isolate the variables reveals that the term $(1+t)$ acts as a multiplier on the entire cost of capital.
If we look at a hypothetical firm with a 5 percent discount rate importing a machine, the numbers tell a stark story. Prior to the OBBBA, an asset might face an effective tax rate of 21 percent due to corporate income taxes. Under the OBBBA with full expensing, the effective tax rate on that investment drops to 0 percent—but only if there are no tariffs.
Once a 10 percent tariff is introduced, the calculus shifts dramatically. Even with full expensing, the cost of capital rises, pushing the effective tax rate on that investment to 33.3 percent. The tariff’s impact is "front-loaded" and absolute, while the benefit of expensing is limited by the corporate tax rate. Because the tariff applies to the entire value of the machine, it exerts a much heavier influence on the effective tax rate than the corporate tax, which only applies to the firm’s profits.
Sector-Specific Implications and "Hidden" Tariffs
The impact of this policy goes beyond just machinery and equipment. A significant portion of the U.S. capital stock is comprised of assets that do not qualify for full expensing, such as commercial and residential structures.
While a skyscraper or a warehouse cannot be "imported" in the traditional sense, the materials used to build them—lumber, steel, concrete, and electrical components—are frequently subject to tariffs. These intermediate goods are embedded into the final cost of the project. Because construction does not qualify for the same expensing benefits as high-tech manufacturing equipment, there is no tax mechanism to even partially offset the price hikes caused by tariffs.
Consequently, the construction sector faces a "double-jeopardy" scenario: it suffers from the higher costs of imported inputs without the countervailing "tax shield" that Miran erroneously assumes is universal across the economy. This leads to reduced capital investment in housing and infrastructure, which eventually manifests as higher consumer prices and lower economic growth.
Official Responses and Economic Consensus
The debate has drawn sharp responses from various economic corners. Proponents of the administration’s trade policy argue that the tariffs are intended to force a reshoring of supply chains, suggesting that the initial cost hike is a "transition cost" toward a more resilient domestic industrial base. However, critics, including analysts at the Tax Foundation and other non-partisan research institutions, have consistently argued that the math simply does not support the idea that tax policy can "neutralize" trade barriers.
In public commentary, Miran has doubled down, asserting that even with the tariff, firms are better off than they were under the previous, less-favorable depreciation regime. This argument, however, misses the point of comparative policy. The relevant comparison is not "How does this compare to the old tax code?" but rather "How does this compare to a policy of open trade and full expensing?" By adopting tariffs, the administration is voluntarily abandoning the full economic potential of the OBBBA.
Conclusion: The Path Forward
The economic reality is that tariffs and expensing are not two sides of the same coin. One is a barrier to trade that increases the cost of production, while the other is a mechanism to improve the efficiency of capital allocation. Trying to use one to fix the problems created by the other is a policy failure.
If the goal of the current administration is to foster a robust, productive, and high-growth economy, the solution is straightforward: leverage the benefits of full expensing to their maximum extent by eliminating the tariffs that currently act as a drag on that same investment. Until then, businesses will continue to face an unnecessarily high cost of capital, dampening the very growth that the 2025 reforms were intended to spark. The "low-tax case for tariffs" is, ultimately, a contradiction in terms—one that risks leaving the U.S. economy less competitive, not more.
