Tax cuts, tariffs and deportation: How economists say Donald Trump would increase inflation

Grilled recently about the costs of childcare at the New York Economic Club, Donald Trump turned to tariffs, which he said would generate trillions of dollars for the government.

''As much as childcare is talked about as being expensive, it is relatively speaking not very expensive compared to the kind of numbers we’ll be taking in," he said in an off-topic answer to the question.

But tariffs − which, along with tax cuts and deporting undocumented immigrants, are among Trump's top priorities − are at odds with Trump's promise to eradicate inflation.

In poll after poll, American voters report inflation as one of their top concerns. Although the rate of inflation has dropped to 2.5% , they’re angry that prices have stayed high since their post-pandemic spike: food is 20% more expensive than in 2020 and housing keeps getting more unaffordable. The issue was the opening topic at Tuesday's presidential debate .

Both presidential candidates promise to address inflation and rising costs of living. Several economists, though, have zeroed in on Trump's proposals − which rely heavily on tariffs −and argue that his plan could make inflation worse .

Despite that, Trump has strong support from many in the business community because of other proposals, such as deregulation and lower corporate tax rates.

A statement from campaign spokesperson Karoline Leavitt blamed inflation on Harris' "tie-breaking vote in the Senate for the $400 billion dollar boondoggle Inflation Reduction Act and her support for Biden's war on our domestic energy industry."

Economists raise concerns

One of the nation's largest investment banks, Goldman Sachs, warned earlier this month that Trump's plan for across-the-board tariffs could boost inflation in 2025 by as much as 1.2%.

Other Trump proposals − tax cuts that could raise the deficit, putting pressure on the Federal Reserve to lower interest rates, and mass deportations of undocumented immigrants − could also cause inflation.

Some economists say that with the nation's unemployment rate near record lows and wages rising steadily , big tax cuts and drops in interest rates would trigger new inflation. That's because inflation is caused by a lack of supply relative to demand, and both the Trump economic promises − tax and interest rate cuts − would boost demand for new products.

With an already-tight labor market, supply wouldn't be able to jump in response. Likewise, shrinking the labor force by deporting millions of workers could cause supply shortages, according to some economists.

In July, a majority of professional economic forecasters surveyed by the Wall Street Journal said inflation would be higher under Trump than if Biden won reelection. That followed 16 Nobel Prize-winning economists penning a letter in June warning they "are deeply concerned about the risks of a second Trump administration for the U.S. economy."

"Nonpartisan researchers … predict that if Donald Trump successfully enacts his agenda, it will increase inflation," the Nobel laureates note.

Some economists point out, however, that Trump enacted tax cuts and tariffs in his first term, without causing a burst of inflation.

"You have a whole host of people today who say his policies would be inflationary; they're also the same people who said his policies would be inflationary in his first term, and clearly that didn't happen," said E.J. Antoni, a research fellow at the Heritage Foundation, a conservative think tank.

Trump inflation promise lacks details

Despite Trump's promise to "get rid of inflation," he hasn't offered specific plans for lowering prices.

"'Get rid of inflation' is not a policy," Justin Wolfers, professor of economics and public policy at the University of Michigan, told USA TODAY. "Saying 'I will ask people for their ideas about how to reduce inflation,' is also not a policy for reducing inflation."

"He has quite the inflationary platform," Kimberly Clausing, a senior fellow at the Peterson Institute for International Economics, told USA TODAY. "I don't think we’ve seen a campaign platform that’s more inflationary."

Here are four Trump proposals that economists such as Clausing say would increase inflation and how they would do so:

Tariffs projected to cost $2,600 per household

A tariff is a fee on imports, which proponents believe helps domestic manufacturers. Trump has proposed a 10% to 20% tariff on all $3 trillion per year of imported products , with a 60% rate for products from China.

In 2018, Trump imposed tariffs on $380 billion worth of imported products. He claimed the foreign countries pay the tariff , but a paper from the National Bureau of Economic Research found "the full incidence of the tariff falls on domestic consumers." A study by the New York Fed found Trump's tariffs cost the average household $831 per year.

Trump's next, more expansive, round of tariffs would cost a typical middle-class household more than $2,600 per year , according to the Peterson Institute.

The left-leaning Center for American Progress Action Fund estimated average family's annual cost of Trump's proposal is even higher, up to $3,900 per year. That statistic is regularly cited by Vice President Kamala Harris, although her campaign told the New York Times that she would also "employ targeted and strategic tariffs to support American workers."

"Every dollar of tariff revenue is going to come about through higher prices on Americans," Wolfers said. "It would be the sharpest inflation shock in quite some time."

Some economists and interest groups such as the Coalition for a Prosperous America, a national nonprofit organization representing domestic producers, say that the tariffs' inflationary impact would be less severe − especially over the long haul − as consumers gradually switch to American-made products.

"If the foreign producer tries to pass on the entire cost, what ends up happening is Americans will choose one of those alternatives," Antoni said. "So to stay competitive, they’re essentially forced to eat some of that cost themselves."

Whatever their effect on inflation, Trump's proposed tariffs are popular: a Reuters/Ipsos poll released Monday found 56% of voters said they are more likely to support a candidate who backs a 10% tariff on all foreign-made products and 60% tariffs on products from China.

Tax cuts and deficit spending boost demand

As president, Trump signed into law tax cuts for corporations and individuals that that the Congressional Budget Office estimated would cost $1.9 trillion over 10 years.

Trump did not pay for those tax cuts with spending cuts, and he approved $8.4 trillion of new borrowing during his term − nearly twice as much as President Biden has.

Tax cuts without equivalent spending cuts may be inflationary, because injecting money into the economy stimulates demand. Since prices are set by supply and demand, more demand can cause higher prices.

On the other hand, some studies suggest that deficits have little impact on inflation in developed countries . The federal government ran deficits under Presidents George W. Bush and Barack Obama, and during Trump's first term, and yet inflation remained under control until 2021 .

Trump now wants to extend his tax cuts when they expire at the end of 2025, to cut the corporate income tax further − to 15%from its current 21% − and to exempt Social Security benefits from income taxes. These proposals would increase the debt by $5.8 trillion over 10 years, according to the Penn Wharton Budget Model .

Harris' plans would increase the debt by $1.2 trillion over 10 years, mostly because she would expand the child tax credit, Penn Wharton projects .

Even many fellow Republicans and conservatives say Trump's deficit spending would cause inflation.

"If you run big deficits with full employment, you get inflation," said Doug Holtz-Eakin, who served as chief economist of the President’s Council of Economic Advisers under President George W. Bush. "There's no evidence (Trump) cares a bit about deficits."

Deporting workers can cause labor shortages

In the labor market, like any market, prices are set by supply and demand, so a shortage of the labor supply causes the price of labor to rise. Labor shortages also cause product shortages, which causes price spikes.

News stories of businesses struggling with a shortage of available workers abound. Among the workers who are here, however, are millions of undocumented immigrants and Trump has promised to remove them from the country − and the workforce − through "the largest deportation operation in the history of our country."

This is likely to create labor shortages in immigrant-heavy industries like agriculture.

"It's likely that sort of disruption would be inflationary, for the fairly obvious reason that if there are fewer workers and we need the apples picked, or whatever it is, the supply side of the economy is going to get hurt," Wolfers said.

"When you take away the labor and force them go to other countries, that makes the products they are producing in short supply and drives up the prices very straightforwardly," said Clausing, a former Treasury Department economist.

Political pressure on the Fed to lower interest rates

During his presidency, Trump broke with the bipartisan norm that the president allows the Federal Reserve to set interest rates without interference. Trump repeatedly argued that rates should be lower , calling Fed Chairman Jerome Powell, whom Trump appointed, a "bonehead" for not lowering rates in 2019 .

“I feel the president should have at least a say in there. I feel that strongly,” Trump said in a press conference . “I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve — or the chairman.”

Interest rate cuts generally cause increased inflation , because lower interest rates decrease the cost of borrowing and spending, creating more consumer demand.

Moreover, some economists think the destabilizing effect of politicizing the Fed would cause market anxiety that sets off an inflationary spiral.

"This is a movie we’ve seen before," Wolfers said. "(President Recep Tayyip) Erdogan did the same thing in Turkey. In Turkey is inflation is 60 or 70%."

A politically independent central bank is essential to controlling inflation, according to the International Monetary Fund, the World Economic Forum and academic studies.

But, Wolfers says, "Trump has said very directly that he wants to undermine that."

How Harris might affect inflation

Harris takes a different approach to responding to cost concerns than Trump.

Rather than promising to abolish inflation across the whole economy, Harris focuses on reducing specific, big-ticket cost burdens, especially for low and middle-income families. So, she has proposed a federal ban on price gouging for food, and promised to continue and expand price caps on prescription drugs, like the Biden administration's $35 per month limit on insulin costs , which Republicans opposed .

Harris also proposed to address high housing prices with downpayment assistance, a tax credit for first-time homebuyers and incentives for new housing construction.

Some of these could have unintended inflationary effects, critics warn: Experts such as Edward Pinto and Tobias Peter of the right-leaning American Enterprise Institute Housing Center, argue that subsidizing homebuyers will only worsen high housing prices by stimulating demand.

Another way Trump could reduce inflation: if his policies cause an economic downturn, as many economists fear they could .

"If you deport everybody, you deport something like 6% of the labor force and you get a big recession. You don't usually get much inflation out of recessions," Holtz-Eakin noted dryly. "If productivity is unchanged and 6% of output goes away, you just don't have workers to make stuff. You have a loss of production and income. We need immigration desperately. If we don't have immigration, we shrink."

This article originally appeared on USA TODAY: Tax cuts, tariffs and deportation: How economists say Donald Trump would increase inflation