Kent Smetters, faculty director of the Penn Wharton Budget Model, is challenging the narrative that tariffs are a tool for protecting domestic industry. In a recent interview with Fortune, Smetters held forth on what he said was his long-held view that broad-based tariffs are a “dirty VAT” (value-added tax)—a policy he believes is significantly more damaging to the U.S. economy than traditional tax increases.
While economists generally view a broad-based, flat VAT as an efficient method for raising government revenue, Smetters distinguishes tariffs as a “dirty” variation because they are far less uniform. A standard VAT applies broadly, distorting decisions primarily between spending now versus saving for later. Tariffs, however, target specific goods, causing consumers and businesses to shift behavior in inefficient ways to avoid the tax.
Even more, Smetters said, despite the tariffs being pitched as a deficit-reduction tool that will bring in revenue that makes a material difference on the United States’ $38.6 trillion national debt, he sees it another way.
“We have a lot of debt, and we are going to be floating more and more debt along our current baseline,” Smetters said, adding he sees a future ahead in which investors demand a higher return to keep investing in the U.S., and a “feedback effect” that will just keep driving the debt higher, far into the future.
The Supreme Court has been weighing the legality of many of Trump’s tariffs since hearing arguments in November, with several Trump-appointed justices having sharp wording on the issue. Their decision may come down as soon as Friday.
The ‘corporate tax’ in disguise
A central flaw in the tariff strategy, according to Smetters, is a misunderstanding of what America actually imports. He notes 40% of imports are not final goods destined for store shelves, but intermediate inputs used by U.S. companies to manufacture their own products. Consequently, tariffs act as a tax on American producers, raising their costs and making them less competitive globally.
“The idea that this is pro-American is actually just the opposite,” Smetters said. “It hurts American manufacturers.” He cited the example of companies like Deere, arguing the U.S. economy benefits when such firms focus on high-margin intellectual property rather than producing low-margin components like screws or steel strips. By taxing those inputs, the policy effectively penalizes domestic production.
Deere has repeatedly quantified tariffs as a major cost item, revealing roughly half a billion dollars worth of costs for the full 2025 fiscal year and projecting a $1.2 billion hit for 2026. Management has described tariffs (on metals and specific imported components) as causing “margin pressures” and weaker operating profits, even when revenue has held up. To Smetters’s point, Deere has evaluated and renegotiated supply contracts and considered shifting some sourcing and production footprints to reduce tariff exposure and input‑cost increases.
Americans shouldn’t want Deere to be sourcing steel and screws, he argued.
“That’s really low-margin stuff,” he said. “We want them to focus on the really high-margin intellectual property that they do.” He added he thinks this is “really missing” from the wider discourse.
Long-term debt spiral
Smetters shared Penn Wharton Budget Model projections showing that while the immediate impact of tariffs might seem manageable—potentially reducing GDP by only 0.1% in the first year—the long-term outlook is grim. Smetters projected a GDP reduction of roughly 2.5% over 30 years, considering the impact on the debt this dirty tax would add through escalating debt interest payments.
The primary driver of this decline is this “massive feedback effect” on U.S. debt. As American companies become less efficient and the government floats more debt, Smetters explained global investors will demand a higher return (or risk premium) to hold U.S. Treasuries. In that sense, the tariffs problem is really a national debt problem.
“Think about U.S. Treasury bonds,” he said, predicting investors in the U.S. will demand a higher return to invest. “What happens if the private market now has to pay a higher return to attract investments because it has higher costs?”
The only result, he said, is Treasuries will pay a higher yield to investors over a longer and longer time. The U.S. runs a real risk of turning into Japan—a favorite doomsday prediction from macro analysts such as Societe Generale’s Albert Edwards—which has been paying upwards of 25% of its revenue on interest payments since its stock-market bubble popped in the early 1990s. The U.S. is due to pay $1 trillion in interest payments next year, he noted, “and climbing.”
Worse than a corporate tax hike
To illustrate the inefficiency of tariffs, Smetters compared them to a hypothetical hike in the corporate income tax, which is typically considered the least efficient way to raise revenue. He estimates that to raise the same amount of revenue as the proposed tariffs, the U.S. would need to raise the corporate tax rate from 21% to 29%. However, the economic damage caused by the tariffs would be “2.5 times worse” than that corporate tax hike.
Smetters clarified that he’s not in favor of raising corporate income tax revenue—he’s not advocating for any policy in particular—but essentially he’s surprised that Trump has found a new form of the most inefficient tax increase possible: “Well, Trump just found a new one. It’s even more inefficient than that.”
Smetters noted a “destination-based” tax proposed in 2016 could have achieved similar revenue goals more efficiently. However, that proposal was effectively killed by major retailers, including Walmart, which feared it would raise their import costs. Instead, the U.S. is left with what Smetters calls a “dirty” alternative—a sales tax disguised as trade policy that risks hindering the very growth it promises to protect.
