Big Man Politics – Fat Tail Daily

‘All government spending is taxation.’

Elon Musk

Elon is right about that. Every penny spent by the feds must come from ‘The People’ via some form of taxation. One of them is in the news today. Tariffs. Yesterday, the Trump team put in place new tariffs against China, Mexico and Canada.

And last night, Trump promised an even more aggressive barrage: reciprocal tariffs. Other nations punish their own citizens by denying them quality imports at competitive prices; now, we’ll do it too!

Warren Buffett, as interpreted by Investment Insider:

‘Tariffs are “an act of war, to some degree,” Warren Buffett said. The Berkshire Hathaway chairman and CEO told CBS, “Over time, they are a tax on goods.”’

And now, the trade war has begun. Newsweek:

‘Ontario Premier Doug Ford said on Monday that he would block energy exports to the United States “with a smile” if U.S. President Donald Trump moved ahead with plans for a 25 percent tariff on Canadian goods.

‘The U.S. imposed tariffs of 25 percent of Canadian goods—except for energy products, which face a 10 percent tariff. It also put a 25 percent tariff on imports from Mexico and an additional 10 percent on Chinese goods.

‘According to figures from the U.S. Energy Information Administration, Canada is by some margin the largest source of American energy imports, with 59 percent of all crude oil imported into the U.S. in 2019 coming from the country.’

Associated Press:

‘Mexico President Claudia Sheinbaum said Tuesday that Mexico will respond to 25% tariffs imposed by the United States with its own retaliatory tariffs on U.S. goods. Sheinbaum said she will announce the products Mexico will target on Sunday in a public event in Mexico City’s central plaza, perhaps indicating Mexico still hopes to de-escalate the trade war set off by U.S. President Donald Trump.’

And the first casualties are limping back into camp:

‘On Monday, the Federal Reserve Bank of Atlanta released an estimate for GDP performance in the first quarter of 2025, which showed an economic contraction of 2.8%… the same model-based projection estimated growth of almost 3% in early February.’

Whoa. A 5.8% drop in GDP growth estimates. We haven’t seen that since the Great Depression…or Donald Trump’s first term, with the Covid Panic.

If that kind of contraction happens, and continues, the feds will have to spend more money on unemployment comp, etc. And the Great Helmsman will be tempted to steer towards more stimmy measures. But where will he get the money?

The feds hold no bake sales. They sell no cookies, door to door, nor engage in charitable fundraising. They produce few goods and offer few services that people would willingly pay for. When they want money…they just take it.

So it was that last year they took $4.9 trillion in tax revenue. But they spent $6.7 trillion. Whence cometh the difference? From other forms of taxation — inflation, primarily…and tariffs.

This is why Donald Trump’s 2017 tax cut… and the proposal to extend it… are such frauds. They do not actually cut taxes; they simply shift it from direct taxes on income to indirect taxes from inflation or tariffs.

Inflation has been called the ‘cruellest tax’. It falls disproportionately on poor people. If you earn a million and only spend $100,000 per year, inflation is only taking a bite out of 1/10th of your income. If you earn $40,000…and spend all of it…it eats into the whole thing.

Charlie Bilello:

‘Highest earners also tend to be the biggest owners of assets such as stocks (the top 10% own 87% of stocks) and houses, which have outpaced inflation by a wide margin over the past five years…The result: the top 10% of income earners in the US (households making $250,000 or more) now account for half of all consumer spending, a record high. Three decades ago, they accounted for roughly 36% of all spending.’

If you are rich, and you need money, you dig into savings. But what do you do if you’re living hand to mouth? You use a credit card. Bilello continues:

‘US Credit Card debt hit a record $1.2 trillion in the 4th quarter, rising 7% over the last year. The interest rate on that debt remains near record highs, at 21.5%. The combination of high debt levels and much higher interest rates is leading to an uptick in delinquencies. Over 11% of credit card balances in the US are now 90+ days delinquent, the highest since 2011.’

Inflation is simply a tax on goods. As Buffett explains, so is a tariff. And like inflation, the poorest people will shoulder the heaviest portion.

But unlike inflation, tariffs are especially suited to Big Man politics. They can be used as carrots or sticks. Trump can punish opponents or reward crony friends. An industry with good lobbyists is likely to get protection from foreign competitors. One that is on the wrong side politically may not.

Tariffs make great political theatre, but bad economics.

Regards,