By Ali Ikhwan 
In a recent analysis published in The Wall Street Journal, former White House Council of Economic Advisers chair Stephen Miran proposed a provocative thesis: that the Trump administration’s broad-based tariffs on imported goods, when paired with generous tax provisions like full expensing, do not necessarily disadvantage American businesses. Miran’s core argument suggests that because businesses can deduct the cost of imported inputs and capital equipment from their taxable income, the financial sting of a tariff is effectively neutralized.
However, a rigorous examination of tax economics reveals that this perspective is fundamentally flawed. While full expensing is a vital tool for encouraging domestic investment, it acts as a separate mechanism from trade policy. When evaluated through the lens of the user cost of capital, it becomes clear that tariffs represent a persistent, additive burden on investment that cannot be "expensed away."
The Chronology of 2025: OBBBA and the Tariff Surge
To understand the current economic landscape, one must look at the policy shifts initiated in 2025. The centerpiece of this period was the passage of the One Big Beautiful Bill Act (OBBBA). This legislation was designed to modernize the U.S. tax code by introducing permanent 100 percent bonus depreciation for short-lived assets, restoring full expensing for research and development (R&D) expenditures, and providing temporary bonus depreciation for manufacturing structures.
The intent behind the OBBBA was clear: to eliminate the tax code’s historical bias against capital investment. By allowing firms to deduct the full cost of an investment immediately, the government effectively removes the income tax burden on new capital formation. In isolation, the OBBBA was a triumph for pro-growth tax reform.
Simultaneously, however, the administration launched a massive, broad-based tariff campaign. These levies were applied not only to finished consumer goods but, crucially, to intermediate inputs—such as steel, aluminum, and semi-finished components—and capital goods like industrial machinery. While the OBBBA lowered the cost of capital by adjusting income tax treatment, the tariffs simultaneously raised the acquisition cost of that same capital. This creates a policy tug-of-war where one hand gives a tax incentive while the other levies a surcharge on the very machinery that incentive is meant to promote.
The Algebra of Investment: Debunking the Neutrality Myth
The argument that tariffs are "neutrally" offset by expensing relies on a misunderstanding of how business taxes function. To analyze this, economists use the "user cost of capital" formulation, which calculates the minimum pre-tax return an investment must generate to satisfy shareholders and cover the replacement cost of the asset.
The cost of capital, c, is fundamentally determined by the interaction between the corporate tax rate (u), the value of depreciation deductions (z), and the tariff rate (t). When we break down the formula, the acquisition cost is modified by the tax value of the asset. Miran’s argument assumes that because a tariff is part of the purchase price, it is treated like any other cost—deductible over the life of the asset.
However, the math proves otherwise. When you rearrange the user cost of capital formula to isolate the tariff impact, the term (1+t) acts as a multiplier on the entire cost of the investment. Because a tariff is an upfront increase in the sticker price of capital, it exerts an upward pressure on the cost of capital that is independent of depreciation schedules. Even if a company enjoys 100 percent full expensing (where z = 1), the tariff remains as a permanent wedge, effectively raising the cost of that asset by the full percentage of the tariff rate.
Supporting Data: When Tariffs Outpace Tax Benefits
A common point of confusion in the debate is the belief that expensing is "generous enough" to absorb the tariff burden. To test this, consider a hypothetical firm importing a machine that depreciates at 20 percent per year. Before the OBBBA, such an investment faced an effective tax rate of 21 percent—the statutory corporate income tax rate. Under the OBBBA’s full expensing, that effective tax rate drops to zero.
If we then apply a modest 10 percent tariff to this machine, the math changes drastically. Despite the fact that the company can fully expense the asset, the 10 percent increase in acquisition cost causes the effective tax rate on the investment to surge to 33.3 percent.
In this scenario, the tariff imposes a burden far greater than the benefits provided by the tax code. The reason is structural: the corporate income tax is levied only on net profits, whereas a tariff is a tax on the entire cost of the investment, including the principal. Consequently, even a relatively low tariff rate creates a disproportionately high effective tax burden that can easily erase the competitive advantage gained by full expensing.
Official Responses and Theoretical Misalignments
Stephen Miran’s commentary has leaned heavily on the idea that "intermediate goods are largely untariffed" due to the way they are handled in corporate balance sheets. However, this interpretation ignores the reality of supply chain economics. Many businesses operate on thin margins where the upfront cash outlay for imported capital is the primary constraint on growth.
Critics of the current trade policy note that Miran’s view appears to confuse tax accounting with economic burden. While a firm can certainly deduct a tariff payment on its tax return, it still had to pay that tariff to the Customs and Border Protection agency at the point of entry. That cash is gone. The "benefit" of the deduction is merely a partial recovery of that lost capital, spread out over time or, in the case of expensing, realized in the current year. It does not change the fact that the firm has paid more for the same piece of equipment than it would have in a free-trade environment.
The Reach of the Burden: Beyond Expensing
The most significant danger of the "tariffs-are-neutral" narrative is that it ignores the vast swaths of the economy that cannot utilize full expensing. While the OBBBA covers many manufacturing assets, non-manufacturing structures—such as residential real estate, commercial office space, and warehouses—do not qualify for full expensing.
These industries remain highly exposed to the indirect costs of tariffs. Construction firms, for instance, rely on imported lumber, glass, and specialized hardware. These inputs are now subject to tariffs, increasing the price of the final structure. Unlike a factory owner who can point to a tax deduction to mitigate the sting of a machine purchase, a homebuilder or commercial developer simply faces higher input costs with no corresponding mechanism to offset them. This cascades through the economy, inflating the cost of housing and business expansion across the board.
Implications for Future Growth
The evidence presented suggests that the U.S. economy is currently operating under a policy contradiction. By implementing full expensing, the administration has correctly identified that high taxes on investment are a drag on worker productivity and wage growth. Yet, by maintaining broad-based tariffs, they are imposing a de facto tax on the very investments they are trying to encourage.
If the goal of the 2025 reforms was to create a globally competitive environment for American industry, the current tariff regime is undermining that objective. The economic reality is that tariffs and expensing are not two sides of the same coin. They are competing forces: one acts as a catalyst for growth, while the other acts as an anchor on capital formation.
To truly foster a high-growth environment, policymakers must reconcile these positions. If the objective is to maximize investment, the most direct path is to leverage the benefits of full expensing while removing the distortive barriers of tariffs. As the data shows, expensing is not a "cushion" for tariffs—it is a separate, pro-growth policy that is being hampered by the very trade barriers it is supposedly neutralizing. For American businesses to thrive, they need more than just efficient tax deductions; they need an environment where the cost of the tools they use to build the future is not artificially inflated by trade policy.
Suro Senen 
Reynand Wu 
Evan Lee Salim 