Kent Smettes, faculty director of the Penn Wharton Budget Model, challenges the narrative that tariffs are a tool to protect domestic industry. In a recent interview with wealth, Smettes backed what he said was his long-standing view that large-scale tariffs are a “dirty VAT” (value-added tax) — a policy he believes is far more damaging to the U.S. economy than traditional tax increases.
While economists generally view a flat, broad-based VAT as an effective method of raising government revenue, Smettes distinguishes tariffs as a “dirty” variation because they are much less uniform. A standard VAT is widely applied, distorting decisions primarily between spending now and saving for later. However, tariffs target specific goods, causing consumers and businesses to change behavior in inefficient ways to avoid the tax.
What’s more, Smettes said, despite the tariffs being presented as a deficit-reduction tool that will bring in revenue that will make a significant difference to the United States’ $38.6 trillion national debt, he sees things differently.
“We have a lot of debt and we will pay down more and more debt along our current baseline,” Smettes said, adding that he sees a future where investors demand higher returns to keep investing in the U.S. and a “feedback effect” that will continue to increase debt well into the future.
The Supreme Court has weighed in on the legality of many of Trump’s tariffs since hearing arguments in November, with several Trump-appointed justices taking a stand on the matter. Their decision can be made as soon as Friday.
A central flaw in the tariff strategy, according to Smettes, is a misunderstanding of what America actually imports. He notes that 40 percent of imports are not final goods destined for store shelves, but intermediate inputs used by American companies to manufacture their own products. As a result, the 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 the exact opposite,” Smettes said. “It Hurts American Manufacturers.” He cited the example of companies like Deere, arguing that the US economy benefits when such firms focus on high-margin intellectual property rather than making low-margin components such as screws or steel strip. By taxing these inputs, the policy effectively penalizes domestic production.
Deere has repeatedly quantified tariffs as a major cost element, disclosing costs of about half a billion dollars for the full 2025 fiscal year and projecting a $1.2 billion hit for 2026. Management described the tariffs (on metals and certain imported components) as causing “margin pressures” and weaker operating profits, even as operating income held up. According to Smetters, Deere has been evaluating and renegotiating supply contracts and considering shifting some sourcing and manufacturing footprints to reduce exposure to tariffs and input cost increases.