A 10 percent tariff raises the cost of business investment by 10 percent even when companies can immediately deduct those costs under full expensing, according to a new analysis from the Tax Foundation. The report directly challenges claims by former White House Council of Economic Advisers chair Stephen Miran that Trump's tariffs don't really make imported business equipment more expensive because businesses can deduct those costs from their taxes. The Tax Foundation's mathematical breakdown shows that argument is mistaken—tariffs burden investment regardless of tax deductions.
The report demonstrates this with a hypothetical machine that depreciates at 20 percent per year. Before the One Big Beautiful Bill Act (OBBBA), that machine faced an effective tax rate of 21 percent under the corporate income tax. After OBBBA introduced full expensing, the effective rate dropped to zero. But when a 10 percent tariff is applied to the same machine, the effective tax rate jumps to 33.3 percent—higher than before expensing was introduced. The report calculates the cost of capital rises to 27.5 percent under the tariff scenario. Even though the tariff rate is less than half the 21 percent corporate tax rate, it creates a bigger burden on investment because tariffs apply to the entire investment while corporate income tax only applies to net returns.
"Even under the most favorable case, full expensing, the corporate tax term cancels out, but the tariff term remains," the authors write. The report finds that Miran's claim that "intermediate goods are largely untariffed" under current policy fundamentally misunderstands how tariffs interact with tax deductions. According to the analysis, the basis adjustment for tariffs only means the same share of returns is taxed with and without the tariff—but the cost of the investment still rises proportionally with the tariff rate. The authors note that tariffs also burden assets that get no expensing at all, such as non-manufacturing structures like residential property, where imported lumber and other intermediate goods face duties with no offsetting tax benefit.
The report explains that tariffs and expensing work through completely different mechanisms in the cost of capital formula. Expensing eliminates the income tax burden on new investment by letting firms immediately deduct investment costs, while tariffs raise the acquisition cost of imported capital goods and inputs. Using standard cost of capital calculations, the Tax Foundation shows that the tariff term increases the entire cost of capital regardless of how generous depreciation deductions are. This matters especially for quickly depreciating machinery like computer equipment—exactly the kind of imported assets that qualify for bonus depreciation and face Trump's tariffs of at least 10 percent. The Trump administration's 2025 policies created a collision: OBBBA reduced tax burdens on investment while broad-based tariffs on goods imports simultaneously increased investment costs.
The report's conclusion is straightforward: full expensing and the repeal of tariffs would leave investment less burdened than current policy. "There is another way to decrease the cost of capital in the US," the authors write. "And it's much simpler: repeal the tariffs." For businesses importing machinery, equipment, and intermediate goods, the math is clear—tariffs impose a heavier effective tax rate than the corporate income tax itself, and no amount of expensing can neutralize that burden.