Lower taxes, fewer regulations, and open trade are the formula for prosperity. Conservatives used to understand this.

I repeatedly hear a dangerous idea in some corners of the right: the notion that extending the 2017 Tax Cuts and Jobs Act (TCJA) will somehow offset the economic damage of President Trump’s protectionist tariffs. As the theory goes, “as long as Republicans hurry to pass the president’s one big, beautiful bill, all will be okay.”

This is economic fantasy, and it’s time we confront it.

Jack Salmon and I explain this here. It is worth mentioning that we strongly support extending the TCJA’s expiring provisions. Letting them lapse would amount to a broad tax hike on American families and businesses. But the reality is that the long-run growth boost from a full extension is modest, on the order of 0.5 to 0.7 percent of GDP according to the best dynamic estimates from the Economic Policy Innovation Center. Also, as we write:

The Tax Foundation’s model finds that making the individual and business tax cuts permanent would eventually raise U.S. economic output by roughly 1.1% in the long run​. (Put differently, it might bump the annual growth rate by only a few tenths of a percent on average.) However, the Tax Foundation assumes that the additional $4.6 trillion in budget deficits has no impact on the capital stock and subsequently no impact on growth prospects.

This matters to us because the reality of higher debt brought on by a tax extension bill that overlooks offsets in favor of political gains could further undercut the supply-side impact of the tax cuts. The borrowing that will come from an extension without enough offsets will likely raise interest rates and crowd out private investment. Even the Congressional Budget Office, using conservative assumptions, acknowledges that the drag caused by added debt could outweigh some of the short-term growth. And the CBO’s models likely underestimate the long-run impact of debt on capital formation and productivity.

But the bottom line is that even under the most optimistic assumptions, we’re talking about lifting average annual growth by only a few tenths of a percent. I will take this over policies that dampen growth, but it won’t be as much as some lead us to believe.

For one, most of the provisions are already in place and largely expected to be extended, meaning the economic effects of doing so are already baked in. For another, the most effective provisions — like R&D expensing and bonus depreciation — are relatively narrow and don’t get as much attention as the broader, less growth-oriented individual rate cuts.

Now, consider what the economy is up against on the other side of the ledger: tariffs. While some Republicans continue to romanticize tariffs as a tool of economic patriotism, the evidence is overwhelming that they’re a self-inflicted wound. Trump’s tariffs are taxes on American consumers and businesses. They raise input costs, damage global supply chains, and inject enormous uncertainty into investment decisions.

The early estimates put the long-run GDP loss from the tariffs at around 1 percent. But that number is likely too low. More recent modeling, like the work from Penn Wharton’s Budget Model, finds that when you account for uncertainty, retaliatory tariffs, and the impact on capital investment, the long-run hit could be 2–3 percent, or even as high as 5–6 percent in worst-case scenarios. That’s the kind of economic damage that extending the tax cuts simply can’t patch over.

To put it plainly, a renewed TCJA might give us a 0.6 percent bump in growth, but the tariffs could easily erase four times that.

This is not a plea to abandon tax reform. Quite the opposite. We should extend the tax provisions (and the pay-fors), while prioritizing the most pro-growth provisions of the TCJA, particularly full and immediate expensing. We should also pair extension with spending restraints and loophole closures to reduce the debt burden.

For spending restraints, EPIC’s Paul Winfree and Paragon’s Brian Blaise make a powerful case for reforming Medicaid, which is as they note “the nation’s third-largest, and most flawed, entitlement program.” They also explain that “Done right, reform could protect the vulnerable, promote private coverage and save hundreds of billions of dollars.” Here is a reality that those claiming we can’t cut Medicaid without hurting the poor fail to understand:

Medicaid’s financing is fundamentally broken. Because of ObamaCare, the federal government pays $9 for every $1 of state spending on able-bodied working-age adults, compared with roughly $1.33 for pregnant women and disabled children. That incentive pushes states to favor healthy adults over the vulnerable in enrollment and access to providers and better services.

As for closing loopholes, we at the Mercatus Center have created an exhaustive list of tax expenditures, with an explanation of what each of them does and the special interest they often serve, and arguments for terminating or reforming them. There is a lot of tax revenue on that website to offset the tax extensions, with the bonus of moving us closer to a better tax base.

But, please, let’s not pretend that tax extension alone can overcome the economic drag of a trade war. That’s like trying to win a footrace while dragging an anchor. Lower taxes, fewer regulations, and open trade are the formula for prosperity. Conservatives used to understand this.