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Key Takeaways
- The US government’s 2025 fiscal shift involves significant income tax cuts alongside unprecedentedly high tariffs, a combination that economic analysis suggests will leave most Americans worse off.
- While tariff revenues have increased substantially, their long-term fiscal benefit is questionable due to potential legal challenges, behavioral responses, tax avoidance, and the dampening effect on economic growth.
- Tariffs are found to be a more regressive tax than income tax, disproportionately affecting lower-income households, and add to the negative distributional impacts of other legislative changes.
- The implementation of tariff policy is marked by unpredictability and legal uncertainties, alongside significant efficiency costs and negative political economy consequences like rent-seeking and corruption.
- Economic analysis indicates that tariffs will not effectively address US trade imbalances and are unlikely to spur a manufacturing renaissance, instead acting as a negative supply shock that increases prices and reduces economic growth.
The US Fiscal Pivot: Tax Cuts and Tariffs
In 2025, the United States experienced a major fiscal transformation. The US Congress enacted substantial income tax cuts, concurrent with the second Trump administration introducing new tariffs on goods at levels not seen in the US since the Great Depression. These exceptionally high tariffs are unusual for most developed nations, where tariff revenues typically represent a small fraction of both the value of goods imported and total government revenues.
Note: Actual revenues may be lower than those implied by this rate due to myriad exemptions.
While extensive analyses exist regarding the first Trump administration’s tariffs on China and historical uses of tariffs in the US, the full ramifications of the administration’s 2025 fiscal redirection are still emerging. An examination of tariffs as a comprehensive fiscal policy tool, considering both tax policy and macroeconomic factors, suggests that this fiscal shift will likely result in a net negative outcome for the majority of Americans. The adverse distributional effects of tariffs are exacerbated by considerable efficiency costs, unfavorable political economy consequences, and the dual macroeconomic pressures of negative supply shocks, which typically lead to increased prices and diminished economic growth.
Evaluating Tariffs as a Fiscal Tool
Although tariff revenues have surged under the new Trump administration’s policies, reaching approximately $30 billion per month by August 2025, several factors will shape the long-term revenue potential of these tariffs. These include the increasing likelihood of price pass-through as companies adjust their pricing over time if tariffs persist, consumer and business behavioral shifts, strategies for tax avoidance, and the potential for companies to lobby for exemptions. Furthermore, other key considerations diminish the net fiscal benefits derived from tariffs. These include a mechanical reduction in other tax bases, as revenue generated from tariffs cannot simultaneously be taxed through other means. There are also costs associated with payments to domestic industries experiencing market share losses abroad, such as the agricultural sector. Finally, the broader impact of reduced economic growth on the overall tax base cannot be overlooked.
Legal uncertainties also surround the President’s tariff regime. If the US Supreme Court upholds lower court rulings that question the President’s expansive use of tariff authority under the International Emergency Economic Powers Act (IEEPA)—a possibility many legal scholars consider significant—it could restrict the administration’s flexibility in implementing tariffs, potentially dampening tariff revenues substantially. A large portion of the new US tariff revenues generated in 2025 originates from IEEPA tariffs.
Should these broad tariffs withstand legal challenges, they could generate an estimated $2 trillion in revenue over the next ten-year budget window. However, these projected tariff revenues are insufficient to offset the income tax cuts enacted as part of the 2025 budget legislation, which are estimated at $3.4 trillion over the same period. Despite this shortfall, the substantial current path of US deficits and debt may make these tariff revenues difficult for future administrations to dismiss. Nevertheless, the potential revenue from tariffs remains limited; even at revenue-maximizing rates, they would fund less than one-fifth of current US federal personal income tax revenue.
Economic Costs and Distributional Impacts
Even at current rates, tariffs carry significant economic drawbacks. Analysis indicates that the efficiency costs associated with tariffs are approximately 30% of the revenue raised at the current US tariff rates (as of September 2025). These efficiency costs could escalate to 90% of the revenue raised if tariffs were set at their revenue-maximizing levels.
💡 Moreover, tariffs function as a more regressive tax compared to income tax, primarily because lower-income households save a smaller portion of their income than higher-income households. While less efficient than value-added taxes, tariffs exhibit similar distributional effects, as savings are exempt from both. The 2025 tax and budget legislation has already impacted lower-income segments of the population through reductions in Medicaid and food assistance, generating negative income effects for the bottom three income deciles. The legislation’s overall regressive impact is further amplified by the fact that the tax cuts represent a larger share of after-tax income for households higher up the income distribution. The addition of tariffs exacerbates this regressivity, resulting in a negative net impact for the majority of households. For all but the top decile of US income earners, the tax increases resulting from tariffs eclipse the benefits derived from the OBBBA tax cuts.
In addition to economic costs, tariffs foster political dysfunction by encouraging rent-seeking and corruption. Foreign governments, corporations, and lobbyists actively seek preferential treatment, such as lower tariff rates or exemptions, over their competitors. Compounding these distortions, the Trump administration has employed tariffs in a coercive manner, compelling several foreign governments to agree to unprecedented terms, including commitments of multi-hundred-billion-dollar investment funds allegedly subject to the Trump administration’s direction. US tariffs have also been used as punitive measures based on criteria unrelated to trade; for instance, a 50% tariff was imposed on Brazilian products, largely due to perceived displeasure with legal proceedings within Brazil.
Implementation Challenges and Unforeseen Consequences
The current implementation of US tariff policy is characterized by haphazardness and uncertainty, creating both opportunities for rent-seeking and considerable unpredictability. In less than eight months (up to the end of August), more than 87 significant policy shifts have altered the US trade landscape. Concurrently, de minimis exceptions, which streamline the customs treatment of small packages, were abruptly eliminated, and the introduction of complex new rules has complicated compliance efforts.
These administrative frictions impose a particular burden on smaller businesses and increase costs for both US importers and customs officials. Supporters of tariffs may focus on specific implementation details while arguing that the costs to households are justifiable if they achieve goals such as addressing US trade imbalances and boosting domestic manufacturing production and employment. However, evidence suggests that tariffs will not effectively resolve US trade imbalances, as they do not address the fundamental causes.
✅ The US operates as a net international borrower, largely due to significant fiscal imbalances within the US federal government. Budget deficits have exceeded 6% of GDP during periods of peace and full employment. The budget deficits for 2025 are tracking similarly to those of 2023 and 2024, and the OBBBA is projected to widen budget deficits compared to pre-OBBBA forecasts in the coming years. Furthermore, the Trump administration’s push for increased foreign investment in the US, if successful, could actually widen trade imbalances by increasing financial inflows, which are the mirror image of US current account deficits.
Impact on Exports and Manufacturing
While tariffs are intended to reduce imports, they also negatively affect exports through several mechanisms. Firstly, tariffs reallocate economic resources toward industries that compete with imports and away from export-oriented industries. All else being equal, tariffs contribute to a stronger dollar, facilitating this reallocation. Secondly, exports suffer from retaliatory measures; the current difficulties faced by US soybean farmers serve as an example of US exporters encountering diminished market access. Thirdly, a considerable number of US exports incorporate imported components, meaning tariffs increase input costs, thereby negatively impacting competitiveness.
📊 Beyond macroeconomic imbalances, tariffs are proving ineffective in sparking a US manufacturing renaissance. This outcome is not surprising to those who have studied previous tariff episodes, including the tariffs imposed on Chinese goods during the first Trump administration, which were associated with reduced job growth. Production in many US industries has been negatively impacted by disruption, uncertainty, and competitiveness challenges stemming from higher input costs. On balance, the efficiency costs associated with tariffs are expected to harm overall economic growth.
Tariffs as a Negative Supply Shock
Ultimately, tariffs function as a negative supply shock. In addition to hindering output, they contribute to upward price pressures, as both imported goods and their domestic competitors, or products using imported inputs, become more expensive. The propagation of these price increases throughout the economy can be delayed for several reasons. Some level of import stockpiling likely occurred before tariffs were implemented. There are lagged effects of tariffs on intermediate goods, and some firms may hesitate to raise prices until tariff certainty increases. Indeed, significant uncertainties persist regarding the future trajectory of tariffs, given the unpredictable nature of policy implementation and the strong possibility that the tariffs could be overturned by the Supreme Court.
⚡ Nevertheless, tariffs are poised to lead to higher price levels, and available data suggest this process is already underway.
Conclusion: A Misguided Policy Approach
In conclusion, the Trump administration’s approach to tariffs is fundamentally misguided. Combining significant income tax cuts with substantial tariff increases creates a tax system that is less efficient, less progressive, and more susceptible to political manipulation. The Trump tariff regime also introduces stagflationary headwinds and deteriorates goodwill with international partners. While tariffs can serve as a useful tool within a rules-based system under specific circumstances, such as for remedies or safeguards, the ad hoc imposition of high tariffs against nearly all global trading partners by the Trump administration causes serious damage to US international economic and political relations.
The underlying policy objectives of tariffs, some of which may be constructive, could be more effectively achieved through alternative means. For example, various tax system reforms can generate general revenue, the income tax system can facilitate income redistribution, and subsidies can be employed to support strategic industries—all at a lower efficiency cost than the deployment of tariffs.
Expert Summary
The analysis concludes that the 2025 US fiscal shift, integrating significant income tax cuts with high tariffs, is likely to harm most Americans. Tariffs are identified as a regressive and inefficient tax, exacerbating existing economic inequalities and failing to address trade imbalances or revitalize manufacturing. The policy’s implementation is fraught with uncertainty and potential legal challenges, while its broader economic consequences point towards stagflationary pressures and reduced growth.
Ultimately, the study suggests that the objectives pursued through tariffs could be more effectively and efficiently addressed using alternative policy instruments, such as other tax reforms, income redistribution mechanisms, and targeted subsidies, thereby preserving international economic and political relations.
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