The White House is arguing that revenue from President Trump's tariffs on U.S. importers is going to help pay for domestic tax cuts.
“This time around, tariffs will help pay for both tax cuts and deficit reduction,” Stephen Miran, chair of the White House Council of Economic Advisers (CEA), said Monday, distinguishing the incoming general tariffs from more targeted tariffs initiated in Trump’s first term.
“Lower taxes on Americans, financed in part by revenue provided from foreigners, will create economic growth,” he said.
But there is a lot more to this argument than simple addition and subtraction.
The tariffs’ inflationary effects could undercut savings for American households spurred by the tax cuts, undermining revenue gains from higher consumer spending.
Looked at another way, tax cuts for consumers could end up effectively subsidizing cost increases spurred by tariffs.
And Trump's tariffs —if they work as intended — could shrink their own tax base as businesses import fewer goods from abroad and Americans shift their spending away from higher-tax foreign goods.
On top of that, projected tariff revenues are just a fraction of the cuts Trump is seeking legislatively. Official government accounting separates revenue changes resulting from legislation from those resulting from executive actions, potentially making it difficult to get an official score.
Here’s a look at the interplay between higher tariffs and lower domestic taxes on consumers and U.S. businesses.
Trump's tax cuts will cost more than what tariffs will bring in
Trump has proposed roughly $600 billion annually in import taxes on foreign goods.
While there is great uncertainty about how much of Trump's proposal will stick, even the most optimistic estimates of revenue created by the new tariffs fall well short of the cost of his tax plan.
Extending the 2017 Trump tax cuts is projected to cost $4.6 trillion over the next decade, according to the Congressional Budget Office. All proposed tax cuts being sought by Republicans — including Trump's call to scrap income taxes on tips, overtime pay and Social Security benefits — would cost $7.7 trillion, according to the Penn Wharton budget model.
Estimates for the long-term revenue additions of the tariffs hover in the range of between $2 trillion and $3 trillion over the next decade. The Tax Foundation puts the number at $2.9 trillion, the Yale Budget Lab puts it at about $3 trillion, and an analysis by Bloomberg Economics puts it at about $3 trillion.
“All tariffs to date in 2025 raise $3.0 trillion over 2026-35, with $588 billion in negative dynamic revenue effects,” the Yale budgeteers said Monday.
Tariffs should shrink their own tax base over time
If the tariffs work as intended, U.S.-based companies will import less, and foreign firms will relocate their factories to the U.S.
“As the tariffs are imposed, as consumers and businesses change what they buy and where they buy it, imports and the base that the tariffs are imposed upon will decline over time,” Joseph Rosenberg, a tax and income modeler at the Urban-Brookings Tax Policy Center (TPC), told The Hill.
Rosenberg said the diminishing returns on tariff revenues could cost up to 30 percent to 50 percent of the revenue originally generated by the taxes.
The reductions could be so significant that the revenue from tariffs could be thought of as a “side effect” compared to the main effect of reducing U.S. imports.
“It is important to note here that tariffs are not levied simply to collect revenues,” Miran said Monday. “Revenue is a nice side effect.”
Will tax cuts end up ‘subsidizing’ the higher price of goods from tariffs?
Just as consumers are set to get more money in their pockets from the extension of an income tax cut, goods are likely to get more expensive from tariffs.
“You’re taking with the left hand what the right hand is giving,” Rosenberg said. “Extending the tax cuts … offers more disposable income, but you’re also taking away that disposable income via tariffs. Those things will offset each other from a household perspective.”
While the 2018 Trump tariffs did not result in a bout of inflation anywhere close to the scale of the pandemic inflation, Trump’s general tariff is producing some consensus among economists about inflationary effects.
“Higher tariffs will be working their way through our economy and are likely to raise inflation in coming quarters,” Federal Reserve Chair Jerome Powell said in a speech Friday.
Tariffs and tax cuts are a double whammy for lower earners
The benefits of the 2017 Trump tax cuts were skewed toward higher earners, nearly all analyses of the legislation show.
One report by the Institute for Taxation and Economic Policy found that “the richest 1 percent would receive an average tax cut of about $36,300” if the 2017 cuts remain in place in 2026.
“The next richest 4 percent would receive an average tax cut of about $7,200. All other groups would see a tax increase with the hike on the middle 20 percent at about $1,500 and the increase on the lowest-income 20 percent of Americans at about $800,” the group found.
Economists argue that higher tariffs amount to a regressive tax, since the consumer goods that are subject to tariffs make up a larger share of the expenses for low- and middle-income households.
“As you offer income tax cuts that are tilted toward the high end, on the one hand, and then these tax and price increases from tariffs that are distributed across the income distribution, on the other hand, it’s the households at the low and middle that are going to be worse off,” Rosenberg said.
Trump’s additional tax cut proposals that are geared toward working people — such as canceling taxes on tips and providing a break on auto loan payments — are unlikely to redistribute the overall burden of the tariff-and-tax-break combination, said Erica York, vice president of federal policy at the Tax Foundation, a right-leaning think tank.
“You’re not going to make up for the huge tax hike of tariffs with some really targeted little carve-outs like tips and that sort of thing,” she said.
Tariffs won't show up in official scorekeeping
The tax cuts are coming from Congress, and the tariffs are coming from the White House, which means there might not be an apples-to-apples comparison of their revenue, distributional and dynamic effects from official scoring bodies such as the Joint Committee on Taxation and the Congressional Budget Office.
“The tariffs will not show up in the official scorekeeping because they’re not being enacted legislatively. They’re being imposed by administrative action,” Rosenberg said.
But even if taxes and tariffs are considered side-by-side in response to an inquiry from lawmakers, official models might not fully capture their interplay.
“I would be very skeptical of the numbers that we see come out of the White House on tariffs and taxes,” York said.
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