Key Points:
- Tariff revenue to pay down debt might be appealing on paper, but uncertainty about the amount that would be raised and the duration of the tariffs should temper expectations.
- Further, economic analysts across the political spectrum have raised concerns about how the proposed tariffs would impact the United States economy.
- In sum, tariffs aren’t a free lunch.
At a time when the federal government is facing escalating and unsustainable budget deficits, the prospect of a multi-trillion dollar windfall from new tariffs might sound attractive. Before counting the money, however, we should listen to the bipartisan chorus of economists, business leaders, and everyday American consumers who are expressing concerns that the windfall could be a bust, or worse.
When he announced a 10 percent universal tariff on April 2, along with higher “reciprocal” tariffs on selected nations, President Trump claimed that they would produce “trillions and trillions of dollars to reduce our taxes and pay down our national debt.” More precisely, one of his senior advisors, Peter Navarro, estimated that the tariffs would bring in $6 trillion over 10 years. If true, that would offset the $5.8 trillion deficit increase proposed in the congressional budget resolution.
There are, however, significant caveats to note with these projections. For one thing, it’s not clear that the President has the legal authority to impose these tariffs without congressional approval. That issue is currently being litigated in at least three cases. But assuming that the President prevails in those cases, any projection of major new revenue is dependent on the tariffs remaining in place, undiminished by exclusions, delays, and deals.
President Trump has already paused the reciprocal tariffs to allow for dealmaking and indicated that some electronics imported from China would be excluded. If the tariffs turn out to be primarily a negotiating tactic, they won’t remain in place or at their initial levels long enough to raise trillions of dollars.
Assuming the tariffs do remain in place, side effects such as inflation, uncertainty, retaliation, and bailouts for domestic businesses hit by retaliation would combine to reduce the likely net revenue. As noted by the nonpartisan Committee for a Responsible Federal Budget, “Although significant revenue can be derived from tariffs, tariffs are also likely to increase prices and reduce output, and the negative economic consequences associated with tariffs can lower expected revenue.”
The President has not released a budget yet so there is nothing on paper to support his revenue estimates from tariffs, but economic analysts across the political spectrum have looked at what the Administration has proposed and concluded that the tariffs would likely raise far less revenue than Trump and Navarro have claimed. More significantly, they have universally concluded that broad and large scale tariffs would have a negative effect on the gross domestic product (GDP).
- As of April 11, the Tax Foundation found that, “Altogether, Trump’s tariffs will raise $2.2 trillion in revenue over the next decade on a conventional basis ($1.4 trillion on a dynamic basis), it will reduce US GDP by 0.8 percent, all before foreign retaliation. Including foreign retaliation announced as of April 10, the tariffs reduce US GDP by 1.0 percent.”
- As of April 15, The Budget Lab at Yale (TBL) found that, “The 2025 tariffs to date, were they to remain in place (and not expire after 90 days), would raise $2.4 trillion over 2026-35 conventionally-scored. Given the negative output effects of the tariffs, there would be additional dynamic reductions in tax revenue as a result. Based on Congressional Budget Office rules-of-thumb, TBL estimates that these effects would total -$631 billion over the decade.” TBL also found that “US real GDP growth is -1.1pp lower from all 2025 tariffs. In the long-run, the US economy is persistently -0.6% smaller respectively, the equivalent of $180 billion annually in 2024$.”
Concerns about the negative economic effects of higher tariffs, including uncertainty, higher prices and trade wars, have sent the markets on a roller coaster ride and renewed speculation that the U.S. may be headed for a recession. Even President Trump appeared to take notice when yields on Treasury securities jumped and the dollar fell. Under normal circumstances, investors would be expected to flock to these assets, not dump them. The unusual market behavior raises the uncomfortable question whether our huge borrowing needs have damaged the United States’ status as the “safe haven” it has been throughout the post-WWII years.
Alarm bells were also triggered by Federal Reserve Board Chair Jerome Powell, who told the Economic Club of Chicago this week that, “The level of the tariff increases announced so far is significantly larger than anticipated. The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
Powell warned that “[t]ariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent. Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored. Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.”
Powell may well be keeping an eye on the expectations of American consumers, who have not greeted a potential trade war with enthusiasm. According to the University of Michigan Surveys of Consumers, “Consumer sentiment fell for the fourth straight month, plunging 11% from March. This decline was, like the last month’s, pervasive and unanimous across age, income, education, geographic region, and political affiliation. Sentiment has now lost more than 30% since December 2024 amid growing worries about trade war developments that have oscillated over the course of the year.”
Not surprisingly, inflation continues to be a concern. According to the Surveys, “Year-ahead inflation expectations surged from 5.0% last month to 6.7% this month, the highest reading since 1981 and marking four consecutive months of unusually large increases of 0.5 percentage points or more. This month’s rise was seen across all three political affiliations. Long-run inflation expectations climbed from 4.1% in March to 4.4% in April, reflecting a particularly large jump among independents.”
As with so much that affects the economy, higher tariffs are not a free lunch. While there is clearly the potential for tariffs to provide a needed source of revenue, which in theory could help reduce the budget deficit, there is also a risk that this particular “cure,” when taken in heavy doses, could do more harm than good.
