At several points over the course of the 2024 campaign, former President Trump has put forward a variety of different proposals for broadly raising tariffs across the board. A tariff is a tax on imports, generally levied at an ad valorem rate on the import’s customs value. Americans purchase imports directly as a part of final demand—such as when a consumer buys imported clothing at a retailer, or a business buys imported software—or as an input into the domestic production process, such as when a domestic auto manufacturer imports a key part. Tariffs, therefore, carry the potential to affect many different layers of the economy.
Like all tax policy, tariffs involve trade-offs, and they have both fiscal and macroeconomic implications. Unlike narrow, targeted tariffs, the broad tariffs of the magnitude proposed by President Trump have the potential to raise meaningful revenue over the budget window. However, these effects are uncertain and sensitive to key assumptions about the behavior of both US and foreign consumers, businesses, and governments.
President Trump’s proposals have also sparked a public debate about who bears the ultimate burden, or the incidence, of tariffs. This question is neither new nor broadly open in the forum of public finance and trade economics, however. A consistent theoretical and empirical finding in economics is that domestic consumers and domestic firms bear the burden of a tariff, not the foreign country.
This analysis’ purpose, therefore, is not to re-adjudicate the incidence question but to instead, from the standpoint of economic evidence, quantify the fiscal and macroeconomic effects of illustrative tariff proposals that capture the elements of various comments from President Trump. The Budget Lab (TBL) modeled 12 proposals that differ in their tariff rates on various countries and whether those countries retaliate against the US with their own counter-tariffs. TBL employed a widely-used global trade model to help measure the effects of these proposals on US and foreign trade flows, on US tax revenues, and on US consumer prices.
TBL’s main findings:
- The tariff proposals TBL modeled raise between $1.2 to $4.4 trillion over 10 years under conventional assumptions, or 0.3 to 1.2% of average GDP.
- When other countries retaliate against US tariffs, that lowers US tariff revenue relative to the same proposal under a no-retaliation scenario by 12-26%.
- TBL calculated that these tariffs also initially raise the level of consumer prices by 1.2 to 5.1%. To put this in perspective, this represents 7 to 31 months of normal inflation under the Federal Reserve’s target, and between a tenth and a third of the price level increase experienced over 2020-2023.
- The loss in average disposable income from these price increases would be the equivalent of $1,900 to $7,600 per household in 2023 dollars (the final price increase and loss to household purchasing power would depend on, among other things, the extent of substitution away from tariffed goods and the Federal Reserve’s reaction to the tariff-driven price shock).
- Effective (that is, weighted-average) tariff rates are 13 to 52 percentage points higher before substitution. Even after US consumers and businesses substitute towards domestic or lower-tariffed-imported options, effective tariff rates are 6 to 27 percentage points higher, raising the overall effective tariff rate to levels at least unseen since World War II and possibly since 1899.
Finally, while TBL performed most of its analysis under a conventional assumption of fixed US aggregate economic activity, we also present some partial estimates of dynamic effects on the size of US economy from the various tariff proposals.
- In the medium-term, real US GDP contracts by between -0.5 to -1.4%. Under standard Congressional Budget Office (CBO) rules of thumb, these partial GDP effects imply tariff revenue would be smaller by an additional $400 billion to $1 trillion over 10 years.
To read the report as it was published on the Budget Lab webpage, click here.
To read the full report, click here.