Tariffs as Fiscal Policy

The year 2025 brought a historic shift in the role of tariffs in the US tax system, as the Trump administration imposed high broad tariffs while Congress simultaneously enacted large income tax cuts. This fiscal shift has important implications. While maintaining tariff rates at autumn 2025 levels would generate large government revenues, such broad tariffs have significant downsides: efficiency losses would approach one-third of revenues raised, the tax system would be less progressive, and tax administration would become more complex. Among their macroeconomic implications, broad tariffs generate a large negative supply shock, raising prices while dampening aggregate activity.