Why tariffs will hurt American consumers and fail to compensate for tax cuts

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Listener Susan Maxwell from Ypsilanti, Michigan, asks: 

Where does tax revenue from tariffs go? Into a general fund? How can I know if a product that I am buying has a tariff attached to the price? Can tariff tax money be a way of making up for tax cuts? Tariffs are so confusing!!!

Tariffs are an import tax that you – the consumer – end up paying for. 

President-elect Donald Trump claims that tariffs punish other countries, but they’re really a tax placed on imported goods that American companies pay to the U.S. government. Companies can either eat those costs or pass them along to you in the form of higher prices. 

“The most beautiful word in the dictionary is ‘tariff,’ and it’s my favorite word,” Trump said during an October conversation with Bloomberg News. 

Consumers may feel differently, if he goes through with his plan to impose sweeping tariffs on all goods coming into the U.S. Not only will prices likely go up, but the money that the government raises from tariffs won’t be enough to offset his planned tax cuts. 

The U.S. Customs and Border Protection currently collects revenue from tariffs and deposits it into the U.S. Treasury’s general fund. You can think of the general fund as “America’s checkbook,” which the federal government uses to help finance programs like Medicare. 

In 2023, tariffs raised $80 billion, accounting for 2% of America’s $4.4 trillion tax revenue.

“Eighty-billion dollars sounds like a lot of money to real people, but when you’re talking about $4.5 trillion, it’s not very much. It’s a very small amount of money,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center. 

Let’s assume that Trump goes through with his proposals to impose a 60% tariff on all Chinese imports, a baseline 10% tariff on all other goods and reciprocal tariffs on countries that have their own tariffs on American products. 

Those import taxes would bring in about $2.7 trillion from 2026 through 2035, according to a projection from the Committee for a Responsible Federal Budget. The Tax Policy Center has a similar estimate for how much tariffs could raise during a similar time period, putting the amount at about $2.8 trillion by 2034.

But that won’t compensate for the tax cuts and spending policies Trump has proposed for his second term.

“We don’t import enough goods. It’s not possible,” Gleckman said. 

Trump’s tax and spending plans could add $7.75 trillion to the more than $35 trillion national debt, according to the CRFB. (The CRFB produced a range of estimates looking at the impact of Trump’s policy proposals. The aforementioned numbers are their “central” estimates.)  

These calculations include Trump’s proposal to eliminate taxes on Social Security benefits and tips, and  assume that Trump’s 2017 tax cuts will be extended past 2025, when they’re set to expire. His tax law lowered the top individual tax rate from 39.6% to 37%, nearly doubled the standard deduction and increased the Child Tax Credit from $1,000 to $2,000, among other changes.  

Tariffs create ripple effects throughout the economy. Higher prices could prompt the Federal Reserve to hike interest rates again, Gleckman said. 

“By raising interest rates, it’s going to slow business investment, it’s going to reduce business profits and it’s going to reduce wages,” Gleckman said. 

Countries could also retaliate against us, which would hurt American businesses and constrain wage growth, Gleckman said. 

“What’s going to happen is foreign buyers are going to buy less American products because their countries are going to put tariffs on American imports, just like we put tariffs on their imports,” Gleckman said. 

Say, for example, Canada places a tariff on American-made television sets. 

“Canadians will buy fewer of those American-made products, and American companies will sell fewer of them and make less money,” Gleckman said. 

Retailers expected the tariffs under the U.S.-China trade war to be temporary, said Mary Lovely, senior fellow at the Peterson Institute. 

But Trump, nor President Biden, pulled back on tariffs, Lovely pointed out. While some companies held off on passing on prices during the first phase of the U.S.-China trade war, they may not be as generous this time around. 

The CEO of Autozone said in an earnings call that if Trump imposes tariffs, the company “will pass those tariff costs back to the consumer.” 

How do you know if what you’re buying has a tariff? 

It’s tricky for consumers to figure out whether the products they buy are imported, much less subject to certain tariffs, said Alan Deardorff, a professor emeritus of international economics at the University of Michigan’s Gerald R. Ford School of Public Policy. 

Many American-made products have parts that were imported from other countries, like cars, Deardorff said. 

But consumers can look up the tariff rates on products like food, textiles, chemicals, electrical equipment and more through the United States International Trade Commission’s website. You can directly look up an item using a search bar at the top of the page. 

Once you look up an item, you should see two columns. Column one duties are the ones you should focus on. Those are the rates that typically apply to the products the U.S. imports, Deardorff said. The site should also tell you if there are countries whose products are exempt from a tariff. 

Column two tariffs apply to “countries that do not have normal trade relations status with the United States,” according to the CBP. They include Cuba, North Korea, Russia and Belarus.

Not only will tariffs raise prices, but they’re a headache to navigate. 

“Most economists’ view of this is that tariffs are a terrible tool, but they’ve been used historically by countries as long as governments have existed because they’re such an easy thing to tax,” Deardorff said. 

They’re just not easy to see.