Trump tariffs could help clear the way for bigger tax cuts as Congress eyes a potential revenue windfall — and a shrinking economy
- President Donald Trump's much higher-than-anticipated tariffs have crushed stocks but could raise a substantial amount of revenue, while shrinking the economy in the process. The import taxes could generate $700 billion a year in revenue. That could help clear the way in Congress for bigger income tax cuts, though the tariffs would also be the equivalent of a massive tax hike on consumers.
Wall Street suffered a massive case of sticker shock when President Donald Trump unveiled his latest round of tariffs on "Liberation Day," wiping out $6 trillion in market cap.
But the flip side of the much higher-than-anticipated duties is a potential revenue windfall that could help clear the way for getting bigger tax cuts passed in Congress.
Lawmakers have already taken a key step toward that end. Early Saturday morning, Senate Republicans approved a framework to extend Trump's tax cuts from his first term, add new cuts like ending taxes on Social Security income, and slash spending.
Some fiscal conservatives in the GOP have balked at the massive deficits and debt more tax cuts could bring. But economists at Citi Research said in a note on Thursday that the aggressive tariffs "may now become a justification for larger tax cuts."
It's unclear if tariffs will remain as high as announced (Chinese imports face a 54% levy) or for how long, as Trump has suggested he is open to negotiating rates lower while his authority for imposing them could also face legal challenges.
But for now, they could provide political cover for lawmakers to push through tax cuts on Capitol Hill.
"So long as tariffs remain in place, the administration can also point to the around $700bln in annualized revenue they would raise assuming unchanged trade deficits," Citi said. "Treasury Secretary Bessent suggested yesterday that that could be used to offset new individual tax cuts. That might be an argument used to win over fiscal conservatives and is also consistent with prior administration statements that the tariff revenue will be redistributed to the American people."
Tax cuts could help ease the impact that tariffs will have on the economy, which is increasingly seen slipping into recession.
On Friday, JPMorgan analysts said they expect GDP to shrink by 0.3% this year, reversing a prior view for an expansion of 1.3%. The unemployment rate is also seen climbing to 5.3% from the current level of 4.2%.
A separate analysis from the Tax Foundation also estimated the costs and benefits of Trump's tariffs.
It found that when the new duties are added to the already-announced ones, the tariffs will reduce GDP by 0.7% and raise nearly $2.9 trillion in revenue over the next decade. Foreign retaliation will shrink GDP by another 0.1%.
The tariffs will also reduce after-tax income by an average of 1.9% and equate to an average tax increase of more than $1,900 per US household in 2025, according to the Tax Foundation.
Meanwhile, estimates vary on the effective tariff rate. The Tax Foundation put it at 16.5% and said tariffs will increase federal tax revenues by $258.4 billion in 2025, or 0.85% of GDP, representing the largest tax hike since 1982.
But Fitch Ratings estimated that the overall effective tariff rate will be about 25%—the highest since 1909—up from its prior estimate of an 18% rate and more than 10 times last year’s rate of 2.3%. Citi said it's above 25%.
In a note on Thursday, JPMorgan chief economist Bruce Kasman called the tariffs the biggest tax increase since the Revenue Act of 1968, which preceded the 1969-70 recession, and sounded doubtful that they could be sufficiently offset by income tax cuts.
"The effect of this tax hike is likely to be magnified—through retaliation, a slide in US business sentiment, and supply chain disruptions," he wrote. "The shock is likely to be only modestly dampened by the flexibility tariff hikes afford for further fiscal policy easing."
This story was originally featured on Fortune.com