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The Economic and Fiscal Effects of the Trump Administration's Proposed Tariffs [1]

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Date: 2025-02

The Budget Lab modeled the economic and fiscal impact of the tariff proposal both with and without retaliation.2 The results are summarized in the table above.

Aggregate price effects. The proposed tariff puts upward pressure on the PCE price level of 0.72-0.76% before consumer substitution, depending on the extent of retaliation from Canada, Mexico, and China. Pre-substitution is the best way to gauge the hit to consumer welfare. That is the equivalent of a loss of purchasing power of about $1,250 on average per household in 2024$.

Even after consumers substitute, and assuming the Federal Reserve does not tighten monetary policy to counteract the tariff’s price effects, the level of PCE prices is still persistently 0.6% higher in the medium-term, a loss in purchasing power of about $1,000 per household in 2024$.

Output effects. In the medium-to-long run, the size of the US economy is persistently 0.2% smaller in real terms under the package, even after the US and global economies rebalance. This long-run result does not differ meaningfully between retaliation and no retaliation scenarios. 3 4

In the medium-to-long run, the size of the US economy is persistently 0.2% smaller in real terms under the package, even after the US and global economies rebalance. This long-run result does not differ meaningfully between retaliation and no retaliation scenarios. Fiscal effects. Over 2026-2035, this tariff package raises $1.4-1.5 trillion under “relaxed” conventional assumptions (keeping income constant for the US but allowing it to fall for foreign countries). Conventional revenues under retaliation are 6% smaller than under non-retaliation assumptions.

Net revenues would, in reality, likely be even lower than this once dynamic effects are taken into account, given the smaller size of the US economy. Under Congressional Budget Office (CBO) rules of thumb, a -0.2% permanent shock to the size of the US economy that phases in over three years—akin to how The Budget Lab models tariff impacts—lowers revenues by an additional roughly-$130 billion over a decade.

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[1] Url: https://budgetlab.yale.edu/research/economic-and-fiscal-effects-trump-administrations-proposed-tariffs

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