The election of Donald Trump to a second term in November 2024 indicated that tariffs would play a much larger role in US economic policy. The use of tariffs—taxes on imports— expanded significantly during Trump’s first term, with tariff revenue nearly doubling relative to the value of imports. But his 2024 campaign promised a far larger role for tariffs, and he has delivered on that promise. In early 2025, the average tariff rate soared from less than 3 percent at the end of the Biden administration to over 20 percent. As of September 4, 2025, it stood at about 17.5 percent, the highest level since 1935. While recent analysis has shown that exemptions and other factors may lower the average tariff rate below this level, this number may understate the negative economic effects of the tariffs because they vary dramatically across trade partners and goods. In any case, the future of tariffs remains unclear: Congress has yet to legislate on tariffs, and legal challenges against many of them are underway. Nonetheless, we expect these issues to be relevant to policy discussions for some time.

While tariffs have been a tool for policymakers of both parties, the recent increase in tariffs has introduced an important public debate about their role in national economic policy. The broad use of tariffs by the current Trump administration is unprecedented. It marks a departure from modern practice in wealthy countries, where tariffs are minimal. For high-income countries in the Organisation for Economic Co-operation and Development, tariffs account for a mere 1.25 percent of the value of goods imports and less than 2 percent of government revenue. Furthermore, the Trump administration’s use of tariffs is part of a larger fiscal shift that moves tax burdens away from the income tax and toward tariffs. The 2025 One Big Beautiful Bill Act extended the expiring tax cuts from the 2017 Tax Cuts and Jobs Act and enacted a broad array of new income tax cuts. At the same time, the tariffs in place as of this writing would raise substantial revenue, marking an important shift in how the US government is funded.

Our research evaluates this fiscal shift according to standard tax policy criteria, focusing on revenue, distribution, efficiency, and tax administration. The Trump tariffs have already raised substantial revenue, with 2025 revenues exceeding the year prior by about $185 billion; estimates suggest that if the tariffs stay at their current levels, they could generate about $2 trillion over the next 10 years. Our analysis finds that tariff rates of around 45 percent would maximize revenue, but even these tariffs would raise an amount less than one-fifth of federal income tax revenue. Moreover, such high tariffs would generate efficiency losses nearly equal to the revenue raised. Efficiency losses occur when taxes distort socially desirable economic activity. For example, tariffs encourage producers to shift resources toward domestic production of tariffed products and away from production of other goods and services. Our research estimates that a 20 percent tariff rate would generate efficiency losses equal to about one-third of the revenue raised.

The present fiscal shift also affects the distribution of tax burdens in the United States. The One Big Beautiful Bill Act substantially cut federal income taxes in a way that favored high earners. People in the top quintile of the income distribution gained far more in after-tax income than those in the lower quintiles, and the bottom quintile was made worse off. Tariffs are also regressive, raising taxes more on those in the bottom quintile than on those at the top quintile because lower-income households spend a larger portion of their income. In addition, today’s tariffs are particularly high, variable, and uncertain. This raises compliance costs, reduces investment, creates serious tax administration problems, and encourages corruption and wasteful lobbying efforts.

Finally, our research examines the macroeconomic consequences of tariffs, focusing on their effects on employment, inflation, growth, and trade balances. While tariffs may be intended to increase manufacturing employment, attract foreign investment, and/​or reduce trade imbalances, these goals are unlikely to be met. Tariffs do reduce imports, but they also reduce exports, since export industries will shrink in favor of industries that compete with imports. Furthermore, export industries will be harmed by retaliatory tariffs from other countries, possible dollar appreciation, and higher prices for the imported intermediate goods used in production. Thus, broad tariffs will reduce production and increase prices, with an ambiguous effect on the trade deficit.

Ultimately, the traditional case for tariffs is limited. Tariffs can be useful for countering certain foreign trade practices or temporarily helping industries adjust to new market conditions. But most traditional aims of tariffs can be achieved by other policies that have lower efficiency costs: The income tax can redistribute income, and subsidies can stimulate strategic industries, both with lower efficiency costs than tariffs. Restricting trade with adversaries and reducing supply chain risks may justify modest tariffs, but even these applications induce trade reshuffling and collateral damage and therefore warrant restraint. In contrast, using tariffs as a broad revenue source is likely to impose substantial costs that exceed the benefits. The absence of broad tariffs in other wealthy countries is one testament to this policy lesson.

Note
This research brief is based on Kimberly A. Clausing and Maurice Obstfeld, “Tariffs as Fiscal Policy,” Peterson Institute for International Economics Working Paper 25–19, September 2025.