Key Points
Revenue Impact: President Trump’s tariff plan (as of April 8, 2025) is projected to raise significant revenue—over $5.2 trillion over 10 years on a “strict conventional” basis and $4.2 trillion on a “partially dynamic” basis commonly used with tariffs.1 This revenue could be used to reduce federal debt, thereby encouraging private investment.
Comparison with a Corporate Tax Increase: Tariffs are estimated to raise about the same amount of revenue as increasing the corporate income tax from 21 to 36 percent, in the absence of these recent tariffs. While raising the corporate tax rate is generally seen as highly economically distorting, tariffs would reduce GDP and wages by more than twice as much. All households, regardless of age or income, would be worse off. The estimated economic declines are likely lower bounds, with actual declines potentially even larger.
Broader Economic Impact: Many existing trade and macroeconomic models fail to capture the full harm caused by tariffs, focusing mainly on the “current account” flow of goods and services. Larger tariffs would also decrease international capital flows, reducing worldwide demand for U.S. Treasuries. This is especially costly under the nation’s current baseline debt path, which is increasing faster than GDP. U.S. households would need to purchase more bonds, requiring bond prices to fall (yields increase), domestic capital investment prices to fall (the marginal product of capital increases), or both. Even conservatively assuming only domestic capital investment prices fall, the reduction in economic activity is more than twice as large as a tax increase on capital returns that raises the same amount of revenue.
The Economic Effects of President Trump’s Tariffs
On April 2, 2025, President Trump signed an executive order imposing a minimum 10 percent tariff on all U.S. imports, with higher tariffs on imports from 57 specific countries. The general tariff rate became effective on April 5, while tariffs on imports from the 57 targeted nations, ranging from 11 to 50 percent, took effect on April 9. See the PWBM tariff simulator posted separately, which may have been updated after the publication date of this brief. This resource provides revenue estimates and projected price increases across thousands of different spending categories.
President Trump's tariffs will impact the U.S. economy through at least three main channels:
Direct Tax on Imported Goods: Tariffs impose a direct tax on imported goods. The economic burden of these tariffs can fall on either domestic consumers or businesses, depending on factors such as the elasticity of supply and demand for each product and businesses' ability to pass on costs to customers. Given the uncertainty surrounding who bears this tax burden, we consider several scenarios ranging from one in which consumers bear the entire burden to one in which the tariff costs are shared equally between consumers and businesses. In the short run, consumers and businesses are likely to share the burden, with more of it falling on consumers over time. Nonetheless, the macroeconomic performance does not differ significantly between these scenarios.
Reduction in Imported Goods and Capital Flows: A reduction in imported goods means foreign businesses and governments will purchase fewer U.S. assets, including U.S. federal government bonds. The decrease in the value of imports directly corresponds to reduced foreign purchases of U.S. assets through standard accounting relationships. U.S. households will need to increase their future take-up of government bonds and will subsequently decrease their savings into productive capital.
Increased Economic Policy Uncertainty: President Trump’s tariff announcements have increased economic policy uncertainty, which generally depresses economic activity by prompting firms and households to postpone investment, hiring, and consumption decisions. Economic policy uncertainty can be quantified using the Economic Policy Uncertainty (EPU) Index, a measure designed to capture uncertainty surrounding economic policy decisions.2 By the end of March, the EPU reached its highest point since the beginning of the COVID-19 pandemic, doubling in value from the start of January. We apply the methodology of Baker, Bloom, and Davis (2016) to determine that the rise in economic uncertainty will reduce investment by about 4.4 percent in 2025.3
As shown in Table 1, we project that tariffs will raise $5.2 trillion in new revenue over the next 10 years, even after accounting for reduced import demand due to higher prices. Over the next 30 years, tariffs are expected to raise revenues of $16.4 trillion. This revenue can be used to reduce federal debt relative to the baseline path. Table 1 also shows that President Trump's tariffs will reduce total imports by $6.9 trillion over the next decade and by $37 trillion through 2054. These reductions in imports will also reduce capital flow.
| 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2025-2034 | 2025-2054 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | 419 | 570 | 566 | 561 | 554 | 544 | 532 | 518 | 501 | 481 | 5,246 | 16,390 |
| Value of Imports | -319 | -434 | -492 | -555 | -627 | -706 | -794 | -892 | -1,000 | -1,118 | -6,937 | -37,236 |
Source: Penn Wharton Budget Model.
Note: Revenues include an estimate of how demand will respond to higher prices.
Table 2 presents the economic effects of President Trump’s tariffs under different assumptions about how the burden is distributed between consumers and businesses.
Table 2.A: When consumers bear 100 percent of the burden, consumption falls by 4.5 percent in 2030 and by over 5 percent in 2054. The decline in imports reduces foreign purchases of U.S. government debt, requiring U.S. households to absorb more of this debt and divert savings away from investment in private productive capital. This shift, coupled with reduced short-term investment due to increased economic uncertainty, leads to a decline in the capital stock of 2.3 percent in 2030 and nearly 15 percent in 2054. Less capital reduces worker productivity, translating into lower wages and causing households to work slightly less. By 2054, wages will decline by 6.5 percent, and hours worked will fall by 1.3 percent. The combination of reduced private capital and fewer hours worked leads to a 7.7 percent decline in output by 2054. However, the additional revenue from tariffs helps reduce federal debt, which is 5.4 percent lower in 2030 and 6.0 percent lower in 2054.
Table 2.B: When 75 percent of the tariff burden falls on consumers and 25 percent on businesses, the initial decline in consumption is slightly smaller, but the decline in capital and wages in 2030 is larger. By 2054, the capital stock is 16 percent lower than under current law, and wages are 7.4 percent lower—both significantly worse than when consumers bear the entire cost of the tariffs. Consumption declines slightly more by 2054 due to lower wages. Lower wages also lead to lost tax revenues on labor income, resulting in a smaller reduction in federal debt, which is only 5.1 percent lower by 2054.
Table 2.C: When businesses and consumers equally split the cost of the tariffs, the economic effects follow a similar pattern to the differences between Tables 2.A and 2.B, but the impacts are more pronounced. Capital, wages, and output fall even further, while the reduction in debt is slightly smaller.
A) Tax burden falls 100 percent on consumers
| 2030 | 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|---|
| Gross domestic product | -1.1 | -1.7 | -2.6 | -3.8 | -5.3 | -7.7 |
| Capital stock | -2.3 | -3.6 | -5.5 | -7.8 | -10.7 | -14.9 |
| Hours worked | 0.0 | 0.1 | -0.1 | -0.3 | -0.7 | -1.3 |
| Average wage | -1.0 | -1.6 | -2.5 | -3.4 | -4.7 | -6.5 |
| Consumption | -4.5 | -4.3 | -4.4 | -4.7 | -4.9 | -5.3 |
| Debt held by the public | -5.4 | -7.0 | -7.5 | -7.5 | -6.9 | -6.0 |
B) Tax burden falls 75 percent on consumers and 25 percent on businesses
| 2030 | 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|---|
| Gross domestic product | -1.1 | -1.8 | -2.8 | -4.1 | -5.7 | -8.3 |
| Capital stock | -2.5 | -4.0 | -6.1 | -8.5 | -11.6 | -16.2 |
| Hours worked | 0.1 | 0.1 | -0.1 | -0.3 | -0.7 | -1.4 |
| Average wage | -1.6 | -2.2 | -3.1 | -4.1 | -5.4 | -7.4 |
| Consumption | -4.1 | -4.1 | -4.3 | -4.7 | -5.0 | -5.5 |
| Debt held by the public | -5.2 | -6.8 | -7.1 | -6.9 | -6.2 | -5.1 |
C) Tax burden falls 50 percent on consumers and 50 percent on businesses
| 2030 | 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|---|
| Gross domestic product | -1.2 | -2.0 | -3.1 | -4.4 | -6.2 | -8.9 |
| Capital stock | -2.8 | -4.4 | -6.7 | -9.3 | -12.6 | -17.4 |
| Hours worked | 0.1 | 0.1 | 0.0 | -0.3 | -0.7 | -1.4 |
| Average wage | -2.2 | -2.8 | -3.7 | -4.8 | -6.2 | -8.4 |
| Consumption | -3.7 | -3.9 | -4.2 | -4.7 | -5.1 | -5.7 |
| Debt held by the public | -5.0 | -6.4 | -6.6 | -6.2 | -5.4 | -4.1 |
Source: Penn Wharton Budget Model.
Dynamic distributional analysis considers how a policy affects households across the income and age distribution, including the unborn (represented by a negative age index at the time of the reform). It evaluates how much, on average, households in each (income, age) bucket value the proposed policy change over their entire lifetime, represented as a one-time transfer at the time of the policy change. Dynamic distributional analysis is the standard in academic research, addressing several key limitations that dynamic analysis addresses.
Table 3 reports policy “equivalent variations” for the same cases and versions reported in Table 2. A positive equivalent variation means that the person would be better off under the policy reform; a negative equivalent variation means that the person would be worse off. For example, as shown in Table 3.A, a household aged 30 in the bottom 20th percentile of income loses the equivalent of $28,500, as indicated by the negative value. This household would be indifferent between this policy bundle and a one-time payment of $28,500 to avoid the tariff increase.
As Table 3 shows, every household is worse off, regardless of when they were born or their income level. The range of losses is large, from $9,000 for an 80-year-old household in the bottom income quintile when the tax burden is split between consumers and businesses (Table 3.C) to $205,000 for an 80-year-old household in the top income quintile when consumers bear the entire tax burden (Table 3.A).
A key distinction between the different policy scenarios lies in their varied effects across age and income groups. Households born in the future fare significantly better when the cost of tariffs is primarily borne by households (Table 3.A), while retirees are better off if businesses bear most of the costs (Table 3.C).
Future households benefit from a higher capital stock and higher wages when businesses are shielded from the full burden of tariffs. Under Table 3.A, younger households face smaller lifetime losses—especially in lower income brackets—compared to the more severe reductions in capital accumulation seen in Table 3.C. For example, unborn individuals in the bottom income quintile lose $40,400 in Table 3.A but $44,800 in Table 3.C.
Conversely, retirees are more sensitive to immediate changes in consumption prices. In Table 3.C, where businesses shoulder a portion of the burden, older high-income individuals (age 80, top income quintile) lose $181,200—roughly $24,000 less than the $205,000 loss in Table 3.A. By shifting some of the tax burden off consumers, this scenario mitigates short-term consumption costs for the elderly, even if it leads to worse long-term economic outcomes for younger generations.
A) Tax burden falls 100 percent on consumers
B) Tax burden falls 75 percent on consumers and 25 percent on businesses
C) Tax burden falls 50 percent on consumers and 50 percent on businesses
Source: Penn Wharton Budget Model.
As a comparison, Table 4 presents an alternative policy where the corporate tax rate is increased to match tariff revenue in each future year on a dynamic basis. In the first year, the corporate tax rate increased from 21 percent to 36 percent. Despite being one of the most economically distorting ways to raise revenue to pay down debt, the tariff policy reduces GDP and wages by more than twice as much, regardless of the burden assumed to be borne by consumers.
| 2030 | 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|---|
| Gross domestic product | -1.0 | -1.6 | -2.1 | -2.4 | -2.7 | -3.0 |
| Capital stock | -2.7 | -4.0 | -5.0 | -5.8 | -6.4 | -6.9 |
| Hours worked | 0.5 | 0.5 | 0.5 | 0.5 | 0.5 | 0.5 |
| Average wage | -1.3 | -1.9 | -2.4 | -2.7 | -3.0 | -3.2 |
| Consumption | -2.0 | -2.7 | -3.3 | -3.7 | -3.9 | -4.0 |
| Debt held by the public | -4.3 | -5.3 | -5.3 | -5.0 | -4.6 | -4.2 |
Source: Penn Wharton Budget Model.
Despite the complexities of our modeling, we have abstracted away from several real-world features that could cause even larger economic losses. First, current manufacturing is highly interdependent across international boundaries in numerous ways that economists cannot directly observe with major public and proprietary datasets. Our current modeling minimizes these short-run disruptions by assuming that processes can be reshored to the United States without any reduction in total factor productivity along the way. Instead, all growth effects are concentrated in the future supply of labor and capital. Second, we assume that the “equity premium” fully adjusts to increase the marginal product of capital without any change in the government borrowing rate. In the current context of an exploding debt along the baseline, this assumption is conservative; debt stabilization must happen much sooner if the borrowing rate is also adjusted.
This analysis was produced by Lysle Boller, Kody Carmody, Jon Huntley, and Felix Reichling under the guidance of Felix Reichling and Kent Smetters. Mariko Paulson prepared the brief for the website.
-
See Table 1 and the PWBM tariff simulator. ↩
-
“Measuring Economic Policy Uncertainty” by Scott Baker, Nicholas Bloom and Steven J. Davis at https://www.policyuncertainty.com/. ↩
-
Scott R. Baker, Nicholas Bloom, Steven J. Davis, "Measuring Economic Policy Uncertainty", Quarterly Journal of Economics, November 2016, 131(4), pp. 1593-1636. ↩
Age 0 to 20 20 to 40 40 to 60 60 to 80 80 to 100 -20 -40400 -56000 -62500 -42600 -36300 -10 -37800 -55800 -60600 -41900 -42100 0 -35500 -41700 -53500 -35000 -27800 10 -30100 -34700 -32300 -27000 -14800 20 -23600 -28200 -24600 -22300 -11600 30 -28500 -44000 -57300 -84700 -104300 40 -30200 -47600 -58200 -68100 -94300 50 -25700 -39500 -49800 -62800 -94000 60 -24600 -37600 -48300 -60500 -97900 70 -16700 -40100 -64000 -88500 -173100 80 -15900 -43500 -72800 -105600 -205000
Age 0 to 20 20 to 40 40 to 60 60 to 80 80 to 100 -20 -44800 -62300 -69600 -47600 -40700 -10 -41800 -61900 -67200 -46500 -47000 0 -38500 -45400 -58400 -38300 -30500 10 -32200 -37100 -34600 -29000 -15900 20 -24300 -29100 -25400 -23000 -11900 30 -28900 -44900 -57900 -85400 -104300 40 -30000 -47300 -57500 -67000 -90500 50 -25100 -38200 -47600 -59300 -87200 60 -22100 -34000 -43700 -54700 -88600 70 -13200 -31800 -51000 -72800 -151300 80 -12500 -35000 -60400 -89400 -181200
Age 0 to 20 20 to 40 40 to 60 60 to 80 80 to 100 -20 -49700 -69200 -77300 -52900 -45400 -10 -46000 -68400 -74300 -51600 -52200 0 -41700 -49400 -63600 -41700 -33400 10 -34400 -39700 -37100 -31000 -17100 20 -25000 -30100 -26200 -23800 -12400 30 -30000 -46000 -58700 -86500 -105100 40 -30100 -47500 -57300 -66300 -87600 50 -24400 -36900 -45600 -56200 -81000 60 -19600 -30300 -39000 -48900 -79300 70 -9600 -23500 -37900 -56900 -129000 80 -9000 -26400 -47900 -73200 -156800
