On December 18, 2024, the Congressional Budget Office (CBO) released a preliminary analysis of the impact of proposed import taxes titled “Effects of Illustrative Policies That Would Increase Tariffs.” CBO analyzed the potential impacts of three hypothetical tariff policies in response to a request from then-Senate Majority Leader Chuck Schumer (D-NY), then-Finance Committee Chair Ron Wyden (D-OR), and then-Budget Committee Chair Sheldon Whitehouse (D-RI):
- A uniform 10% increase in tariffs on all imports.
- A 60% tariff increase on imports from China.
- A combination of both policies.
CBO finds that, while the tariffs could increase revenues, they would also lead to harmful economic side effects, including a decline in U.S. Gross Domestic Product (GDP), higher consumer prices, reduced productivity, and potential retaliatory tariffs from trading partners:
- Revenue Increase: The combined effect of both tariffs could generate approximately $2.7 trillion in additional revenue over a decade, potentially reducing the federal budget deficit.
- Economic Contraction: CBO projects that tariffs would reduce real GDP by 0.6% in 2035. Based on the estimated 2035 real GDP of $28.43 trillion, this projection yields a GDP reduction of approximately $170.58 billion. The total ten-year impact would be much greater.
- Inflationary Pressure: Consumer prices may rise by about 1% initially due to higher costs of imported goods and increased demand for substitutes.
- Business Uncertainty: Elevated tariffs may lead to delays or reductions in business investments and supply chain adjustments.
- Productivity Decline: Reduced competition from imports might result in less efficient allocation of labor and capital within the U.S. economy.
- Retaliatory Measures: Trading partners are likely to impose equivalent tariffs on U.S. exports, adversely affecting sectors such as agriculture.
CBO also notes that lower-income households would disproportionately bear the brunt of these economic effects.
CBO previously looked at tariffs in August 2019. At the time, it highlighted concerns about tariffs’ shorter-term economic impacts during the height of trade tensions. This report indicated that tariff increases had already begun to slow economic growth by raising costs for businesses and consumers, reducing investment, and disrupting supply chains.
Both reports underscore the broader economic risks of tariff policies; while the August 2019 report focused on ongoing trade actions and their immediate effects, the December 2024 report provides a forward-looking analysis of hypothetical tariff scenarios, emphasizing long-term fiscal and economic trade-offs.
A policy brief by Trade Partnership Worldwide suggests that CBO’s use of a “static” trade model may actually underestimate the long-term impact of tariffs. Its assessment suggests that employing a “dynamic” model would reveal a more significant GDP reduction of 1.2% and a 1.5% decrease in household real wage income over the same period.
While increased tariffs could bolster federal revenue, they are projected to have adverse effects on the broader U.S. economy, including reduced GDP, higher inflation, and negative impacts on both businesses and consumers. In his nomination hearing, Scott Bessent, President Trump’s nominee for Treasury Secretary, said: “We do not have a revenue problem in the United States of America. We have a spending problem.” The Trump Administration and Congress can best address federal deficits by controlling spending, not by increasing import taxes.