Understanding the Effects of Tariffs
We provide an overview of the major implications of tariffs on the economy, federal revenue, and households. Tariffs do not directly affect the trade deficit, which is driven by net lending and borrowing between the US and the rest of the world. Tariffs would cause the US dollar to appreciate, which would increase untaxed imports, reduce exports, and transfer wealth from Americans to foreign holders of US assets. As an indirect tax, tariffs could prompt the Federal Reserve to increase the price level to prevent unemployment. Tariffs would reduce the after-tax return on work and investment, distort the allocation of resources in the economy, and ultimately reduce economic output in the long run. Broad-based tariffs can raise revenue for the federal government, but that revenue is partially offset by significant behavioral and economic responses. Tariffs would reduce after-tax income for households at all income levels but be slightly regressive.
AEI
2025.04.25