Trump's tariffs would boost inflation, shrink the economy, CBO says

Donald Trump made tariffs a centerpiece of his successful presidential campaign, and the Congressional Budget Office has calculated that they might reduce the budget deficit and the GDP in the process.

On Thursday, the president-elect remarked on a tweet by venture entrepreneur Marc Andreessen on tariffs as a share of federal revenue from the late 1700s to the present.

President-elect 'Donald Trump.'

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"The Tariffs, and Tariffs alone, created this vast wealth for our Country," Trump wrote. "Then we turned to income tax. We had never been as affluent as we were at this time period. Tariffs will repay our debt and "MAKE AMERICA WEALTHY AGAIN!"

The federal government relied on tariff money when its position in society was much smaller than it is now. But this has altered over hundreds of years. The first federal income tax was enacted during the Civil War, when the Union organized a massive army.

During the first half of the twentieth century, when the United States fought two world wars and emerged as a worldwide superpower, income taxes increased but tariff revenue decreased.

Throughout the second part of the twentieth century, the United States advocated for freer trade and reduced tariffs across the world. Meanwhile, the social safety net expanded, necessitating payroll taxes to fund programs such as Social Security and Medicare.

However, amid a reaction against free trade in the twenty-first century, Trump put targeted tariffs on China during his first term, which President Joe Biden has sustained. On the campaign road in 2024, Trump pledged much more, promising to slap 10%-20% tariffs across the board while targeting China with tariffs of up to 60%.

Tariffs of such size have not occurred in the United States in more than 50 years. Top CEOs have previously warned that tariffs will lead to price increases for consumers. Bond yields have risen as the expectation of higher inflation prohibits the Federal Reserve from cutting rates more quickly.

As companies and governments prepare for tariffs, Senate Democrats urged the Congressional Budget Office to predict their effects. Last month, the CBO replied with a study of the fiscal, economic, and distributional implications.

The CBO's prediction was based on a 10% uniform tariff and a 60% China tariff. It anticipated that the increase in revenue would assist reduce the federal budget deficit by $2.7 trillion between fiscal years 2025 and 2034, after accounting for economic effects and trade partner retaliation.

The CBO did not analyze the tariffs' impact on overall US debt. However, a June prediction projected government deficits of $22.1 trillion over the following ten years. That implies Trump tariffs might reduce, but not eliminate, deficits, which would continue to contribute to the $36 trillion national debt.

Meanwhile, the CBO cautioned that tariffs would raise the cost of consumer and capital goods, lead U.S. enterprises to delay or cancel new investments, impair productivity, and spark retaliation against US exports.

"All of those effects would lower U.S. output," CBO Director Phillip Swagel wrote to Senate Democrats on December 18, adding that some imported items would be replaced by domestically produced ones, mitigating the impact.

The total impact for the economy would be a 0.6% decrease in real GDP by 2034. That drop would be substantially sharper without the associated deficit reduction. According to the CBO, reducing federal borrowing would enhance private investment, boost production, and mitigate the economic impact.

In terms of inflation, the CBO estimates that Trump tariffs will raise prices by 1% in 2026. However, they "would not have additional significant effects." Tariffs would also lead the currency to increase, lowering the cost of imported products and making certain imported services cheaper. And trade retaliation would reduce international demand for some domestically produced goods, making them less expensive for Americans.

The CBO cited that Trump's tariffs would have various effects on the economy. Of course, industries that compete with imports would prosper, but those that export goods would suffer.

Higher pricing would impose a greater burden on lower-income consumers. Meanwhile, the dollar worth of the United States' overseas asset holdings would plummet as tariffs jolted currency markets.

"That reduction in U.S. wealth would likely be concentrated at the top end of the income distribution," the CBO's Swagel said. FA