Options to Raise Tariff Revenue

As policymakers look to offset their priorities and address the unsustainable growth of the national debt, they may consider raising or imposing tariffs – taxes on imports. Indeed, President-elect Donald Trump called for trillions of dollars of new tariffs in his campaign plan.

While the Constitution gives Congress authority to regulate foreign commerce, certain trade laws give the President authority to adjust tariffs and address concerns related to national security. Tariffs could in theory generate significant deficit reduction, though they also tend to slow economic growth – especially if retaliatory tariffs are imposed – which could counter some of the revenue gains.

As part of our Budget Offsets Bank, the below table includes several tariff options that have recently been discussed.

Tariff Scenarios and Their Net Impact on Revenue

Sources: Committee for a Responsible Federal Budget estimates based on data from the Congressional Budget Office and U.S. Census Bureau. 
Notes: Numbers are rough and rounded. Estimates reflect the average of scenarios where lost trade is and isn’t diverted to other trading partners. Conventional estimates assume tariffs would reduce import levels consistent with an import elasticity of 1.7 and that roughly half the tariff revenue would be subject to income and payroll tax revenue offsets. For diversion estimates, diverted imports are subject to elasticities to the degree that tariffs on imports from other countries have also risen. Impacts on the economy are roughly created using Tax Foundation estimates as a reference, and the resulting revenue impacts assume GDP losses are due to productivity losses.
* Represents very rough estimates
' Based on 2021 sector-level data from the World Integrated Trade Solution (WITS) using a sample of ten U.S. trading partners.
 

While tariffs can raise significant amounts of new revenue under conventional scoring, the negative economic consequences associated with tariffs can result in lower “dynamic” scoring for scenarios – for which changes in economic growth and the resulting impact on revenue is also accounted for. While the degree that tariffs impact the economy is dependent on the details of the tariffs that are ultimately implemented, there is general agreement among most experts that significant increases in tariff levels would have noticeably negative impacts on the economy. Additionally, retaliation by countries impacted by tariffs can worsen economic consequences.

The conventional estimates above are based mainly on modeling from the Committee for a Responsible Federal Budget and incorporate the fact that higher tariffs will likely reduce the volume of trade. In general, our figures closely match those of other estimators, including those by Clausing & Lovely and Yale Budget Lab.

Our estimates including dynamic and retaliatory effects on revenues are very rough and meant to convey the magnitude of their effects rather than precise scores. While we conservatively assume heightened tariffs have negative economic consequences for the U.S. economy, it is also possible that exporting nations bear more of the burden of tariffs than anticipated. For example, changes in currency valuations by countries on which the tariffs were imposed can directly offset increases in tariffs for U.S. consumers.

One option proposed by President Trump on the campaign trail is implementing a universal baseline tariff on all imports. Using conventional scoring, we estimate that a 10 percent universal baseline tariff would raise $2.4 trillion through 2035 while a 20 percent tariff would raise $4.1 trillion. If countries with which the U.S. has free trade agreements with are excluded from the universal baseline tariff, such as Mexico and Canada, then revenues would be nearly halved to $1.4 trillion and $2.4 trillion, respectively. Dynamic scores might reduce these estimates by about one-fifth.

There has also been discussion of specifically imposing tariffs on Chinese imports, with some calls for a tariff rate of between 10 or 60 percent. We estimate a 10 percent tariff would raise $200 to $300 billion on a conventional basis, while a 60 percent tariff would actually reduce revenue under current law and raise $150 billion if a 10 percent universal baseline tariff were in place. Dynamic effects would reduce collection of the 10 percent tariff by about one-fifth and could turn the 60 percent tariff (assuming a 10 percent universal baseline tariff) negative.

Many other tariffs have also been suggested by policymakers. For example, President Trump recently threatened a 25 percent tariff on Mexican and Canadian imports if the countries continue to allow drugs such as fentanyl and undocumented immigrants into the U.S., which we estimate could bring in a combined $1.5 trillion ($1.2 trillion dynamically) if allowed to go into effect. A carbon border adjustment tariff – which has been proposed by Members of Congress such as Senators Sheldon Whitehouse (D-RI), Bill Cassidy (R-LA), and Chris Coons (D-DE) – could also raise significant revenue under conventional scoring. Reciprocal tariffs, eliminating the “de minimis” loophole, and tariffs on automobiles could raise revenue as well. However, tariffs that are very high – like Trump’s proposed 100 percent tariff on BRICS countries if they back a currency to replace the U.S. Dollar – would likely lose revenue due to the large negative impact on trade.

As an alternative to tariffs, lawmakers could consider imposing a Destination-Based Cash Flow Tax (DBCFT) with a border adjustment – something suggested by Yale Budget Lab’s Ernie Tedeschi on top of or in place of the corporate tax, and included in tax plans from House Republicans in 2016 and Pomerleau-Schneider in place of the corporate tax. A DBCFT is effectively a consumption tax on return to capital that taxes business net cash flow. Nearly all expenses – including multi-year investments – are immediately deductible under a DBCFT, while interest payments are non-deductible and a “border adjustment” makes imports non-deductible while exempting exports from taxable income. This tax would raise about $250 billion per percentage point – compared to $240 billion per percentage point for a universal baseline tariff – and is expected to have little if any net cost to the economy.

As previously mentioned, significant increases in tariffs tend to reduce economic output by reducing trade and specialization. Estimates from outside groups have found that a 10 percent universal baseline tariff could reduce output by anywhere from roughly 0.2 percent to 3.6 percent, and tariff policies that are more aggressive would have even larger impacts. Effects could be more dramatic if tariffs led to a trade war or exacerbated existing inflationary pressures.

However, tariffs can have benefits separate from their effects on revenue or output. For example, they can be used as a tool to extract concessions from other countries, reduce reliance on foreign and potentially hostile economies, theoretically boost domestic manufacturing in some cases, and strengthen national security.

Importantly, it would not be possible to fully replace the income tax with tariffs despite claims to the contrary.

But with debt growing to record levels and calls for further deficit-increasing policies on the horizon, policymakers should consider a wide array of possible tax and spending changes to reduce deficits and offset new initiatives. Our Budget Offsets Bank discusses many such options.