Tariffs as Fiscal Policy

Kimberly Clausing and Maurice Obstfeld

No WP25-19, Working Paper Series from Peterson Institute for International Economics

Abstract: The year 2025 brought a remarkable shift in the role of tariffs in the US economy, as the Trump administration simultaneously escalated the use of broad tariffs and ensured that Congress enacted large income tax cuts. This fiscal switch has important implications for the US tax system. While maintaining tariff rates at summer 2025 levels would generate large government revenues, such broad tariffs have significant downsides: Efficiency losses would approach one-third of revenues raised, the tax system would be less progressive, and there would be serious tax administration concerns. The fiscal shift also has significant macroeconomic implications, although probably not the intended ones. Broad tariffs generate a large negative supply shock, simultaneously raising prices and reducing macroeconomic activity.

Keywords: Tariffs; revenue; deadweight loss; optimal tariff; pass-through; rentseeking; retaliation; redistribution; industrial policy (search for similar items in EconPapers)
JEL-codes: F13 F32 F38 F42 F52 H21 H23 H26 H68 L52 (search for similar items in EconPapers)
Date: 2025-09
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