Biggest Tax Hike Since 1982? Trump's Tariff Strategy Faces Harsh Economic Forecast

A bold bet on tariffs as a self-funded strategy for future tax cuts could backfire, as President Donald Trump's sweeping import duties promise massive tax revenues, but at the cost of slower growth and higher consumer pain.

In a recent report, the Tax Foundation analyzed the economic fallout of Trump's tariff plan announced on April 2, estimating it would trigger the biggest tax increase since 1982 and shrink gross domestic product by 0.7% over the next decade, even before accounting for foreign retaliation.

What's The Economic Impact Of Trump's New Tariff Push?

The new tariff proposal would raise the average tariff rate on all imports from 2.5% to 16.5% by 2025, a level unseen since the Great Depression era in 1937.

According to the Tax Foundation, the plan comprises a universal tariff policy and prior tariff escalations, together projected to generate $2.9 trillion in federal revenue over 10 years.

"The 2025 Trump tariffs are larger than the tax increases enacted under Presidents George H.W. Bush, Bill Clinton, and Barack Obama,” the report stated.

A Steep Cost For US Households

What boosts the Treasury's balance sheet drains the wallets of American families. Tariffs are essentially taxes on imports, and those costs typically fall on U.S. consumers and businesses.

The think tank estimates the average U.S. household would pay over $1,900 more in 2025, with after-tax income declining by 1.9%.

"Tariffs raise prices and reduce available quantities of goods and services for U.S. businesses and consumers, resulting in lower income, reduced employment, and lower economic output," the report said.

Imports are also expected to plunge by more than $800 billion in 2025, a 25% drop, which could upend global supply chains and inflate prices of goods that rely on foreign components.

"Economists generally agree free trade increases the level of economic output and income," the report said.

A Shrinking Incentive To Work And Invest

The economic damage extends beyond just higher consumer prices. One major effect comes from rising production costs. As tariffs raise the price of imported parts and raw materials, U.S. businesses pass those increases on to consumers. The resulting inflation erodes the real return on both labor and capital, ultimately discouraging work and investment.

"Because higher prices would reduce the return to labor and capital, they would incentivize Americans to work and invest less, leading to lower output," the Foundation said.

Another, more subtle risk lies in the currency market. A stronger U.S. dollar may offset some price inflation for American consumers, but it would also make U.S. exports less competitive globally.

That, in turn, could reduce revenue for exporters, suppress job creation, and further dampen economic output.

Whether through rising prices or a stronger currency, the long-run effects from tariffs remain dire: lower growth, weaker income gains, and reduced economic dynamism.

Read Next:

• Trump Tariff Strategy Creates ‘Self-Inflicted Market Debacle’: Analyst

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