The Congressional Budget Office (CBO) has released an analysis of President Donald Trump’s tariff plan, projecting a US$2.8 trillion reduction in the federal deficit over the next ten years.

However, the report also highlights potential economic drawbacks, including increased inflation and decreased household purchasing power.

According to the CBO, the tariffs, announced between January and May, are expected to raise the average annual inflation rate by 0.4 percentage points in 2025 and 2026.

The policy may also lower gross domestic product (GDP) growth by 0.06 percentage points per year and decrease household wealth.

The CBO’s projections assume the tariffs will remain in place permanently.

🔗 Source: CBS News

🧠 Food for thought

1️⃣ Tariffs create an economic tradeoff: revenue gains versus growth contraction

The proposed tariffs present a classic economic dilemma where deficit reduction comes at the cost of economic growth and household purchasing power.

Yale Budget Lab projects the tariffs will generate approximately $2.4 trillion in revenue over the next decade, aligning with the CBO’s $2.8 trillion deficit reduction estimate, but will simultaneously reduce real GDP by 0.6% in the long term 1.

Similarly, the Penn-Wharton Budget Model calculates substantial revenue generation of $5.2 trillion while projecting that all households would be worse off as consumption and investment decline 2.

Historical evidence shows that tariffs typically raise short-term government revenue while creating longer-term economic distortions that reduce productivity and growth rates.

The Tax Foundation’s analysis indicates that tariffs create inefficient resource allocation as capital and labor shift to less productive sectors protected by tariffs rather than flowing to their most productive uses 3.

2️⃣ Tariff impacts are regressive, hitting lower-income households hardest

The economic burden of tariffs falls disproportionately on households with lower incomes, creating an effectively regressive form of taxation.

Yale Budget Lab research shows that while tariffs cost the average household about $3,800 annually, lower-income households face losses of approximately $1,700 per year, representing a much larger percentage of their disposable income 4.