Middle and lower quintiles have zero or negative benefits.

What the SCOTUS Tariff Decision Means

The CATO Institute discusses What the SCOTUS Tariff Decision Means for Fiscal Policy in Four Charts

The Supreme Court of the United States (SCOTUS) struck down President Donald Trump’s so-called “reciprocal tariffs” enacted under the International Emergency Economic Powers Act (IEEPA).

The tariffs modestly increased revenue but did not meaningfully improve the government’s long-term budget outlook. They reduced economic growth, shrank other sources of tax revenue, and offset a substantial share of the administration’s signature tax reforms.

High Tariff Revenues Miss Administration Claims

The federal government collected $264 billion in total tariff revenue in the 2025 calendar year. That amount is more than triple the $85.6 billion collected by the Biden administration over the same period in 2021 and far exceeds the comparable $35.2 billion from Trump’s first term.

Even at over a quarter-trillion dollars, 2025’s tariff revenue falls well short of the administration’s claims. Treasury Secretary Scott Bessent projected that tariffs could raise as much as $500 billion per year, implying collections roughly twice those reported in official data. Even those figures overstate the budgetary benefit, because tariffs partially offset themselves: higher input costs reduce business profits and worker pay, shrinking the corporate and individual income tax base, while broader economic effects of slower investment and hiring can further depress other revenue sources.

Deficits Continue to Grow With or Without IEEPA Tariffs

The United States’ budget is on an unsustainable path, driven by automatic spending that’s projected to increase faster than the economy, inflation, and the population. As spending rises and revenues remain flat, the deficit increases. The Treasury estimates that more than 95 percent of the government’s long-term funding shortfall is driven by growth in just two programs: Medicare and Social Security. Additional revenue, from any source, cannot fix these spending-based drivers of the long-term fiscal imbalance.

Historically, Tariffs Have Not Been a Significant Revenue Source

History underscores the difficulty of using tariffs to fix the federal budget. Tariffs have never financed a government remotely as large as today’s. In the 19th century, when tariffs accounted for most federal revenue, the federal government itself spent less than 3 percent of GDP. Today, federal spending is 23 percent of GDP.

Tariffs Offset the Benefits of Trump Tax Cuts

One way to understand the effects of the administration’s trade actions is by comparing them with the tax cuts in the One Big Beautiful Bill Act (OBBBA). Tariffs raise the domestic price of imported consumer goods and manufacturing inputs, which functions as a tax on US consumers and producers. Estimates from the Tax Policy Center show that this amounts to a roughly $ 2,600-per-household tax increase in 2026 (for all announced tariffs from January 20, 2025, through December 4, 2025).

Those tariff costs offset a majority of the average $3,736 tax cut Americans are projected to receive in 2026 from the OBBBA. Considering both policies together, Figure 4 [Lead Chart] shows that the bottom two income groups face a net tax increase, decreasing their after-tax income by between 1.2 percent and 0.3 percent. Middle- and higher-income Americans see small net tax cuts of between 0.3 and 0.6 percent of after-tax income. Overturning the IEEPA tariffs will allow more Americans to fully benefit from the 2025 tax cuts.

The same tension appears in the macroeconomic effects. The OBBBA is projected to raise long-run GDP by about 1.2 percent, but Trump’s tariffs are expected to reduce GDP by roughly 0.8 percent. Taken together, the net effect is a muted 0.4 percent increase in output, with tariffs significantly eroding the growth benefits of the underlying tax reform.

Conclusion

The Court’s decision will have wide-ranging economic and political implications for trade policy and executive power. But it also brings important fiscal consequences. The administration has repeatedly overstated the budgetary impact of the tariffs, yet the effects are not trivial. Tariffs are, after all, an economically costly, revenue-raising tax on American consumers. Relief from the IEEPA tariffs will benefit American consumers, but risks remain that the administration will pursue similar levies through other statutory authorities.

I disagreed at the time where the benefits of the OBBBA would go. The primary beneficiaries were the very wealthy in high tax states.

They received huge deductions for State and Local Income Taxes (SALT).

Since the OBBBA raised deficits, the rest of the country is effectively subsidizing the wealthy in high tax (Blue) states.

Tariffs are a tax on consumers and since the lower income groups spend every penny, they are a very regressive tax.

To encourage more people to work, I would have much rather had a very high limit below which no Federal income taxes were taken.

To pay for my proposals, I would end all of the deductions across the board.

Trump went the other way. We now have no tax on tips, no tax on overtime, deductions for interest on autos, etc.

The tax code should be simple. Instead, Trump took thousands of pages of tax code and added hundreds if not thousands more.

What Should We Do to Get Government Spending Under Control?

For my 12 idea proposal, please see What Should We Do to Get Government Spending Under Control?

That’s the question I was asked today. 12 Ideas.

Article posted with permission from Mish Shedlock