Tariffs will reduce deficits by $2.5 trillion over 10 years: CBO

Yahoo

3 days ago

President Trump's tariffs will take a major bite out of U.S. deficit levels, reducing them by $2.5 trillion over the next decade and shrinking the size of the U.S. economy, the Congressional Budget Office (CBO) found in a Wednesday analysis.
The deficit reduction is almost exactly the same size as the deficit addition that would result from the GOP's 'big, beautiful bill.' The CBO found that the bill would add $2.4 trillion to deficits through 2034, according to a separate analysis released Wednesday.
The tariffs measured by the CBO are those implemented from Jan. 6 to May 13, which includes the trade truce with China announced May 12.
The CBO included in its calculation a menu of tariffs that Trump has announced since taking office: a 30 percent tariff on imports from China and Hong Kong; 25 percent tariffs on imports from Canada and Mexico that started March 7; 25 percent tariffs on steel and aluminum from March 12; 25 percent tariffs on most automobile imports starting April 3; 10 percent tariff on imports from most countries that began April 5; and 25 percent tariff on imports of most auto parts, as of May 3.
Trump has said since the start of his term that he would implement tariffs to balance trade with other countries and to try to spur a manufacturing boom in the U.S. He has routinely announced tariffs, then paused them in an effort to strike a trade deal with a particular nation. But several tariffs have stuck and the overall tariff rate is now between 10 percent and 15 percent, the highest level in decades.
The boosted projections for federal revenue will likely raise long-term economic confidence, especially since the bond market has been quaking in recent weeks. Bond yields have popped in response both to tariffs and proposed GOP legislation.
Republican arguments about the fiscal health of the U.S. economy are likely to get a jolt from the new CBO scores, as well.
Democrats asked the CBO to score the president's tariffs.
Marc Goldwein, policy director of the nonpartisan Committee for a Responsible Federal Budget, described the tariff offsets of the cost of the Republican's budget bill as 'pretty coincidental.'
The main reasons for the higher deficit reductions than in other forecasts are lower interest rate payments on the debt along with higher tax revenues from increased inflation.
The decrease in primary deficits from less spending on interest would reduce total deficits by an additional $500 billion, the CBO projected.
'Total deficits over the 2025-2035 period would be $3.0 trillion lower than projected in CBO's January 2025 baseline,' the agency said.
Higher nominal prices from a 0.4-percent boost to inflation from the tariffs will increase federal revenues, since taxes are taken out of income. 'The net result of those effects will be an increase in federal revenues,' the CBO said.
The estimate is in line with some previous projections by Washington policy groups.
The Tax Foundation estimated in April that a 10 percent universal tariff similar to the one imposed by the White House would raise $2.2 trillion over the 2025-to-2034 budget window.
The Yale Budget lab predicted $2 trillion in revenues, including dynamic effects. Without $347 billion in losses due to economic shrinkage, the tariffs would have pulled in $2.4 trillion through 2035, the group found.
Penn Wharton, basing its analysis on the much more expansive 'Liberation Day tariffs' that have since been walked back, projected that the tariffs would bring in more than $4.5 trillion when accounting for their economy-shrinking effects.
The CBO score does not include economic growth or shrinkage effects, which the agency said will be included at a later date.
The CBO also found that the tariffs are likely to have a more negative effect on poorer Americans due to the fact that their expenses are concentrated in the goods sector, which is more affected by the tariffs than service products.
Tariffs will hit hardest in durable goods — things like cars and home appliances — and the price increases are likely to be greatest in those sectors.
Updated at 1:09 p.m. EDT
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