Executive Summary
Tariffs have become an important economic policy in the United States. Tariffs are a form of excise tax that applies to imported goods. They can be imposed for three, sometimes contradictory, reasons: to generate revenue, protect domestic industries, and retaliate against other countries for economic or non-economic reasons. As with other taxes, tariffs have important equity and efficiency considerations. Although they can raise revenue and protect certain domestic industries, they reduce economic output, misallocate resources in the economy, reduce the quantity and quality of goods and services available to consumers, and burden households with lower real after-tax incomes. In the current environment, tariff policy has been a source of uncertainty for businesses and households both because of the Administration announcing tariffs and then changing the rates or delaying their imposition, as well as because of legal challenges that have struck down tariffs
I. Tariff Basics
Tariffs are a tax on imported goods. Tariffs are collected when the tariffed goods enter the United States. Tariffs can be levied either as a fixed percent of the value of an import, a fixed dollar value per imported good, or as a tariff-rate quota, which applies tax when the value of certain imports exceeds a certain threshold (Pomerleau and York 2025).
Like all taxes, tariffs affect the price and quantity of goods on which they are levied. An excise tax increases the price paid by consumers and decreases the price received by sellers of the product. An important issue with any tax is its incidence – by how much do consumer prices rise and by how much does the price received by producers fall? In the case of tariffs, the consumers are domestic residents while the producers are foreign, which has implications for whether the costs of tariffs are borne by American consumers or foreign sellers. The extent to which a tariff is paid by domestic residents is called its pass-through – for example if a 10% tariff results in an increase in the price of domestic goods by 6% then the pass-through is 60%. Research suggests that tariffs are primarily passed through to U.S. importers as higher import prices (Amiti et al 2019) and the extent of price pass-through rises over time. Evidence on the latest round of tariffs suggests that the pass-through is almost 100%, that is, United States consumers are bearing the full costs of tariffs (Gopinath and Neiman 2026). Between March 2025 and May 2026, The price of imported goods rose by 6.8 percent relative to a pre-tariff price trend between March 2025 and May 2026, as measured by a study that tracks the online prices of over 350,000 products sold at five large U.S. retailers. The largest price increases observed were in carpets and other floor coverings (54 percent), other articles of clothing and clothing accessories (24 percent) coffee, tea, and cocoa (16 percent), and fish and seafood (16 percent) (Cavallo, Llamas, and Vazquez, 2025b).
Tariffs that raise the price of imported goods can also result in rising prices of domestically produced goods that compete with those imports. When the price of an imported good rises due to a tariff (or for other reasons), domestic producers who sell goods that compete with those imports raise the price of their goods as well since they have less competitive price pressure from foreign goods (Cavallo, Llamas, and Vazquez, 2025a). Experience from President Trump’s first term suggests that even untaxed complimentary goods can face price increases due to tariffs. For example, the price of clothes dryers rose after tariffs were applied to imported washing machines in 2019. Importantly, the increase in the price of domestically-produced goods generates no tariff revenue for the government.
The burden of tariffs is shared broadly. Research shows that while tariffs burden households of all income levels, they tend to be regressive taxes – that is, they fall proportionally more heavily on lower-income households, who devote a larger share of their income to consumption of goods that are either subject to tariffs or that compete with tariffed imports (Tax Policy Center 2024). As an example, the Tax Policy Center estimated that if the tariffs in place as of December 2025 stayed in place during 2026, they would reduce household after-tax income by 2 percent for the bottom 95 percent of households. At the same time, this tax would reduce after-tax income for the top 1 percent and top 0.1 percent by 1.7 and 1.5 percent, respectively.
