Tariff revenue won’t compensate for the fiscal costs of TCJA extensions. Added tariff revenues will be below 1% of GDP – most likely 0.5-0.9% of GDP. Unfunded tax cuts could put further upward pressure on US rates, Standard Chartered’s analysts report.
Everything everywhere all in the reconciliation bill
“The Trump administration argues that higher tariffs will pay for tax cuts. Despite the worse-than-expected tariff announcement on ‘Liberation Day’, the administration’s 90‑day tariff pause and rhetoric since then suggest that the worst-case tariff scenario has already played out and we expect tariff rates to be negotiated down in the coming months.”
“Assuming tariff negotiations lead to tariff rates of 60% on China, 10% on the rest of the world (ROW), and minimal tariffs on Canada and Mexico, realistic tariff revenues are likely to be under 1% of GDP and possibly well below. We think tariff revenues will fall well short of financing the extension of the current Tax Cuts and Jobs Act (TCJA), with an estimated cost of 1.4% of GDP as estimated by the Joint Committee on Taxation (JCT).”
“It is still uncertain whether tariff revenues can be included in the baseline for the reconciliation bill. Normally, only legislated tariffs would be seen as permanent enough to be a ‘pay-for’. Moreover, arguing that the executive orders will raise tariffs permanently may weaken the government’s position if legal challenges arise. But even if these non-permanent tariff revenues are included, the administration will likely need to find savings elsewhere. This is especially the case if the intention is to add tax cuts that go beyond the TCJA. Long-term rates now seem to be reacting more to deficit slippage than in 2017 when the TCJA was passed.”