The sweeping import tariffs that the Trump administration announced in April 2025 could raise new revenue of up to $5.2 trillion over 10 years, which can help reduce federal debt and encourage private investment, according to a Penn Wharton Budget Model (PWBM) report titled “The Economic Effects of President Trump’s Tariffs.” But the other side of the ledger will have red ink: losses in terms of GDP, wages, and demand for U.S. Treasury bonds and their prices. (PWBM is a nonpartisan, research-based initiative that provides accurate, accessible, and transparent economic analysis of public policy’s fiscal impact.)
One of the biggest stated goals of the tariffs is to bring back manufacturing jobs to the U.S. But that is difficult to forecast in the short run with existing models because “the entanglement between economies is so complex,” PWBM faculty director Kent Smetters said in an interview with Wharton Business Daily. (Listen to the podcast.) Smetters is also a Wharton professor of business economics and public policy.
For instance, a car may have 30,000 different parts sourced from numerous places, and “just one of those parts being disrupted could actually lead to you not being able to produce,” Smetters said. Even assuming that all that production will come back to the U.S., and a lot of that will happen smoothly, the lower demand for U.S. government debt will make “our government debt path even more challenging,” he added.
Spiraling Impact
The new revenue from the tariffs will be equivalent to that from raising corporate income taxes from 21% to 36%, the report stated. But while higher corporate taxes are generally seen as “highly economically distorting,” tariffs will be twice as damaging in terms of GDP and wage growth, PWBM added. Over the next 30 years, those tariffs would reduce GDP growth by 6% and wages by 5%. Those macro trends would percolate down to the individual level — for instance, a middle-income household faces a $22,000 lifetime loss. All households, regardless of age or income, would be worse off, the report stated.
Higher tariffs will hurt international capital flows, and reduce the demand for U.S. treasuries. As a result, it would get harder for the U.S. to sell its bonds to foreign buyers at attractive rates. “It will be harder for the government going forward to float its federal debt — [that will] essentially be at higher prices, but at cheaper interest rates,” Smetters said.
In that setting, U.S. domestic households would be required to pick up the slack, forcing a fall in the prices of those bonds, and those of domestic capital investment. “Even conservatively assuming only domestic capital investment prices fall, the reduction in economic activity is more than twice as large as a tax increase on capital returns that raises the same amount of revenue,” the report stated.
“It will be harder for the government going forward to float its federal debt — [that will] essentially be at higher prices, but at cheaper interest rates.”— Kent Smetters
PWBM based its analysis on a tariff simulator, which provides revenue estimates and projected price increases across thousands of different spending categories. It allows users to explore tens of thousands of different tariff scenarios across various countries, regions, and product sets. The report was produced by PWBM experts Lysle Boller, Kody Carmody, and Jon Huntley, under the guidance of its senior economist Felix Reichling and Smetters.
According to the report, the tariffs will impact the U.S. economy through at least three main channels: a direct tax on imported goods; a reduction in imported goods and capital flows; and increased economic policy uncertainty. It tracked the uncertainty aspect with an Economic Policy Uncertainty (EPU) Index. PWBM estimated that the rise in economic uncertainty will reduce investment in the U.S. by about 4.4% in 2025.
It’s of course hard to predict how long that uncertainty will persist. “If the uncertainty gets resolved fairly soon, that will change,” Smetters said. “But we project that uncertainty itself wears off by 2027. That might be optimistic, but what could actually happen are things that are not captured by our model.”
Sharing the Tariff Burden
The analysis considers several scenarios ranging from one in which consumers bear the entire burden of the tariff costs, to one where they are shared equally between consumers and businesses.
When consumers bear 100% of the burden, consumption falls by 3.5% in 2030 and by over 3.3% in 2054. When 75% of the tariff burden falls on consumers and 25% on businesses, the initial decline in consumption is slightly smaller, but the decline in capital and wages in 2030 is larger. When businesses and consumers equally split the cost of the tariffs, the economic effects follow a similar pattern to the differences between the first and second scenarios, but the impacts are more pronounced: capital, wages, and output fall even further, while the reduction in debt is slightly smaller.
In each of those scenarios, U.S. households are required to absorb more government debt, which then diverts their savings away from investment in private productive capital. That, combined with increased economic uncertainty, results in declines with a domino effect — across output, capital formation, worker productivity, and wages. Lower wages lead to lost tax revenues on labor income, resulting in only modest reductions in federal debt of between 9.8% and 11.6% by 2054, the analysis showed.
A dynamic distributional analysis in the report considers how the tariffs could affect households across income and age groups, including the unborn. For instance, a household aged 30 in the lowest income group loses the equivalent of around $16,000 across their lifetime. Households born in the future fare slightly better when the cost of tariffs is primarily borne by households, while retirees are better off if businesses bear most of the costs. The losses range from $6,500 for a 70-year-old household (when the tax burden is split between consumers and businesses) to $102,600 for a 70-year-old household (when consumers bear the entire tax burden).
