Combined Distributional Effects of the One Big Beautiful Bill Act and of Tariffs
Key Takeaways
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For all income groups except the top decile, the combination of 2025 tariff increases and the One Big Beautiful Bill Act will reduce after-tax-and-transfer incomes on average.
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The bottom ten percent of households will see an average reduction of 7 percent in incomes, while those at the top will see an increase of about 1.5 percent.
Note: Per CBO, the values for average annual income after transfers and taxes (in 2025 dollars) over 2026-2034 by decile are: $38,843, $62,457, $75,733, $89,522, $105,481, $122,119, $143,667, $171,786, $218,026, and $517,699. Deciles are calculated with respect to equivalized household income; see the Technical Appendix for more details.
Yesterday, the Congressional Budget Office (CBO) released a distributional analysis of the 2025 reconciliation act, also known as the One Big Beautiful Bill Act (OBBBA). The report analyzes how the OBBBA, which includes cuts to both taxes and to spending, will affect households across the income distribution. CBO finds that the that the bottom two deciles of households will see a net reduction in their resources while benefits for other income groups are regressive.
CBO’s report considers the effects of the OBBBA alone, excluding the effects of other recent policy changes, like the Trump Administration’s tariff increases, by design. This is because the goal of CBO's report is to estimate the impacts of the bill only, and tariffs are not part of the bill. The Administration has repeatedly claimed, however, that tariffs should be understood as a fiscal offset to the OBBBA—a revenue-raising policy tool used to “pay for” higher deficits resulting from the OBBBA.
In this post, we estimate the combined distributional impact of the OBBBA and the Trump Administration's 2025 tariff increases as of August 7th. This analysis is an update to our piece from June where we looked at the House-passed version of the OBBBA and the tariffs announced as of early June. Since then, the OBBBA was amended by the Senate then passed into law, and additional tariffs have been announced.
The results of this exercise are shown in Figures 1 and 2 above, which show average annual changes to after-tax-and-transfer income over the 2026-2034 period. We find that the combination of the OBBBA and 2025 tariffs will reduce resources on average among all income groups except the top decile. Those in the bottom decile will see an average reduction in after-tax-and-transfer income of about $2,700, whereas those in the top decile will see an increase of nearly $8,000 on average.
Appendix
The results in this report can be replicated by running this R code.
The Technical Appendix of our June report explains the methodology we use to combine CBO's numbers with TBL’s tariff estimates.
Since then, we have slightly amended our methodology for calculating the distributional impact of tariffs. The change involves the degree to which income data from the Consumer Expenditure Survey (CEX) is incorporated in our model.
Earlier this year, our tariff distribution estimates were based on the ratio of consumption to after-tax-and-transfer income in the CEX (the “C/Y ratio”). Because the CEX has a well-known issue with underreporting of income, this approach leads to inflated estimates of the C/Y ratio for lower income groups—and thus somewhat estimates regressivity.
Starting with the June report, we moved to a different approach where the CEX’s C/Y ratio was no longer the basis of our estimates. Instead, we took each income decile’s share of total consumption in the CEX, then used those shares to impute the level of consumption for each decile in the CBO distribution data. In this setting, only the rank-order of income from CEX is incorporated—not its level. While this approach addresses the overreliance on CEX’s C/Y ratios, it introduces a new problem: imputed C/Y ratios were no longer strictly monotonically decreasing by income, a pattern which economic theory suggests is unlikely.
After further review, we have decided to update our tariff distribution methodology by averaging the two approaches, each with weight of 50 percent. In other words, for each decile in the CBO data, we impute consumption under each approach then take the simple average of the two. The exception is the bottom decile, for which we use the second approach only because the CEX C/Y ratios are so implausible. We feel that this blending balances the pros and cons of either approach.