Economic and Fiscal Effects of the February 2025 Proposed Tariffs on China
The Budget Lab estimates that the 10% China tariffs raise the overall price level by just over 0.1%, which is the equivalent of a decline in disposable income of $223 per household on average. The policy raises roughly $400 billion over 10 years, but less when the -0.1% lower level of GDP that results is taken into account.
The Short-Run Distributional Effects of the 10% China Tariffs
In the short-run, the 10% China tariffs raise PCE prices by 0.14%, assuming the retaliatory actions already announced by China and assuming the Federal Reserve does not counteract the price effects. This is the equivalent of a loss in annual purchasing power of $223 per household on average.
But this tariff burden is not equally shared across households. Tariffs are a near-term regressive tax. Distributional analysis by The Budget Lab using the Consumer Expenditure Survey finds that while disposable income falls 0.14% on average from the 10% China tariffs, it falls 0.08% for households in the top decile by income while it falls 0.21% for households in the second decile (Figure 2, first panel). The percent of disposable or after-tax income is the best way to gauge the progressivity of a tax policy. In dollar terms, the consumer loss is higher for higher-income households because the distribution of disposable income grows faster than the burden of the China tariffs fall: so the average loss is $92 per year for households in the second decile (again, 0.21% of their disposable income) and $412 for households in the top decile (0.08% of their disposable income).
In the longer-run, the distributional impact of tariffs is more complex. Tariffs reduce both labor income and above-normal returns to capital, or rents. We assume that owners of capital hold rents rather than consume them in the short-run, but consume them over their lifetime in the long-run. The implication is that the tariff burden is more regressive in the short-run and more evenly-distributed across households in the long-run (for a similar approach, see Clausing & Lovely 2024).
