Offsetting the Burden of Tariffs on Low- and Middle-Income Families

• In Event: Crypto, Credits, and Consumption: Tax Policy in a Changing Economy

Abstract

Tariffs are the centerpiece of President Donald Trump’s economic policy. Since taking office, he has announced historically high tariffs on imports coming from many of our largest trading partners, sometimes lifting them temporarily and sometimes restricting them to specific goods.

Though Trump has repeatedly asserted that our trading partners pay the tariffs, US consumers bear the burden of tariffs—either by paying more for goods or from switching to less preferred goods. If extended permanently, Trump’s tariffs (as of mid-April) would reduce after-tax income by roughly 3 percent throughout the income distribution. But compared to higher-income taxpayers, lower- and middle-income families have fewer resources to fall back on when their after-tax income falls.

In this paper, we explore the use of a credit to offset the tariff burden on lower- and middle-income families. The design choices can be divided into three categories:
• Should the credit be an add-on to existing refundable tax credits, or should it be a new stand-alone tax subsidy?
• Should the credit offset all tariffs or a subset? (For example, the credit could offset tariffs on food but not on fine wines.)
• Should the credit be tied explicitly to the amount of tariffs incurred by a taxpayer, or should the tariffs be based on the average burden within an income group?

We will use TPC’s enhanced microsimulation model to measure both the revenue and distributional effects of the combined tariff-offset policy options.

Authors

• Janet Holtzblatt, Urban-Brookings Tax Policy Center

• Robert McClelland, Urban-Brookings Tax Policy Center