America’s working families will bear the higher costs brought on by tariffs and tax cuts.
By Lael Brainard
Lael Brainard, formerly director of the National Economic Council and vice chair of the Federal Reserve, is a Distinguished Fellow at the Georgetown Psaros Center for Financial Markets and Policy.
The Trump administration’s shock-and-awe approach to economic policy has already depressed the stock market, raised investors’ expectations of a recession and increased consumers’ concerns about inflation. Administration officials have suggested this pain is necessary for broader gain.
The question is: Whose pain and whose gain?
The president has captured the world’s attention by putting forward extreme plans on tariffs, which Republican officials are citing as a way to help offset deficit increases caused by their emerging package of tax cuts. But American consumers know that they will pay for these tariffs out of their pockets. Tariffs were the most frequently cited concern in recent consumer sentiment surveys, which showed that consumer worries about high prices have spiked while consumer confidence has slumped. (And that was before the latest car and car-parts tariffs were announced.)
One thing is certain: Higher broad-based tariffs mean more pain for America’s working families. The tariffs that have been proposed and imposed so far mean higher costs for groceries and the purchase of a car; they mean higher costs for housing materials, putting homeownership further out of reach for many Americans. These are not “cheap baubles,” as some administration officials have suggested, but basic necessities. American consumers are already stressed by high egg prices. Their grocery budgets would be further squeezed by the proposed tariffs on fresh fruits and vegetables from Mexico.
Don’t get me wrong. When they are smart and targeted to counter unfair trade, tariffs are a vital tool. But broad tariffs are just a tax that especially hurts families who can least afford rising costs. In addition, they could slow economic growth and result in higher unemployment and higher prices.
Some officials will tell you that Americans will get so much from tax cuts that the tariff-driven increases in prices won’t matter. But that is true only for wealthy households: The average annual tax cut from extending Trump’s cuts is more than $43,000 for the top 1 percent of earners (those making more than $646,000 a year). These cuts alone will cost more than $1 trillion over the 10-year budget window.
To pay for those top-earner tax cuts, the House prescribes about $1 trillion in cuts to Medicaid and food aid that will result in families paying more for groceries and health care. Many will lose health coverage altogether. Low- and moderate-income families would actually lose between $430 and $1,130 on average each year when the total effects of the cuts in health care and food assistance and the tax cuts in the House package are considered, while middle-income families would see a net benefit of only about $350 per year, a tiny fraction of what Americans at the top of the income ladder would gain.
Some families would be more deeply affected. When a low-income family’s food assistance through SNAP is taken away, it might not be able to pay for both groceries and rent. And someone who can’t afford cancer treatment or diabetes medications because their Medicaid coverage has been terminated could suffer catastrophic consequences.
And none of this includes the income losses resulting from the tariffs. Once you factor in the hit that families will take from the proposed and imposed tariffs on our top three trading partners, the combined effect of the tax package and tariff plans means that families at the middle of the income distribution would lose about $550 per year. Those with incomes in the lower 40 percent of the distribution would lose between $1,030 and $1,670. The top 1 percent of earners, on the other hand, would enjoy a net gain of $35,630. And the income losses for low- and middle-income families would grow larger once we factor in the tariffs on autos and the coming “reciprocal tariffs” on imports from other countries that Trump will announce this week.
The next time you hear that the gains from the combination of tariffs and the budget plans are worth the pain, keep in mind: Working families will bear the pain, while those who are already doing very well will get the gains.