Buckle up, Americans. You’ve just been ambushed by a federal money grab that this nation hasn’t witnessed in recent history, the equivalent of a national sales tax—branded under another name. This version’s a giant revenue raiser that deficit-ridden Washington is likely to get hooked on. In fact, it’s looking more and more like America’s answer to Europe’s fatal attraction that’s long been the leading enabler for the region’s extremely high levels of government spending: the value-added tax—the VAT. As I’m sure you’ve guessed by now, we’re talking about the Trump tariffs. And you can forget about foreigners picking up the tab for the tariffs. It’s Americans who will.
According to a wide range of forecasts, this new nationwide sales levy will yank back from consumers’ wallets about half the projected tax savings from the One Big Beautiful Bill’s extension of the 2017 Trump tax cuts.
Unmasking the Trump tariffs as a national sales tax helps clarify the burden looming for Americans’ finances going forward. It’s time to dispel the widespread confusion and misinformation that surrounds the tariffs’ role, and detail their true impact across the economy.
Tariffs are a national sales tax by another name
Almost all countries except the U.S. impose national sales taxes on all or most goods sold anywhere within their borders, either at a flat rate or at varying percentages depending on the product. These taxes come in two forms: A few nations, including Pakistan and Myanmar, deploy a simple countrywide tax similar to America’s state sales taxes. But the most common type by far is the value-added system imposed in stages at each level of production. It’s a bedrock of the regimes in France, Germany, and virtually every other EU country. The VAT is a formidable revenue generator that has fueled government spending in Europe and imposed a huge drag on its nations’ growth.
The U.S. is highly unusual in that it’s never had a VAT or in the postwar era, anything resembling a major national sales tax. This stand-alone status in shunning the former likely explains why America’s federal spending stands at least 10 percentage points lower as a share of GDP than the lions of Europe. But the Trump tariffs mark a historic shift to an effective national sales tax. By employing huge tariffs, Uncle Sam is embracing a tax that’s virtually never been used at remotely this scale by any other major economy in recent history.
Although tariffs were an important source of federal funding from the 1880s to just after World War II, they’ve amounted to a relatively small portion of U.S. federal receipts ever since. In 2024, even though the Biden administration retained most of the tariffs from Trump’s first term, the average U.S. tariff ran at just 2.5%, raising only $77 billion, or around 1.6% of all federal tax proceeds.
By making tariffs more than a minor footnote in the federal budget, the Trump administration takes this long-fading mode of taxation into uncharted fiscal territory. To be clear, tariffs operate differently from VATs. They’re collected at U.S. ports of entry by the U.S. Customs and Border Protection agency and are paid entirely by American importers. Under the Trump plan, the rates vary greatly even for the same goods, depending on what country they’re arriving from. On aluminum and steel, we’re charging Canada 50% and the U.K. “just” 25%. Typically, importers tack the tariff cost onto the price of their products in auto showrooms, grocery chains, and megastores. Hence, they raise the bill for American consumers at checkout counters. In this sense, tariffs are no different than the German VAT that marks up tabs at the supermarket chain Edeka in Munich or the Minnesota state sales tax that gets added to Walmart price tags in Minneapolis.
By the way, tariffs resemble VATs in another sense. Tariffs are “indirect” taxes embedded in retail prices, like VATs, and are not added at checkout. Sales taxes, on the other hand, are tacked on at the point of sale and visible on receipts, and usually spark outrage when they are increased. A danger of tariffs is that they could become a VAT-like way to hike taxes on the sly.
All told, according to the Budget Lab at Yale, the Trump administration has raised the average effective tariff rate to 18.6% for Americans. This towering figure is approaching the devastating 19.8% rate imposed by the Smoot-Hawley Tariff Act of 1930, a notorious measure that helped sink the U.S. economy during the Great Depression.
Just how big will the tariff tax hit be? According to the nonpartisan Tax Foundation, by the end of 2025, the run rate is predicted to be $210 billion annually. That’s a big number. It equates to over 9% of personal income taxes and 40% of corporate taxes paid in 2024. According to the Budget Lab at Yale, the Trump tariffs will lift a total of $2.7 trillion from Americans’ pockets through 2034.
The Trump tariffs will amount to one of the largest tax hits in U.S. history. You can’t blame Americans for being flummoxed. President Trump lauds the One Big Beautiful Bill’s extension of his 2017 tax reductions as central to the POTUS’ pro-growth agenda. According to the nonpartisan Congressional Budget Office, the extension of Trump’s reductions will reduce taxes by around $400 billion relative to what they would have been next year. Trump’s tariffs will grab back half of those savings via the $200 billion–plus tariff smack in 2026. So Trump’s putting more money in families’ pockets with one hand and taking a big chunk of it back with the other.
Tariffs don’t cause inflation
Critics of tariffs have plenty to legitimately complain about. But they’re wrong in swearing that the duties feed inflation.
Inflation is defined as a broad-based, persistent increase in a nation’s general price level. It is not triggered by taxes, whether they’re sales taxes or de facto sales taxes, like tariffs. Instead, as legendary economist and Nobel laureate Milton Friedman famously stated: “Inflation is always and everywhere a monetary phenomenon.” Indeed, we have never observed significant inflation, a period in which the annual inflation rate exceeds 4% and lasts for at least two years, in any country in which the money supply has not significantly increased prior to the outbreak of inflation.
Just consider our last bout of inflation in the United States. Following the pandemic, the U.S. money supply, measured by M2, experienced the fastest rate of peacetime growth since the Fed’s founding in 1913. The annual growth rate of M2 peaked in February 2021 at 26.7%, and that annual rate averaged a stunning 21.0% from February 2020 to February 2021. As night follows day, inflation surged. In 2022, it peaked at 9.1% per year in June, and it averaged 7.0% per year between April 2021 and December 2022. The inflation wasn’t temporary and wasn’t caused by supply-chain “glitches,” or a variety of any other nonmonetary factors that were thrown up as explanations for the inflation episode. It was caused, pure and simple, by the surge in the money supply.
While tariffs will increase the relative prices of imported goods and services, they will not change the overall price index. The Trump tariffs will simply force Americans to spend more on cars, products made from steel and aluminum, European wines, and all other items heavily taxed at our borders. Unless the money supply is goosed, Americans will have less to purchase products and services that aren’t shipped from abroad—everything from domestic plane tickets to restaurant meals to soft drinks. It will be more or less a wash, with the extra money spent on tariffed goods matching the drop in what’s spent on everything else. The specter of inflation will only reappear if the Fed balloons the money supply.
A classic example from Japan in the 1970s illustrates this point. The island nation imports virtually all of its oil. With the Arab oil embargo of 1973, the world price of crude almost quadrupled. In an attempt to soften the blow from this surge in price, the Bank of Japan (BOJ) juiced its money supply by almost 50% from the start of 1972 to the end of 1973. Not surprisingly, inflation spiked to over 23% per year in 1974.
When the world’s second oil shock of the 1970s hit Japan in 1978, the BOJ, which had learned its lesson from the first oil shock of the decade, chose to not “soften the blow” by increasing the money supply. Indeed, the BOJ tightened its monetary policy a bit, with average annual growth in M2 falling from 13.3% between 1976 and 1977 to 10.6% between 1979 and 1980. Unlike the inflation episode that accompanied the first oil shock, inflation remained steady at 4.9% through the end of 1980.
Tariffs will not eliminate or even significantly shrink the trade deficit
President Trump denounces America’s trade deficits. He asserts that the big shortfall between what America exports and imports constitutes a crushing burden on the economy and can only be substantially reduced by the imposition of tariffs. His twofold solution: Slap high tariffs on imports so that foreign nations sell us far less and pressure foreigners into opening their markets so that the U.S. can ship them bigger volumes of stateside-made products. The president regularly blasts America’s trading partners for “cheating” and deploying all manner of punitive practices to “loot” and “fleece” the U.S. He argues that America’s trading partners are treating Uncle Sam unfairly in a ripoff scheme. According to the president, the only way to eliminate America’s trade deficits is with the imposition of steep tariffs.
The president’s arguments are incorrect. It is all in the arithmetic. The deficits are bulging because Americans spend more than this nation produces domestically. The truth is revealed by a famous economic identity. Spending falls into three categories: consumption, investment, and government expenditures. Whereas the value of all goods and services produced is equal to the gross domestic product (GDP), the gap between the aggregate spending (C+I+G) and GDP is by definition equal to the difference between exports and imports.
And the numbers work perfectly. In 2024, the difference between what the U.S. spent ($31.2 trillion) and what it produced ($30.33 trillion), was $872.5 billion. That precisely equaled the overall trade deficit. Put simply, the deficit arises from a choice we’ve made as Americans to consume much more than we make. It is not the result of nefarious activities by foreigners. In short, since 1974, the U.S. has witnessed a trade deficit each year, all made in the USA.
As it turns out, these deficits have been easy for the U.S. to finance. Foreigners are more than willing to send capital to the U.S. so that the funds can be invested in dollar denominated assets by purchasing U.S. stocks, corporate bonds, and apartment complexes, to name a few places where foreign capital flows in and rests in the U.S. All of this is part of the exorbitant privilege associated with possessing the world’s premier currency.
Tariffs will prove a big downer for growth
President Trump argued correctly that the U.S. would grow much faster if Congress retained his 2017 tax reductions. Strangely, Trump doesn’t realize that tariffs are nothing more than a sales tax on Americans, and a big one at that. Indeed, they promise to negate at least half of the tax reductions contained in the One Big Beautiful Bill. Like all taxes, the tariffs will impose a drag on economic growth. Not surprisingly, the Yale Budget Lab forecasts that the extra duties will slow GDP growth by a substantial 0.4 percentage points per year over the long run. That would amount to a huge hit to the average annual growth rate of 2.2% that the U.S. has experienced since 2000.
Americans are about to shoulder a big, unadvertised, stealth tax hike. This nation is the world’s most abundant supermarket, offering the best prices and greatest variety of goods on its shelves. The Trump tariffs are poised to create a far more limited and expensive marketplace by sweeping from those shelves the best bargains arriving from across the globe.
Steve H. Hanke is a professor of applied economics at Johns Hopkins University. He served on President Ronald Reagan’s Council of Economic Advisers. His most recent book, coauthored with Matt Sekerke, Making Money Work: How to Rewrite the Rules of Our Financial System, was released by Wiley in May. Known as “the Money Doctor,” he’s advised presidents and prime ministers for over 40 years.
