Trump puts tariffs on imports from Canada, Mexico, China. Where does the tariff money go?
After a monthlong delay, President Donald Trump on Tuesday hiked up prices for imports by enacting 25% tariffs on goods from Mexico and Canada and doubling a 10% tariff on Chinese goods to 20%.
So where is that money going?
Trump has long talked about tariffs as a tool to raise revenue and offset costs associated with proposed tax cuts, going so far as to float the idea of replacing income tax with tariffs.
Here’s what we know so far about the potential revenue from Trump’s tariffs and where the money could flow.
How do tariffs work?
A tariff is a tax on goods imported from another country. U.S. companies tend to pass on at least part of the higher costs from tariffs to consumers, which is why economists say tariffs can be inflationary.
Trump's tariffs on Canada, Mexico and China are expected to cost the typical U.S. household more than $1,200 per year, according to the Peterson Institute for International Economics, a nonpartisan think tank.
Where does the tariff money go?
The money from tariffs, paid by American companies, goes to the U.S. Department of Treasury and enters the general affairs budget, said Felix Tintelnot, an associate professor of economics at Duke University in North Carolina. From there, it can be used “essentially for anything.”
Looking back to Trump’s tariffs against China during his first term could offer clues on where the money may go, though. Retaliatory tariffs from China were a blow to U.S. farmers, and Trump authorized $28 billion in relief payments to compensate farmers for their losses.
"We might end up spending some of the revenue on bailing out particular sectors affected by retaliatory tariffs, as happened in 2018," Tintelnot said.
Revenues from tariffs could also be used to address the budget deficit or fund Trump’s plans for tax cuts, according to Tintelnot, although it's not likely to be enough to cover the full costs. Extending Trump’s 2017 tax cut is expected to cost roughly $4 trillion over the next decade.
How much revenue from tariffs?
Tuesday's tariffs could increase revenue by more than $100 billion per year ‒ roughly 2% of total U.S. revenue ‒ and raise more than $1 trillion by 2035 if made permanent, according to the nonprofit, nonpartisan Committee for a Responsible Federal Budget.
But some economists warn that tariffs can be an unreliable source of revenue.
If the trade war hikes up the cost of goods, American consumers could find themselves pulling back on spending. Companies would be expected to slow their imports, which would mean less tax revenue from tariffs for the government, according to Nancy Qian, an economics professor at Northwestern’s Kellogg School of Management.
“It’s not clear how much more revenue they would get,” Qian said. “Whatever revenue they do get, Americans would hope it would go toward subsidizing whoever in the American economy has to bear the costs of tariffs.”
That would likely include consumers, Qian said, although certain Americans would get hit harder than others.
The Peterson Institute for International Economics found Trump's tariffs on Canada, Mexico and China would wipe out 2.7% of the income of the bottom 20% of earners, while the top 1% would lose 0.6%.
“When you increase the price of goods and services, it’s harder for the poor to pay for them. And they don't have discretionary income, so they’ll stop buying things that aren't necessities," said Susan Ariel Aaronson, research professor of international affairs at George Washington University.