Photograph by Nathaniel St. Clair
Donald Trump is putting in place the largest tax increase in the country’s history with his big import taxes (tariffs). We won’t know the full size of Trump’s taxes until after Liberation Day III (August 1), and probably not even then, but we already know that they are huge.
This is evident from the tariff revenue the government is collecting. In June the government collected $26.6 billion in tariff revenue. That is up from around $6 billion a month in 2024 before Trump’s tax hikes. The difference of $20 billion comes to $240 billion on an annual basis. Summed over a decade, as we do with other measures, this comes to $2.4 trillion.
This would be a substantial tax hike in itself, roughly $1,900 per household, but we know that the figure is almost certain to go much higher. Trump is threatening taxes of an additional 10 to 30 percent on imports from our major trading partners, such as Mexico, Canada, the European Union, and Japan. The tax take could easily end up being twice its current level, making Trump’s tariff frenzy by far the largest tax increase in US history.
While we have a great deal of evidence showing that US consumers will end up paying the bulk of these taxes, the Trump administration is in full denial mold. The first clear evidence of the tariffs’ impacts on consumer prices came with the release of June Consumer Price Index (CPI).
There were sharp price increases in some of the items subject to large tariffs. For example, apparel prices rose 0.4 percent, appliance prices rose 1.9 percent, and the price of visual and audio products increased by 1.1 percent.
The overall price index outpaced wage growth, pushing real wages down 0.1 percent for the month. While wage growth data are erratic, as is the CPI, wage growth has been slowing in recent months. A slower pace of wage growth, coupled with more rapid inflation, will mean a reduction in real wages and living standards, after healthy growth over the Biden years taken as a whole.
Many commentators (including me) have been surprised that we have not seen larger increases in prices from the tariffs. There are two factors that likely explain why the impact has not been larger so far.
First, there was a massive accumulation of inventories in the first quarter as businesses rushed to stockpile imports before the tariffs hit. We had been accumulating inventories at an annual rate of just over $50 billion in 2024. In the first quarter, we accumulated inventories at a $207 billion annual rate. Businesses are now selling from this stockpile, on which they did not pay the Trump tariffs.
The other main reason is that businesses do not know the tariffs will stick. Trump seems determined to do his reality TV show routine where we all find out the tariffs after the next commercial break. This uncertainty is likely discouraging businesses from jacking up prices as much as they might otherwise.
That reluctance can be seen clearly in the auto sector. Car prices actually fell by 0.3 percent in June. It is likely that many manufacturers are reluctant to raise prices based on tariffs that may not stick. They are prepared to take smaller margins, at least in the short term, rather than risk pricing themselves out of the market. Over the long term, if the tariffs remain in place, they will almost certainly raise their prices to pass on much, if not all, of the cost.
One issue that Trump has repeatedly raised is the possibility that exporters will absorb much of the tariff. Past experience shows this is generally not the case. We have limited data to date, but thus far it does not appear that exporters are absorbing the Trump tariffs.
Trump’s Council of Economic Advisers put out a study last week that tried to make the case that import prices were falling relative to domestic prices, and thereby claimed this meant importers were absorbing the cost of the tariffs in lower prices. This is not a serious way to measure the effect of tariffs for the simple reason that we expect tariffs to raise the price of domestically-produced goods as well.
One of the points of a tariff, and certainly one claimed by Trump, is that it will promote domestic industry. Part of that story is that by raising the price of imports, it will make it possible for domestic competitors to also increase their prices, thereby getting larger profit margins. The larger profit margins are supposed to lead to more investment and output growth.
Since the price of domestically produced goods are expected to rise in response to tariffs, showing the relative movement of the price of imported goods and domestic goods tells us nothing. Rather, we would be interested in how the price trends of imported goods and domestic goods changed following the tariffs. Here’s that picture.
As can be seen, the price of core (non-fuel, non-agricultural) imports had been rising gradually in the year prior to Trump’s election, when people first began to expect tariffs. It has continued to rise modestly in the eight months since the election. If there has been any slowing of this increase it has been very small.
On the other hand, there has been a clear reversal of course for core goods in the CPI. The price of these goods had been falling at roughly a 1.5 percent annual rate from March of 2023 to August 2024. Since August the price of core goods have risen at roughly a 1.0 percent annual rate. If the trend of falling prices from last August had continued, goods prices would be roughly 2.0 percent lower today. Since we spend over $6 trillion a year on goods consumption, this 2.0 percent difference would translate into $120 billion in annual savings, roughly half the size of the tariff revenue we were collecting in June.
These calculations are obviously crude, but they should give us a rough idea of magnitudes. What it looks like to date is that we are seeing a substantial impact of tariffs on consumer prices. We will almost certainly see more impact over time from the tariffs already imposed, if they remain in effect, and we will see a much larger impact if Trump goes through with the new round of taxes promised for Liberation Day III.
In short, we are in fact seeing the largest tax hike in the history of the country.
This first appeared on Dean Baker’s Beat the Press blog.
The post Contrary to What Trump Tells You, Higher Tariffs Mean Higher Prices appeared first on CounterPunch.org.