Tariffs: What They Are and How They Impact Your Wallet

Tariffs on imported goods are a favored proposal in the eyes of President Donald Trump, who has vowed, to impose a universal baseline tariff on all imports as high as 20%.

As a candidate, Trump’s reliance on tariffs was hard to ignore. Trump pledged to impose global tariffs of up to 20%, followed by a 25% tax on goods from Mexico and Canada. His tariff plans even went as far as threatening to levy a 100% tariff on China over TikTok’s ownership and ban discussions.

Trump did not address how he would levy tariffs in his first day in office, though reports indicate he will likely single out China, Canada, and Mexico in the coming days. For now, universal tariffs seem to be shelved for later.

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Still, the Trump administration is expected to impose a level of tariffs on U.S. imports not seen since before World War II, economists warn. The results could be troubling for U.S. consumers, as tariffs are said to cause prices of everyday goods to spike.

What’s more: Trump recently announced the creation of an ‘External Revenue Service’ which aims to collect tariff revenue, even though there are already government agencies that handle that.

Related: What is the External Revenue Service?

Here’s what you should know about tariffs and how they impact your finances.

What is a tariff?

Tariffs are taxes governments impose on goods and services imported from another country. Tariffs can be a source of revenue for a country, but can also be used as a barrier to regulate international trade and safeguard domestic industries.

Governments generally impose tariffs for several reasons including to:

• Raise revenues
• Protect consumers and domestic industries
• Safeguard the nation from unfair trade practices

However, taxing imported goods can make those products more expensive to consumers. Tariffs also can make local products more attractive to buyers and spur competitiveness in the market, price gauging by locals — or in some cases, inflation.

Tariffs are still implemented as a “targeted tool” to protect the U.S. against unfair trade practices. However, data show that using tariffs as a revenue source can harm low and middle-income households and benefit those with higher incomes.

Who pays for tariffs?

When Trump imposed tariffs on various imports during his first term, the hardest hit were U.S. consumers and firms.

When tariffs are levied on imports from foreign countries, the U.S. directly pays import taxes (tariffs) to the U.S. government for their purchases abroad, according to the Tax Foundation.

However, the economic burden of tariffs generally falls on consumers. After U.S. businesses pay for import tariffs, they often pass on price increases to consumers to make a profit.

As part of the collateral damage from tariffs, consumers may see prices of goods increase, or product stagnation, to name a few.

For example, if a U.S.-based car business is paying $20,000 to import a vehicle from China, a 60% tariff would mean a cost of $12,000 more to import that car. Some of that price hike may be passed onto the consumer, resulting in a more expensive car.

"Tariffs are ultimately paid for in large part by consumers and businesses in the domestic economy..." the Tax Foundation underscored during the pandemic.

Trump’s tariff agenda

President Trump appears to be sticking firm to his aggressive tariff plans for his second term, although how they will be implemented remains unclear. During the 2024 presidential campaign, Mr. Trump signaled tariffs would drive revenue for the U.S., improve domestic manufacturing, and even go as far as subsidizing childcare.

The most prominent pitch includes a 20% universal baseline tariff on all countries, followed by a 25% duty on Canada and Mexico. Lastly, Chinese imports may face an extra-punitive tariff as high as 100%.

So far, Trump appears to be using tariffs on other countries as a blunt tool.

On his first day in office, Trump said he was considering 25% tariffs on Canada and Mexico as soon as Feb. 1, 2025, unless the neighboring countries improved border security regarding illegal immigrants and drugs. In a comment to reporters, Trump said both countries were allowing “vast numbers of people to come in, and fentanyl to come in.”

Notably, when asked about his plans for blanket tariffs on U.S. imports, President Trump said they were “not ready for that yet.” As a candidate during the 2024 presidential campaign, he proposed worldwide tariffs of up to 20% on all imports to the U.S.

Trump tariffs: Cost

For most of his 2024 presidential campaign run, Trump has pitched a blanket 10% tax on every imported good entering the United States, and a 60% to 100% tax on goods imported from China. The 10% measure was projected to cost the typical middle-income U.S. household an annual $2,500 tax increase, according to the Center for American Progress (CAP).

What’s drawn more interest is Trump’s floating of a worldwide tariff as high as 20%. The suggestion could potentially burn an even bigger hole in your wallet.

A 20% tariff on all imported goods, with a 60% tax on Chinese goods would amount to about $3,900 more in taxes for a middle-income family in 2026, CAP estimates. That’s up from the $2,500 tax increase associated with Trump's previous proposal.

Where will you see prices increase due to tariffs? Pretty much across the board, from essentials like food and medicine — to toys and apparel. Here are a few examples of tax increases on everyday items.

• $200 increase on food
• $210 increase on medicine
• $300 on electronics
• $220 tax increase on apparel, footwear, and jewelry

Who pays for tariffs?

Are tariffs good or bad?

While every U.S. household would likely see a tax hike under Trump’s tariff plans, the highest earners would benefit the most. That’s because, as the Peterson Institute for International Economics (PIIE) finds, high tariffs often imply a “massive shift of the tax burden from richer taxpayers toward lower-income households.”

Under a 10% worldwide tariff and 60% tax on imported Chinese goods, the Tax Policy Center projects that U.S. households could see declines in after-tax income anywhere from 1.7% to 1.9%. However, those in the top 0.1% would see their after-tax income fall by about 1.4%.

In dollar terms, Trump’s plans to impose higher tariffs would mean:

• Lower-income households (those earning up to $32,800 a year) would pay about $320 more in taxes (an after-tax income decline of 1.7%)
• Middle-income households (earning between $63,300 and $113,100) would pay about $1,350 more in taxes (an after-tax income decline of 1.8%)
• The top 0.1% (those earning over $4 million annually) would pay about $133,000 more in taxes (representing an after-tax income decline of 1.4%)

Under a 20% worldwide tariff, the median household could expect after-tax incomes to fall even more. A separate study found that after-tax incomes for the median household could sink by more than $2,600.

Steep tariffs could escalate into another trade war. Trump’s across-the-board 10% hike on tariffs, including from allied countries, could also lead to retaliation from other countries, PIIE argues. For instance, the European Union, Canada, and Mexico retaliated immediately when Trump imposed the steel and aluminum tariffs during his presidency.

“It’s a high stakes game, and what is at stake is the health of the US economy and that of the rest of the world,” the organization recently noted.

'Trump tariffs': Bottom line

Tariffs are on the table under President Donald Trump’s second term, as the Republican has continued to double down on his proposal to raise the tax on imported goods. Most economists who oppose this policy see it as a tax that could harm those with lower and middle incomes.

Remember that while tariffs can foster less dependence on other countries' goods and promote competition, these taxes can also increase prices for consumers like you.

Separately, Trump announced plans to create an External Revenue Service that would collect tariffs and fees. But remember, tariffs on U.S. imports are paid by domestic importers, which means those taking a hit will be based in the U.S.

As the Trump administration fulfills its first 100 days in office, the President will likely share more specific proposals regarding his tax agenda. Stay tuned so you can see how tariffs may impact you.

Related Content:

• Project 2025 Tax Overhaul Blueprint
• What's Wrong With Trump's Pledge to End Taxes on Social Security Benefits
• Trump’s Pitch for an ‘External Revenue Service’ Agency Attempts to Shroud Who Pays for Tariffs