Trump Tariffs: Clock Ticks Down To Nearly $1 Trillion Tax H…...

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JED GRAHAM01:56 PM ET 04/08/2025
Financial markets are hoping President Donald Trump will step back from the brink, but fearing he will not. The S&P 500 surged higher Tuesday morning, but then erased gains by the early afternoon. While Trump has signaled he's ready for rapid-fire dealmaking, that may not happen fast enough to avoid — at least temporarily — by far the biggest tax hike since World War II.

At midnight, with "reciprocal" tariffs and a massive additional 50% tariff on Chinese imports set to take effect, the cumulative tax hike from Trump tariffs could escalate to nearly $1 trillion per year, or more than 3% of GDP. That would be the largest tax hike in the U.S. since a World War II funding measure in 1942, according to Tax Foundation data.

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Trump Tariffs: Measuring The Tax Hike
UBS Wealth Management estimated in a Monday report that the so-called reciprocal tariffs announced last week would lift the effective U.S. tariff rate to 25% (from about 2.5% in 2024).

The straightforward way to measure the size of the tax hike is to multiply the rate increase vs. 2024 (22.5%) by total imports ($3.3 trillion in 2024), yielding a $742.5 billion annual tax hike.

Trump's "reciprocal" tariffs announced on April 2 were scheduled to take effect in two steps. The first step, on April 4, was a 10% tariff on almost all trading partners. The next step comes at midnight, when Trump tariffs ratchet up for trading partners the administration says are abusive. With that next step, the across-the-board tariff imposed on China this year would jump from 30% to 54%. The tariff rate would jump from 10% to 20% for the European Union, 24% for Japan, 46% for Vietnam, 26% for South Korea, 32% for Taiwan and 27% for India.

Those tariffs are not actually reciprocal, but are based off other countries' trade surpluses vs. their actual tariffs or trade barriers.

Trump has subsequently announced that he will impose an additional 50% tariff on Chinese imports at midnight, unless Beijing rescinds its 34% tariff matching Trump's 34% reciprocal tariff. Based on U.S. imports of $438 billion in Chinese goods last year, that would raise the tax increase by $219 billion, for a total $961.5 billion.

Who Pays The $1 Trillion Bill
The tax represents the size of the economic adjustment forced by Trump tariffs. Still, who pays the tax is much less straightforward. The burden of the tariffs will be shared by consumers facing price hikes at retail; by importers who may swallow some of the price increase, instead of passing on the full tariff to wholesale customers; by companies buying intermediate goods used in manufacturing products for export; and by vendors in countries whose exports face higher tariffs. Currency fluctuations can offset a portion of tariffs also, if the dollar rises against the currencies of trading partners.

Workers will share the burden in higher unemployment and lower wage growth, analysts say. Investors also will share the burden in lower S&P 500 earnings and lower stock prices.

Even before Trump's threat to escalate vs. China, Jonathan Pingle, chief U.S. economist at UBS, wrote that if Trump tariffs were to stay in place, they could turn growth negative in the second half of 2025, before a shallow recovery in 2026 as the unemployment rate holds above 5%. The Fed's key inflation rate could end the year at 4.6%.

How Much Would Trump Tariffs Raise?
The amount of tax revenue Trump tariffs would raise is far from clear. It depends on the extent to which tariffs depress consumption; whether foreign government retaliation hurts U.S. exporters; how much production is insourced to the U.S.; and the degree to which economic weakness saps income tax revenue while boosting government benefit outlays.

Economists have put the likely revenue take from Trump tariffs will be between $3 trillion and $5 trillion over 10 years. That may be less than the Trump administration hopes for. Trade adviser Peter Navarro said recently that tariffs will raise $6 trillion.

Trump has made clear that he's counting on trillions and trillions in tariff revenue to help pay for his fiscal priorities: renewing the 2017 tax cuts, passing new tax cuts and shrinking federal deficits. The Committee for a Responsible Federal Budget estimates the 10-year cost of Trump tax cuts at $5 trillion and $11.2 trillion, raising the question of how much he's willing to walk back tariffs.

Trump Tariffs: Negotiations Underway
Trump posted on social media today that negotiations with South Korea have begun and he sees a "probability of a great DEAL for both countries." Treasury Secretary Scott Bessent announced the start of negotiations with Japan on Monday. Trump even held out the prospect for a deal with China: "We are waiting for their call. It will happen!"

Yet China has shown no intention of bowing to Trump's demands. Meanwhile, Trump has given some mixed messages about deals to bring down U.S. tariffs. When asked about the EU's offer to zero out tariffs on industrial goods, Trump was unmoved. Trump said the EU could get relief by committing to buy $350 billion in American energy goods.

For perspective, U.S. oil production of 13.5 million barrels per day only amounts to $350 billion a year at a price of $70 per barrel.

On Monday, Israel agreed to remove all tariffs, other trade barriers and eliminate its trade surplus with the U.S. But Trump wouldn't commit to removing the 17% tariff on Israel. In any case, Trump is imposing 10% baseline tariffs even on countries that have trade deficits with the U.S., such as the U.K. and Brazil.

S&P 500
The S&P 500 fell 0.1% in afternoon stock market action after surging more than 4% Tuesday morning. On Monday, the S&P 500 slipped 0.2%, fighting back from intraday depths.

Through Monday, the S&P 500 has fallen 17.6% from its Feb. 19 all-time high. The S&P 500 finished 12.5% below its level as of Election Day.

Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.

Trump Tariffs: Clock Ticks Down To Nearly $1 Trillion Tax Hike At Midnight; S&P 500 Erases Gain

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