By Kenneth Rapoza
August 26, 2025
The Congressional Budget Office (CBO) upped the ante on their estimate for fiscal deficit reduction last week, all due to higher tariffs that kicked into effect this month. Tariffs are offsetting tax cuts signed into law this summer in the One Big Beautiful Bill (OBBB).
The CBO raised its 10 year deficit reduction forecast by a trillion dollars to $4 trillion on Aug. 22. It was last forecast to be a $3 trillion reduction over 10 years back in June. This new update revises the June figures, estimating $3.3 trillion in primary deficit reduction and $700 billion in interest savings, for a combined total of about $4 trillion.
These numbers would be greatly impacted should the U.S. Federal Appeals Court deem that the so-called Liberation Day tariffs, set officially under the International Emergency Economic Powers Act (IEEPA), are illegal and must be rescinded. A court decision is expected next month. The Trump administration does have some alternatives, such as bringing the case to the Supreme Court, or using Section 122 tariffs for three months — a 15% temporary tariff used to amend balance of payments emergencies. Ending IEEPA tariffs could affect the CBO’s estimate in the near term.
Brett Shumate, the Assistant Attorney General and the lawyer who represented the Trump administration in the Federal Appeals Court hearing last month, said in a letter to that court dated Aug. 11 that removing these tariffs, and having to refund tariff payments to importers, “would be ruinous.”
On Aug. 15, Rep. Greg Steube (R-FL-17) and Rep. Jared Golden (D-ME-2) introduced the “Secure Trade Act”, a bill that codifies the President’s 10% tariff as a revenue source. It also calls to remove China’s Most Favored Nation status. CPA supports the bill.
The next CBO report on tariff revenues and the economy will be published on Sept 12.
In 2024, the U.S. federal government collected approximately $2.4 trillion in individual income tax revenue. This represented about 49% of the total federal revenue of roughly $4.9 trillion collected that fiscal year.
CPA estimated last year that a baseline 10% tariff would bring in at least $263 billion in revenue. This number will be surpassed this year due to higher tariffs and new Section 232 tariffs on cars, car parts, steel, aluminum and copper.
As of the first half of 2025, the U.S. brought in around $108 billion in tariff revenue. Treasury Secretary Scott Bessent is forecasting $300 billion in revenue from tariffs, very close to CPA’s original estimate. It could be higher.
Last year, the U.S. imported $3.29 billion worth of goods. If the U.S. imported $3 billion worth of goods and all of those goods were tariffed at 10%, then the U.S. would collect $300 billion in tariff revenue. But the average tariff rate today, thanks to IEEPA tariffs rising from a minimum of 10% to 15%-plus, coupled by Section 232 tariffs as high as 50%, is largely viewed on Wall Street to average out at 18%. An 18% tariff on $3 billion worth of goods imports would put tariff revenue closer to $500 billion. This is not exact, owing to the fact that tariffs did not begin until late April.
Could tariffs replace income taxes? Yes, they can. In 2025, people earning between $50,000 and $100,000 paid between 12% and 22% of their income to the federal government. While exact total federal income tax revenue collected from this income group varies, analysis suggests taxpayers in the $50,000 to $100,000 range contribute a significant but minority share of total federal income tax revenue. According to IRS and Treasury distribution data, this income group contributes roughly 15-20% of total individual federal income tax revenue. Since total individual income tax revenue was about $2.4 trillion in 2024, the group likely accounted for approximately $360 billion to $480 billion in federal individual income tax revenue. Tariffs could pay their taxes.
The OBBB used tariffs to calculate how the government could fund making the ‘Tax Cut and Jobs Act’ permanent. The law, signed by Trump in his first term, was set to expire next year. Other tax cuts enacted in OBBB expire in 2028. These temporary tax breaks include no-tax on tips, no tax on overtime pay, an extra $6,000 in deductions for those over 65 years of age and raising the Alternative Minimum Tax deduction. Raising the AMT exemption means a larger portion of income is exempt from AMT tax calculations, reducing the number of middle income earners that would be subject to that tax.
Still, the best case scenario for tariffs is as follows: product specific tariffs by weight or volume with rates that are high enough to offer protection for the domestic industry to increase capacity across the full value supply chain, making it less attractive for outsourcing or investing overseas instead of domestically. And lower universal tariffs that may not offer protection but are revenue generators that lead to a lower federal income tax burden for Americans.
As tariffs become part of the government’s lexicon for revenue, the income from imports should be used to lower income taxes in the future. Such a move would provide double benefits to Americans working in protected industries like steel, as the risk of outsourcing and import dumping is reduced. A more stable manufacturing base is foundational for the middle class, especially those living outside the large city centers.
A lower tax burden, and protection in some high value, high paying industries subject to massive import penetration will reduce the pressure on the middle class from other economic disruptions, such as artificial intelligence and automation, to the general higher cost of living.
“As the customs revenue from tariffs roll in, it is forcing a rethink in Washington about how those funds can be churned back into the economy, whether to lower income taxes for the working class, or to shore up the U.S. fiscal deficit,” said Mihir Torsekar, senior economist at CPA. “Seen in this light, tariffs can be an effective instrument to reduce income inequality and promote fiscal health for the country,” he said.