Making Sense of the $2,000 Tariff Dividend?!

Abstract

This article examines the Trump administration’s proposed $2,000 tariff dividend and evaluates whether tariff revenues can sustain it while simultaneously achieving the stated economic objectives of reducing the Budget and Trade deficits. The analysis reveals fundamental fiscal and economic contradictions in current tariff policy.

The article documents that tariff receipts have surged from less than $100 billion annually before “Liberation Day” to approximately $268 billion in 2025 Q2 (on an annualized basis), with projections reaching $299 billion by 2026. However, the proposed tariff dividend would cost $300 billion annually (supporting 150 million individuals earning under $100,000), consuming 100 percent of projected revenues. Thus, the proposed tariff dividend would deplete 100% of the projected tariffs receipts in 2026.

Examining the two primary economic objectives of implementing the tariffs, reducing the Budget Deficit and the Trade Deficit, reveals minimal gains with severe tradeoffs:

• The Budget Deficit declined modestly from 6.3% to 5.9% of GDP, yet the tariff dividend would eliminate these gains entirely, pushing Budget Deficit back up to 6.5% or higher and accelerating the current US Fiscal Crisis.
• The Trade Deficit shows no meaningful improvement, at 3.8% of GDP in 2025 Q2 (similar to 2023–2024 levels), despite widespread tariff implementation including 50 percent rates on Brazil and India.

The article argues that reducing the Trade Deficit is itself the wrong economic objective. Drawing on Ricardo’s Comparative Advantage theory and Stan Shih’s Smile Curve, this essay conveys why integer global supply chains (not disrupted by tariffs) generate enormous consumer benefits through lower prices. Eliminating the Trade Deficit would require transferring millions of workers from high-value service jobs to low-value manufacturing jobs, causing inflation spikes and income reduction. The comedian Dave Chappelle said it all:

I want to wear Nike shoes, I don't want to make Nike shoes

Dave Chappelle

Dave Chappelle wearing his Nike shoes on stage… and not making them

As a side note, Dave Chappelle is known to make $20 million per Netflix special. So, you won’t see him working in a factory making Nike shoes. The same is true for anyone reading this article; by “true” I mean not wanting to work in a factory making Nike shoes.

The essay further critiques the White House’s “cognitive dissonance” on tariffs — simultaneously claiming they don’t cause inflation while proposing $2,000 compensation payments that implicitly acknowledge inflation impacts. Critically, the essay challenges the Administration’s narrative blaming Biden for inflation, noting that inflation had declined substantially from its 9% peak in mid-2022 to under 3% by November 2024, making the affordability crisis largely self-inflicted by Trump’s 2025 tariff policies.

Using Traffic Tracker data, the author estimates that on an annualized basis import prices have risen 1.9 percentage points above domestic prices. That is based on the Traffic Tracker data set (online prices from several major retailers).

The author concludes that tariffs neither reduce deficits effectively nor address affordability, and instead recommends immediately eliminating all tariffs imposed in 2025 as the most direct and effective way to address the affordability crisis. This solution would be far more effective than the current tariffs who have genuinely destructive economic impact (contracting international trade & economic growth, rising inflation).

Introduction

The Trump Administration is addressing “affordability” with various proposals. One of them would be to give $2,000 to qualifying individuals to alleviate the impact of tariffs on the price of goods. This proposal is most uncertain because:

• Timing is uncertain. Earlier announcements suggested this tariff dividend would be paid as early as this November. Later rumors suggested it would be sometimes during 2026, probably close to the Midterm Election to influence the outcome;
• Qualifying individuals is not firmed up. Scott Bessent stated on Fox News that it would apply to individuals and households making less than $100,000;
• There are a bunch of Constitutional issues to be worked out.

Next, I will look at whether the tariff revenues are big enough to afford this tariff dividend.

Tariffs revenues vs tariff dividend

Tariffs revenues

Source: Bureau of Ecoomic Analysis (BEA)

As shown above, on an annualized basis tariffs receipt jumped from less than $100 billion a year before Liberation Day to close to $268 billion a year during 2025 Q2. Based on current tariff rates, the Tax Policy Center estimated that tariffs revenues would reach $299 billion in 2026.

Tariff dividend cost

The Tax Foundation has estimated that there are 150 million individuals who make under $100,000 a year who would qualify for the tariff dividend. Thus, the tariff dividend would cost:

$2,000 times 150 million = $300 billion

In other words, the proposed tariff dividend would drain 100% of the tariff revenues for one year. That’s not a tariff-dividend. It is a tariff-wipe out.

And, going forward the Tax Policy Center estimates that tariff revenues would decline fairly rapidly as such tariffs would cause ongoing contraction in imported goods. The latter is among Trump’s ultimate goals.

Reviewing the tariffs economic objectives

Remember the main two economic objectives of the tariffs were to:

1. Reduce the Budget Deficit
2. Reduce the Trade Deficit

Let’s review how things are going so far and how would the proposed tariff rebate would affect these objectives.

Reviewing Budget Deficit

Before Trump 2025, the Budget Deficit was running steadily at 6.3% of GDP. The tariffs did bring quite a bit of revenues. And, on an annualized basis, the Budget Deficit is now running at 5.9%. It is still unsustainably high; but, it is still a reduction of 0.4 of a percentage point. However, the tariff dividend would entirely cancel out the impact of tariff revenues. And, the Budget Deficit would bounce back up to 6.5%, or even higher than before Trump implemented his very high tariff rates.

In other words, the tariff levels even if maintained make hardly a dent in the Budget Deficit let alone the resulting ever rising Debt/GDP ratio. And, if the tariff dividend actually kicks in, the fiscal situation would immediately deteriorate and only accelerate the US already ongoing fiscal crisis.

Trade Deficit

With his broad based tariffs, Trump is contracting overall trade. Between 2023 Q1 and 2025 Q2, exports have declined from 7.5% to 6.6% of GDP. Over the same period, imports have declined from 11.4% to 10.3%.

Within the data above, notice the uptick in imports from 11.0% in 2024 Q4 to 12.1% in 2025 Q1 as American businesses piled up on their inventory of imported goods before Liberation Day tariffs kicked in.

As shown below, the trade deficit reflected this pattern, as it rose from 4.2% in 2024 Q4 to 5.1% in 2025 Q1.

By 2025 Q2, the trade deficit declined to 3.8% which was similar to the trade deficit level in 2023 and first half of 2024. In other words, not much changed.

Trump wants to reduce the trade deficit simply by charging high tariffs to every single country and territory in the World. These high tariffs include a 50% tariff on Brazil, because of the trial of Jair Bolsonaro, and a 50% tariff on India because they import some oil from Russia. In both cases, the losers will be as much the US consumers who ultimately pay these tariffs. Also, the Brazilian and Indian exporters will obviously see their US exports markets shrink. To compensate for the loss in the US market, they are both actively reorienting their export markets outside the US.

Ultimately, Trump could reduce the trade deficit simply as a result of his contracting overall trade dramatically with every single country in the World. But, this would be a really bad trade-off.

The Trade Deficit is the wrong scorecard

The US has had a trade deficit for decades. However, the US has reaped tremendous economic benefits from international trade. It has been able to manufacture goods at a far lower cost than it would have if it manufactured everything domestically. Imagine if the US did not import anything, including intermediary goods. We would have to pay most probably double if not triple the price for I Phones, laptops, TVs, t-shirts, running shoes, etc. Also, we would have to transfer tens of millions of workers from the service sector to the factories.

The comedian Dave Chappelle has a better understanding of international economics than the White House as he was quoted saying:

“”I want to wear Nike shoes, not make Nike shoes”

Dave Chappelle

Dave Chappelle styling on stage wearing his Nike shoes, but not making them

By transferring million of workers from high-value to low-value output, we would greatly reduce workers’ income. Thus, eliminating our trade deficit would cause a surge in inflation and much reduction in income and economic growth. Not a good deal.

The theory of Comparative Advantage and the Smile Curve

The economic benefits of trade (regardless of trade balance) were conceptualized by David Ricardo in 1817 in his theory of Comparative Advantage. A modern successor to this theory is the Smile Curve advanced by Stan Shih in 1992.

Apple has proficiently mastered the Smile Curve. The mechanics of the Smile Curve work as follow:

• Left side-high profit margin. Apple designs high margin products.
• Middle of the curve-low profit margin. Apple manufactures its product at very low cost in Asia.
• Right side-high profit margin. Apple markets and distributes its products in the US and elsewhere. These products are associated with huge profit margins.

If Apple would had to develop everything domestically, it would never have become as big and successful. For more details on the subject, you can read my earlier article.

[embed]Tariffs Tantrums Tariffs tantrums will break up the US cost effective supply chains, blow up World trade, and cause stagflation (higher…medium.com

How to fix economic imbalances

Instead of restricting international trade, it would be far better for the US to fix its domestic fiscal position that is truly in a state of crisis right now. For background on the subject, you can read two of my earlier articles.

[embed]The US Fiscal Crisis When the US pays more for interest on its debt than it pays for Medicare or for Defense, that’s a fiscal crisis all…medium.com

[embed]The U.S. Fiscal Crisis Explained: Aging, Tax Cuts, or Overspending? New analysis shows nearly 60% of the U.S. Fiscal Crisis comes from an aging population, the remainder from tax cuts —…medium.com

The Trade Deficit is a subset of a broader measure called the Current Account Deficit. The latter includes all international transaction flows.

Budget Deficit + Private Deficit = Current Account Deficit

The Budget Deficit results from the Government spending a heck of a lot more than it gets in tax receipts. The Government finances its huge Budget Deficits by issuing $billions in new Treasuries partly purchased by foreigners.

The Private Deficit is due to domestic savings being far less than investments or US domestic production being much lower than domestic consumption. This results in businesses importing many goods. And, foreigners reinvesting their export proceeds either into Treasuries or other financial assets or foreign direct investments in the US.

The most straightforward way to reduce the US Current Account Deficit is to reduce the Budget Deficit. This would also abate the current US fiscal crisis. One would do that by increasing taxes a bit so that the US breaks even at the Primary Deficit or Surplus level (before paying interest on the debt). If the US did that, it would also reduce long-term rates on Treasuries. And, it would render foreigners continuing to finance part of the Budget Deficit and Private Deficit more sustainable.

But, the Trump Administration is doing just the reverse. It has extended and increased unsustainable large tax cuts. These will ensure that the structural US Budget Deficit remains huge and that the US Debt/GDP ratio continues rising unsustainably. Even worse, the Trump Administration has rendered US Treasuries potentially most unattractive to foreigners. This is due to Section 899 of the Big Beautiful Bill Act. This section 899 would impose huge surtaxes on foreigners’ investments in the US if these foreigners came from a country that implements unfair taxes on US interests in their countries. More on the subject in this earlier article.

[embed]The One Big Beautiful Bill Act’s Section 899 will accelerate the World’s de-dollarization Section 899 will greatly reduce the foreign demand for US securitiesmedium.com

To insert a toxic pill to foreigners investing in US Treasuries, just as the Government expects to issue an ongoing and unprecedented level of debt (US Treasuries) is genuinely irrational.

How about Tariffs and Inflation. That’s at the core of the Affordability issue

Trump did not inherit an inflation issue, he is creating a new inflation bout

Just to step back, contrary to what Trump kept on stating during his campaign, the US did not have much of an inflation problem anymore. Indeed, inflation had come way down from 9% in mid 2022 to under 3% by the November 2024 Elections. If not for his tariffs and immigration policies, by now the inflation rate may have headed ever closer to the Fed’s target of 2.0%. Blaming Biden for his “affordability issue” does not make any sense.

As I wrote earlier, if the 2024 Election was about the economy, Kamala Harris should have won by a landslide. The Economist agreed.

[embed]If it is about the Economy, Harris should win by a Landslide To understand the momentum of the US economy, you have to read the foreign Press. The US Press, for various political…medium.com

Tariffs impact on inflation at a high level

So, what about the tariffs impact on inflation. The straightforward arithmetic suggests that it should result in a one time uptick in inflation of:

11% times 17% = 1.87 percentage point uptick in a one year inflation rate.

11% is an estimate of the imports as % of GDP.

17% is an overall estimate of the weighted average tariff rate on imports (sources: Yale Budget Lab, Tax Foundation).

This 1.87 percentage point uptick in inflation would be for a single year. That is unless it feeds into wage increases and inflation expectations. This is what happened when the supply chains broke down during COVID. The Fed believed inflation was “transitory.” It turned out otherwise.

Tariff impact on inflation, so far muted

The impact on consumer price has been so far much lower than expected. It is probably due to several factors, including:

• A substantial portion of consumer spending is on services not directly affected by the tariffs (but, that is in good part reflected in imports representing only 11% of GDP);
• US business importers packed up on inventory imports (during 2025 Q1) before Liberation Day;
• US businesses have eaten up part of the tariff costs by accepting lower profit margins;
• Some foreign exporters to the US have allowed for some price concessions and accepted lower profit margins;
• The trade with Canada and Mexico still includes a high percentage of trades that do not incur any tariffs as such trades comply with the USMCA trade agreement (this may be partly captured by the estimated weighted average tariff rate of 17%);
• The tariffs’ implementation has been so chaotic associated with numerous lags and pauses. As a result the tariffs full effect won’t be fully captured for several more quarters if not a full year;
• The tariffs are so numerous and complex, I would not be surprised there are collection issues. This also includes the issue of tariff arbitrage where one country exports to another associated with a lower tariff rate, who in turns exports to the US. The Administration advances it can control all these complex circumstances. I am not so sure.

Are you confident, the US is extracting the precise tariff on the zillion of goods coming from all over the World within the hundreds of containers shown on the ship below?

The White House cognitive dissonance on tariffs

Back to tariffs and inflation, one can’t argue that:

• on one hand, tariffs do not cause inflation; and
• on the other hand, we need to implement a $2,000 tariff dividend to compensate individuals for the added cost of tariffs.

The “added cost of tariffs” reflects the tariffs impact on inflation.

Estimating the impact of tariffs with the Traffic Tracker

To get an estimate of the impact of tariffs on imported goods vs domestic goods, a team of economists have constructed the Traffic Tracker. The latter tracks prices of domestic vs imported goods on a daily basis at several major retailers (Amazon and Walmart are most probably part of the data set). The difference in indexed price paths (January = 1) between domestic and imported goods at these retailers is interesting. As shown on the data below, prices, as expected rose much faster for the imported goods.

http://www.pricinglab.org/tariff-tracker/

Based on the Traffic Tracker data, if we annualize the price increase between domestic and imported goods at these several major retailers, there is a material difference between the two.

Based on the same Traffic Tracker data, domestic goods prices have on a year-to-date basis risen by 3.4% on an annualized basis. Meanwhile, imported goods prices have risen by 5.3%. That is a difference of 1.9 percentage points. Given the weighted average tariff rate of 17% (Yale Budget Lab, Tax Foundation), the pass through rate to consumers could be estimated as:

1.9%/17% = 11%

My pass through rate estimate of only 11% is apparently way too low. Anna Wong, Chief US Economist for Bloomberg Economics, estimated that the tariffs pass through rate to US consumers is already 26%, with US businesses absorbing 70% of the tariffs costs by compressing their margins. And, foreign exporters are absorbing only 4% of the tariffs costs.

The Yale Budget Lab estimates that over time the pass through rate to US consumers will reach 100%. Their estimate is based on an analysis of Trump’s 2018 tariffs. Thus, the current split of 26%/70%/4% is expected to gravitate fairly quickly to 100%/0%/0%.

Tariffs impact on inflation over the long-term

The longer these tariffs remain in place the higher will the pass through rate become. In turn, these will exert greater upward pressure on inflation.

Additionally, as we have experienced during COVID, you can’t be so sure that tariffs’ impact on inflation will be just “transitory”. Such economic shocks to supply chains can feed into inflation expectations, wage increases, and chronic inflation that the Fed has to fight with another bout of rising interest rates.

If Trump is serious about affordability, he should cancel all the tariffs he has put in place since he returned to the White House, and stop blaming Biden. Doing just the opposite does not work.

THE END