Why the Economic Effects of Taxes (Including Tariffs) Matter

Economic Impact of Tax Types: Different types of taxes can have varying economic impacts even if they generate the same revenue. The Tax Foundation’s General Equilibrium Model evaluates how changes in tax policy affect the returns to capital and labor, and consequently, economic output.
Specific Tax Examples: Taxes like carbon taxes and tariffs are modeled as excise taxes, which reduce real after-tax wages and incentives to work, thus lowering economic output. For instance, the 2018-2019 trade war tariffs were estimated to reduce long-run US output by about 0.2%, with empirical studies showing effects ranging from -0.17% to -0.50%.
Net Negative Impact of Tariffs: Tariffs tend to have a net negative impact by causing greater economic losses for consumers and unprotected businesses than the gains for protected domestic producers. For example, tariffs on steel and aluminum increased production for protected firms by $2.8 billion but caused $3.4 billion in production losses for downstream industries annually.