May 1, 2025
There has been extensive news coverage of the Trump administration’s plans to (1) implement widespread tariffs on imported goods and (2) extend income tax cuts for individuals set to expire at the end of 2025. The effect of these plans on the average family’s disposable income and buying power requires complex calculations and can change on short notice. However, unless there are radical changes to both plans as of early April 2025, the net effect will be an increase in disposable income from lower income taxes, but a reduction in buying power due to the inflationary impact of tariffs. Research shows that the decrease in buying power for most families will outweigh any tax savings from an extension of the income tax cuts.
The Budget Lab at Yale University has released a study showing that the average family will lose $4,700 in annual purchasing power based on the Trump administration's tariff announcement on April 9. Conversely, the Tax Policy Group has stated that the average family will save about $2,000 yearly in taxes from an extension of the expiring Tax Cuts and Jobs Act into 2026. Although these estimates are based on slightly different assumptions, the net effect of the two plans is a reduction in the average household purchasing power of $2,700.
Lower-income families might experience a more significant burden, as the regressive nature of tariffs means they spend a higher proportion of their income on affected goods. In contrast, higher-income families pay a lower portion of their income on goods for consumption. Donald Trump has also proposed eliminating the income tax and funding the federal government by tariffs alone. This proposal will increase the regressive nature of tax policy, but will be favorable for high-income earners. Every individual saving for retirement should assess how these proposals affect their budgets.
For further reading, see:
https://budgetlab.yale.edu/research/fiscal-and-economic-effects-revised-april-9-tariffs
https://www.cnn.com/2025/04/28/business/taxes-trump-tariffs/index.html
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