Fiscal Limits to Protectionism: The 2025 U.S. Tariff Laffer Curve

TL;DR

This paper models the U.S. tariff revenue and welfare outcomes in 2025, revealing optimal tariff levels, the impact of retaliation, and the shifting priorities of U.S. trade policy.

Contribution

It introduces a multi-sector Ricardian model to quantify the Tariff Laffer Curve for the U.S. and defines the Marginal Fiscal Efficiency Index for tariff analysis.

Findings

Optimal tariffs are 20-30% for revenue maximization.

20% of tariffs exceed their revenue-maximizing levels by 2026.

U.S. tariffs show diminished concern for foreign welfare and increased revenue motives.

Abstract

We quantify the Tariff Laffer Curve for the U.S. using a multi-sector Ricardian model calibrated to the 2025 US trade war. We find revenue-maximizing tariffs of 20--30 percent and welfare-maximizing rates of 0--10 percent. We define the Marginal Fiscal Efficiency Index to partition tariffs into welfare-improving, trade-off, and revenue-decreasing regions. Expanding the trade war to more partners raises peak revenue even under retaliation, whereas coordinated retaliation sharply erodes welfare. By January 2026, 20 percent of U.S. tariffs exceed their Laffer peaks. Inverse-optimum estimation reveals diminished U.S. concern for foreign welfare, punitive treatment of China, and rising revenue motives.