“Optimal tariffs” are far from optimal: Part 1

Advocates of President Donald Trump's tariff policies often bash economists for ignoring real-world complexities. Yet administration officials happily invoke the abstract theoretical concept of the "optimal tariff" to rationalize their incessant rounds of trade warfare.

In theory, the "optimal tariff" maximizes national welfare by enabling large countries to improve their terms of trade, raising the prices of their exports relative to the prices of their imports. In a June 2026 Wall Street Journal commentary, Stephen Miran, former chair of Trump's Council of Economic Advisers, relies on this argument to claim that tariffs are a uniquely useful "low-tax" instrument for collecting revenue, echoing testimony by Treasury Secretary Scott Bessent that tariffs are a net benefit to the US.

But these arguments mislead the public, minimizing the many distortionary harms of tariffs that are becoming more evident by the day.

In this blog post, we explain why the misnamed "optimal" tariffs do not lead to a net gain in national welfare in practice. On the contrary, they harm US interests.[1] We also rebut the notion that tariffs are an efficient way to shift tax burdens from US residents onto foreigners. Other tax instruments can raise revenue more efficiently and fairly. There are even superior tax instruments for shifting tax burdens from US taxpayers to foreigners, discussed below.

Our second blog post will dig deeper into the narrower question of who really pays tariffs, the key element of the administration's optimal tariff argument. As we document, all evidence indicates that US consumers and businesses are bearing large tariff burdens.

Problems with the "optimal tariff"

Tariffs distort the economy in two principal ways: (1) by increasing domestic production of goods that could be obtained more cheaply abroad and (2) by making tariffed goods more expensive for consumers. The optimal tariff argument holds that when a large country uses tariffs to reduce domestic demand for imported goods, while increasing the domestic supply of those goods, it will drive down the price of its imports. In theory, a large country can even improve its welfare in this way with tariffs, despite the distortions. Miran contends that "tariffs are unique in that foreigners bear a material portion of the tax burden" due to the terms of trade change.

However, there are multiple serious, even fatal, problems with that argument.[2] One is that not every large country could pursue this strategy simultaneously: the relative price effects would cancel out, leaving only universal distortions with no gains from trade. Rodrik (2026) emphasizes this point, and the folly of the US trying to act as the "robber baron" of the world. Indeed, the foolishness of these sorts of tariffs has been long understood. Such dynamics worsened the Great Depression, and preventing a repeat was a crucial motive behind the design of the world trading system after World War II.

A possible response would be that the US has not experienced much in the way of retaliation from most major trading partners, with the notable exception of China, which successfully pursued a tit-for-tat retaliation (including export controls) until the US backed down, and episodes of retaliation from Canada, Brazil, and the EU.[3]

However, it is not just explicit retaliation that shapes the terms of trade. For example, foreign governments may rearrange their trade relationships and liberalize trade with other countries in a manner that also diverts market access away from US firms. Recently, the EU engaged in new trade agreements with both India and Mercosur; Canada has also sought to expand trade with China and other countries in the wake of recent US trade policy shifts. These sorts of policy changes also drive down demand for US exports, harming the US terms of trade.

Until the second quarter of 2026, the data indicated little improvement in the aggregate US terms of trade after Trump began his second term in early 2025 and increased tariffs on almost all imports (see figure 1 below). Multiple factors besides tariffs also can affect the terms of trade, and the very recent US terms of trade improvement is more plausibly related to wartime disruptions than to tariffs, which have fluctuated considerably. Far larger movements in the terms of trade occurred in the wake of COVID-19.

More detailed econometric studies fail to reveal any major effect of tariffs on the terms of trade, as we will discuss in the second part of this blog post. A preponderance of high-quality research studies shows that US consumers and firms are paying nearly the full cost of US tariffs, indicating that America has limited ability to shift net tax burdens onto foreigners through tariffs.

There are better tax instruments

What would be a better tax instrument for meeting US tax policy goals? Simply put, the tax instruments we already have. Consider first Miran's desire to foist tax burdens onto foreigners. The corporate income tax can do that very well, since 42 percent of US corporate equity is held by foreigners (Rosenthal and Mucciolo 2024).[4] Because taxes on corporate profits burden shareholders to a large extent, the corporate tax is a good way to share internationally the tax burden associated with financing the public goods that help make US corporations successful.[5]

At the same time, corporate tax reform can be a better response than tariffs to offshoring (Clausing 2026). The US corporate tax system includes a large tax preference for foreign income relative to domestic income. As a result, low-tax destinations attract a great deal of the US multinational corporate tax base. Changing tax incentives to reduce the distortion in favor of foreign income can help level the playing field between US and foreign economic activity. In contrast, tariffs introduce new distortions that hurt consumers and shift resources toward sectors where the US lacks a comparative advantage.

Corporate tax reform can also raise a lot of revenue, more than tariffs are forecast to raise over the coming decade, even assuming the continuation of higher Trump tariffs. For example, the Penn-Wharton Budget Model estimates that the package of reforms detailed in Clausing (2026) raises $4 trillion over 2030-2039, or about 0.9 percent of GDP. The latest estimates of the Trump tariff regime imply revenues of about half that (or perhaps less) over the coming decade (Budget Lab 2026). And revenues from the Trump tariffs are also highly uncertain, due to the persistent legal challenges faced by the Trump tariff regimes (Wolff 2026). Tariff revenues even turned negative in June 2026 for the first time as government refunds of Trump's so-called reciprocal tariffs—deemed illegal by the Supreme Court—exceeded new tariff revenues (see figure 2).[6]

A final consideration is having a tax system that responds to the inequities introduced by various forces in in the US economy, including technological change, shifting trade patterns, market power, declining unionization, and other factors. A progressive tax system can do that well, and corporate taxes are among the most progressive US tax instruments (beyond the estate tax), whereas tariffs are a regressive source of revenue, asking more from lower-income households (as a share of their income) than well-off households (Clausing and Lovely 2024, Clausing and Obstfeld 2025).

Moreover, corporate taxes are far from the only tax that could be used to replace the tariffs. Policymakers could also undertake various revenue-raising reforms of the individual tax system, or they could institute other new tax instruments that might be especially efficient, such as a carbon tax. But, given the very negative consequences of the tariff regime—which burdens consumers and businesses, generates large distortions, harms international relations, and provides rampant opportunities for corruption and rent-seeking—policymakers should look elsewhere for worthy tax instruments.

Authors' note: We thank Ariyasuren Baldansenge, Madona Devasahayam, Samantha Elbouez, Nell Henderson, Mary Lovely, and Benjamin Wallace for their help. All errors and opinions are ours.

Notes

1. The economic costs we describe are all additional to the damage to US foreign policy interests, which we leave to others to analyze and quantify.

2. We have criticized the optimal tariff argument at greater length in Clausing and Obstfeld (2025). There we detail many other serious harms from tariffs beyond the production and consumption distortions (and the risk of retaliation) featured in introductory textbook treatments.

3. Export controls or export taxes can also worsen the target countries' terms of trade, by making their import goods more expensive and/or difficult to acquire.

4. This figure is from 2022 data and includes both direct and indirect stock holdings; given trends in ownership patterns, that figure is likely slightly higher today.

5. The corporate tax burdens shareholders to the extent that it falls on profits above the normal return to capital. Under current US law, much of the normal return to capital is either exempt, due to expensing, or even tax-subsidized, when expensed investments are debt-financed. For a more detailed discussion of this issue, see Clausing (2026).

6. In the textbook analysis of an optimal tariff, a fall in the world price of imports raises national welfare due to the sum of three effects: a reduction in the tariff burden on consumers (they consume more imports), a consequent rise in tariff revenue for the government, and a reduction in protection for domestic import-competing industries. Because the largest of these effects is generally the government revenue effect, the fact that US tariff revenue has been moderate and declining is another indication of the limits of the optimal tariff argument.