It’s time to unmask the Trump tariffs for what they really are: A giant national sales tax that will hobble U.S. economic growth

Tariffs are a national sales tax

Tariffs don’t cause inflation 

Tariffs will not eliminate or even significantly shrink the trade deficit

Tariffs will prove a big downer for growth

Shawn Tully is a senior editor-at-large at Fortune, covering the biggest trends in business, aviation, politics, and leadership.

Buckle up, Americans. You’ve just been ambushed

According to a wide range of forecasts, this new nationwide sales levy will yank back from consumers’ wallets about half the projected tax savings from the One Big Beautiful Bill’s extension of the 2017 Trump tax cuts.

Unmasking the Trump tariffs as a national sales tax helps clarify the burden looming for Americans’ finances going forward. It’s time to dispel the widespread confusion and misinformation that surrounds the tariffs’ role, and detail their true impact across the economy. 

Almost all countries except the U.S. impose national sales taxes on all or most goods sold anywhere within their borders, either at a flat rate or at varying percentages depending on the product. These taxes come in two forms: A few nations, including Pakistan and Myanmar, deploy a simple countrywide tax similar to America’s state sales taxes. But the most common type

The U.S. is highly unusual in that it’s never had a VAT or in the postwar era, anything resembling a major national sales tax. This stand-alone status in shunning the former likely explains why America’s federal spending stands at least 10 percentage points lower as a share of GDP than the lions of Europe. But the Trump tariffs mark a historic shift to an effective national sales tax.

Although tariffs were an important

All told, according to the Budget Lab at Yale, the Trump administration has raised the average effective tariff rate to 18.6% for Americans. This towering figure is approaching the devastating 19.8% rate imposed

Just how big will the tariff tax hit be? According to the nonpartisan Tax Foundation,

The Trump tariffs will amount to one of the largest tax hits in U.S. history. You can’t blame Americans for being flummoxed. President Trump lauds the One Big Beautiful Bill’s extension of his 2017 tax reductions as central to the POTUS’ pro-growth agenda. According to the nonpartisan Congressional Budget Office, the extension of Trump’s reductions will reduce taxes

Critics of tariffs have plenty to legitimately complain about. But they’re wrong in swearing that the duties feed inflation.

Inflation is defined as a broad-based, persistent increase in a nation’s general price level. It is not triggered

Just consider our last bout of inflation in the United States. Following the pandemic, the U.S. money supply, measured

While tariffs will increase the relative prices of imported goods and services, they will not change the overall price index. The Trump tariffs will simply force Americans to spend more on cars, products made from steel and aluminum, European wines, and all other items heavily taxed at our borders. Unless the money supply is goosed, Americans will have less to purchase products and services that aren’t shipped from abroad—everything from domestic plane tickets to restaurant meals to soft drinks. It will be more or less a wash, with the extra money spent on tariffed goods matching the drop in what’s spent on everything else. The specter of inflation will only reappear if the Fed balloons the money supply.

A classic example from Japan in the 1970s illustrates this point. The island nation imports virtually all of its oil. With the Arab oil embargo of 1973, the world price of crude almost quadrupled. In an attempt to soften the blow from this surge in price, the Bank of Japan (BOJ) juiced its money supply

When the world’s second oil shock of the 1970s hit Japan in 1978, the BOJ, which had learned its lesson from the first oil shock of the decade, chose to not “soften the blow”

President Trump denounces America’s trade deficits. He asserts that the big shortfall between what America exports and imports constitutes a crushing burden on the economy and can only be substantially reduced

The president’s arguments are incorrect. It is all in the arithmetic. The deficits are bulging because Americans spend more than this nation produces domestically. The truth is revealed

And the numbers work perfectly. In 2024, the difference between what the U.S. spent ($31.2 trillion) and what it produced ($30.33 trillion), was $872.5 billion. That precisely equaled the overall trade deficit. Put simply, the deficit arises from a choice we’ve made as Americans to consume much more than we make. It is not the result of nefarious activities

As it turns out, these deficits have been easy for the U.S. to finance. Foreigners are more than willing to send capital to the U.S. so that the funds can be invested in dollar denominated assets

President Trump argued correctly that the U.S. would grow much faster if Congress retained his 2017 tax reductions. Strangely, Trump doesn’t realize that tariffs are nothing more than a sales tax on Americans, and a big one at that. Indeed, they promise to negate at least half of the tax reductions contained in the One Big Beautiful Bill. Like all taxes, the tariffs will impose a drag on economic growth. Not surprisingly, the Yale Budget Lab forecasts that the extra duties will slow GDP growth

Americans are about to shoulder a big, unadvertised, stealth tax hike. This nation is the world’s most abundant supermarket, offering the best prices and greatest variety of goods on its shelves. The Trump tariffs are poised to create a far more limited and expensive marketplace

Steve H. Hanke is a professor of applied economics at Johns Hopkins University. He served on President Ronald Reagan’s Council of Economic Advisors. His most recent book, coauthored with Matt Sekerke, Making Money Work, was released