Key Takeaways:
The New York Fed's finding that American firms and households absorbed nearly 90 percent of the 2025 tariff burden has reignited a White House dispute over who actually pays for trade protection.
The New York Fed found American firms and households absorbed nearly 90 percent of the 2025 tariff burden through late last year, reigniting a White House dispute over who pays for trade protection.
"The paper is an embarrassment. It's, I think, the worst paper I've ever seen in the history of the Federal Reserve system," Kevin Hassett, White House economic adviser, told CNBC on Feb. 18, adding that the paper's authors should be "disciplined."
The NY Fed analysis, published Feb. 12, found 94 percent of import taxes fell on American companies and consumers through August 2025, easing to 86 percent by November. The nonpartisan Tax Foundation separately estimated the 2025 tariffs were the largest U.S. tax increase since 1993, adding roughly $1,000 per household that year and another $1,300 in 2026.
The dispute matters because it frames the economic stakes of the administration's trade agenda. If tariffs are largely absorbed by U.S. firms and households rather than foreign exporters, the policy functions as a domestic tax increase — a finding that could shape the 2026 midterm debate and future trade negotiations.
The Inflation Gap
The much-feared tariff-driven inflation crisis never materialized. The annual inflation rate for January came in at a modest 2.4 percent, and the National Bureau of Economic Research estimated tariffs added about 0.7 percentage points to U.S. inflation through late 2025 — meaning September's 3 percent reading might have been 2.3 percent without the levies.
Hassett pointed to those figures as evidence the tariffs worked. "Prices have gone down. Inflation is down over time. Import prices dropped a lot in the first half of the year, that leveled off, and real wages were up $1,400 on average last year, which means that consumers were made better off by the tariffs," he told CNBC.
The apparent contradiction — Americans bearing 90 percent of tariff costs while consumer prices barely moved — reflects how exporters and importers absorbed the levies at each step. Some exporters trimmed prices, American companies found cheaper suppliers in other countries, and firms absorbed tariff costs themselves. The NBER paper found only about 20 percent of tariffs were ultimately passed through to consumers.
The Affordability Squeeze
The tariff debate sits within a broader argument about why modern capitalism feels unfair to younger Americans. In a letter to the Wall Street Journal, Adam Berns argued that consumption inequality has barely moved in more than four decades, income at the bottom has roughly doubled in real terms after transfers and taxes, and consumption poverty fell from 33.8 percent in 1980 to 6 percent in 2022.
The squeeze, Berns argued, is concentrated in housing, healthcare, and college — three markets where the government subsidizes demand while restricting supply. Mortgage subsidies run against zoning restrictions, student loans against an accreditation monopoly, and insurance mandates against certificate-of-need laws and licensing. "Subsidize demand, choke supply and the subsidy lands in the price," he wrote.
Berns called tariffs "the same instinct without the disguise, since a tariff is a tax on the American buyer." The policy debate now centers on whether the administration will adjust its tariff strategy as the economic evidence accumulates, with the NY Fed study and Tax Foundation estimates providing fresh ammunition for critics ahead of the 2026 election cycle.
This article is for informational purposes only and does not constitute investment advice.
