Who Is Paying the Tariff?

The cleanest answer is also the least politically convenient one: American consumers and firms are paying most of it.

The 2025 tariff shock was not a small adjustment at the margin. The average effective tariff rate rose from roughly 2.4 percent at the start of the year to around 10 percent by June, with statutory rates running meaningfully higher. By December, realized tariff collections still sat below announced policy rates, ending near 9.4 percent versus a statutory rate of 14.7 percent. That gap matters, but it does not change the incidence story. It only changes the timing.

The lag between statutory and realized tariffs created a delayed inflation channel. Firms did not price every announcement immediately. They passed through costs as duties were collected, inventories rolled over, and replacement stock arrived at higher landed costs. That is why tariff effects on core PCE inflation peaked later, in the first quarter of 2026, rather than at the moment policy was announced.

By March 2026, realized tariff changes were estimated to add roughly 0.80 percentage points to twelve month core PCE inflation. Excluding tariff driven relative price effects, core inflation would have been 2.3 percent, rather than 3.2 percent. That is not a rounding error. It is a direct transfer from household purchasing power to tariff revenue and higher goods prices.

The key is elasticity. Tariffs applied to inelastic consumption categories are much easier to pass through. Consumers can delay a sofa or appliance purchase, but not indefinitely. Durable goods, household equipment, electronics, and other core goods often sit in categories where substitution is limited, supply chains are specialized, and domestic alternatives are not instantly available. That gives importers and retailers room to raise prices without absorbing the full margin hit.

The core goods data make this visible. Published core goods PCE inflation rose to 2.3 percent, while the tariff adjusted series was near negative 0.7 percent, close to its pre pandemic average. In plain English, tariffs explain essentially the entire excess inflation in core goods. The policy did not merely protect domestic producers. It raised the consumer price level in the exact categories households encounter when replacing cars, appliances, furnishings, electronics, and household supplies.

The Budget Lab data point in the same direction. Through June 2025, core goods prices rose 1.5 percent, compared with 0.3 percent in the same period of 2024. Durables rose 1.7 percent, versus a decline of 0.6 percent a year earlier. Relative to pre 2025 trend, core goods and durables were 1.9 percent and 2.3 percent higher. That is the signature of pass through, not producer absorption.

The welfare loss is broader than the tariff bill itself. Tariffs reduce real income by raising the cost of consumption, distorting resource allocation, and increasing the marginal cost of investment. Even if the federal deficit improves through higher customs revenue, households still face lower after tax real income. The government collects the tariff, but consumers finance it through higher prices.

The distribution of burden is also asymmetric. Foreign producers appear to have absorbed little of the cost. Import prices excluding tariffs did not fall meaningfully. In some measures, they were slightly above pre 2025 trend. If foreign exporters were eating the tariff, export prices would have declined. Instead, the evidence suggests they largely held prices, leaving US importers and consumers to absorb the increase.

American importers technically write the check at the border, but economic incidence is not the same as legal remittance. Importers can pass costs forward when demand is inelastic, supply alternatives are constrained, and competitors face similar tariff exposure. The Budget Lab estimated consumer pass through in June at 61 percent to 80 percent for core goods and durables. Other research found nearly 90 percent of the economic burden fell on US firms and consumers, with pass through to import prices still around 86 percent by November.

The table is the strongest evidence. For core goods, the actual PCE weighted effective tariff rate rose from 4.2 percent in June 2024 to 12.1 percent in June 2025. Full pass through implied a 2.1 percent price effect. Actual price increases were already 1.5 percent, implying consumer pass through of roughly 69.8 percent to 72.3 percent. For durables, the tariff rate rose from 2.8 percent to 12.4 percent, with consumer pass through estimated between 60.7 percent and 79.8 percent.

That is why the welfare cost is not concentrated only among importers. Importers are conduits. The more inelastic the final consumption category, the more the tariff becomes a consumer tax with extra steps.

The monthly decomposition also shows why the burden accumulated over time. Early tariff waves in February, March, and April kept feeding into prices months later. By late 2025 and early 2026, cumulative tariff effects on core goods prices approached 0.75 percent to 0.77 percent in several months, before easing slightly. The delayed profile reflects contract timing, inventories, shipping lags, and staggered retail repricing.

For private equity and M and A professionals, the implication is simple. Tariffs are not just a macro headline. They are an underwriting variable. Any consumer facing asset with imported inputs, durable goods exposure, or price sensitive demand now requires a sharper view of gross margin durability and pricing power. A company that passed through tariffs in 2025 may have preserved EBITDA, but only by transferring the shock to customers. That can protect near term margins while weakening volumes, brand equity, and household demand.

The policy also complicates monetary interpretation. If the Fed looks through tariff inflation, consumers bear the cost through higher realized prices. If the Fed tightens to offset tariff inflation, consumers bear the cost through weaker nominal income, slower hiring, and reduced consumption. Either way, real household welfare falls. The channel changes. The burden does not disappear.

So who is paying the tariff? Mostly Americans. Foreign producers have absorbed little. Local importers have absorbed some, but much of that cost has moved forward into consumer prices. The highest pass through appears where demand is least elastic and substitutes are hardest to find. That is the central welfare problem. A tariff applied broadly across inelastic sectors does not primarily punish foreign producers. It taxes domestic consumption, raises relative goods prices, and reduces real purchasing power.

The government receives the revenue. Consumers receive the bill.

Sources & References

Federal Reserve Bank. (2026). Detecting Tariff Effects on Consumer Prices in Real Time – Part II. https://www.federalreserve.gov/econres/notes/feds-notes/detecting-tariff-effects-on-consumer-prices-in-real-time-part-II-20260408.html 

Federal Reserve Bank of New York. (2026). Who Is Paying for the 2025 U.S. Tariffs? https://libertystreeteconomics.newyorkfed.org/2026/02/who-is-paying-for-the-2025-u-s-tariffs/ 

Ron M., Tucker S. (2026). Effects of realized tariff changes on PCE prices peaked in first quarter 2026. Federal Reserve Bank of Dallas. https://www.dallasfed.org/research/economics/2026/0505-mau 

Tamberi, N. (2026). The trade elasticity from tariff-based regressions: what do we measure? https://citp.ac.uk/publications/the-trade-elasticity-from-tariff-based-regressions-what-do-we-measure 

World Bank. (n.d.). Import Demand Elasticities and Trade Distortions. World Bank Group. https://openknowledge.worldbank.org/server/api/core/bitstreams/fbde9297-88cc-5291-a098-1654c415ef86/content 

Yale Budget Lab. (2025). Short-Run Effects of 2025 Tariffs So Far. https://budgetlab.yale.edu/research/short-run-effects-2025-tariffs-so-far