How Do Tariffs Impact the Economy, Inflation, and Your Taxes?

A nickel ain’t worth a dime anymore. -Yogi Berra

If your trip to the grocery store feels like making a second mortgage payment, you’re not alone. It seems like everything has gone up in the last couple of years — from eggs, milk, and bread to gas, furniture, and toilet paper.

It can be easy to blame the current president or congress for the rise in our everyday household expenditures, but the truth is that we as a nation are battling several forces that are working together to cause the pain in the checkout line.

In this post, we’ll dive into everything involved in how tariffs impact the economy, including the economic factors that are creating the inflationary pressure in your expenses. As for the good news – you have ways to fight back! This includes revamping your budget, streamlining your investments, and maximizing any tax advantages at your disposal.

If you’re interested in learning even more about the topic of tariffs and inflation, make sure to register for our upcoming webinar where we will discuss practical ways you can minimize the effects of rising costs in your personal financial life.

What Are Tariffs, and How Do They Work?

A tariff is defined as “a duty or custom imposed by a government on imports or exports.” A duty is also known as a tax. 

In the purest sense, tariffs create higher prices because manufacturers pass on the increased cost to the consumer. For example, a $10,000 imported car x 25% tariff = $12,500 final cost.

Tariffs can be applied to virtually any type of import, which is why they can affect such a large portion of the population.

How Do Tariffs Impact the Economy?

If you’re like me, the mention of a tariff triggers the picture of the Boston Tea Party from your high school history book. However, tariffs involve much more in the current modern era. We live in an extremely connected world, where news spreads fast and can have other repercussions. As a result, tariffs can be used not only as a financial tool, but also as a political and economic bargaining chip.

In April 2025, we saw the news of tariffs on “Liberation Day” trigger a massive selloff in global markets, with some sectors being down over 30% from their beginning-of-the-year highs. While we saw a sharp snapback within 60 days thanks to many trade deals and agreements being reached, this was still an eye-opening effect of what just the mention of tariffs can do.

As for how tariffs affect the economy? The economic effects of tariffs can take many months or even years to be completely felt in the broad economy. Because markets are forward-looking, there can be knee-jerk reactions that affect the stock market, even if the raw numbers haven’t changed yet. We saw this in effect during April, as the news of the tariffs caused markets to anticipate higher costs, lower production, and lower profits, even though only a few days had passed since the announcement.

As we look back on Liberation Day several months later, we can see the strategy of the tariff announcement more clearly. The main goal of the announcement was not to set a rigid stake in the ground, but to open a doorway to trade agreements, which are a much more economically friendly policy to implement.

What are Trade Agreements?

Trade agreements are typically a win-win for the countries involved. It allows each side of the agreement to negotiate for what it wants, and then usually meet somewhere in the middle. Thus, the abrupt across-the-board tariff shock is usually not as severe.

While the “goldilocks” scenario of a trade agreement may not play out in every single situation, we can still see a large benefit from those that do. Even just a 5% decrease in our trade deficit can cause billions of dollars to remain in our country by not paying them out in tariffs or by increasing the amount we receive. In essence, small improvements multiplied by hundreds of countries = a large win for America.

How Tariffs Fuel Inflation and Taxes

As mentioned before, tariffs can take many months or years to be fully felt in the economy. In the same way, we are still experiencing the effects of inflation from rock-bottom interest rates in 2021 and 2022. Trade agreements will eventually cause inflation to subside; however, short-term price increases on imports will be felt sooner, which generates a more substantial effect until prices stabilize in the long term.

Because tariffs create an added increase to the prices of goods, the result is the exact same as an increase in taxes. For this reason, many have called tariffs the “hidden tax”.

As tariffs create an increase in expenses, workers demand an increase in wages to offset their decreased disposable income. When wages increase, higher nominal incomes lead to wages being taxed at higher tax brackets. This can be visualized as follows:

Tariffs raise prices → higher nominal incomes → higher tax brackets (aka bracket creep).

Who’s Most Affected?

It’s true that tariffs affect those arguably most vulnerable, which is the working middle-lower class. Since employees pay taxes before their expenses, higher-end costs create a bigger hit to the bottom line than businesses or corporations, who are able to write off certain expenses before they pay taxes.

However, tariffs can also affect tax-paying business owners who import goods, since those goods now cost more. While a tax deduction can be a “silver lining”, it’s still less valuable than just lower costs to begin with. Retirees on fixed incomes are a third group of people who can be affected by higher tariffs due to the decreased disposable income left after expenses are accounted for. Finding lower-cost replacement options, discounts, coupons, or other cost-saving measures is an effective way of combating higher costs.

What You Can Do About It

At this point in this post, you may be thinking, “What steps can I take to fight back?” Without further ado, here are four tips to help you offset the rising costs caused by tariffs, taxes, and inflation:

1. Refine your Budget. Costs can creep up slowly and create a shortfall in your monthly budget if not accounted for. If you haven’t taken the time to review your average monthly expenses, it can be a good opportunity to find ways to save money in the areas you know will be coming up.
   
   Pro Tip: Before you hit submit on your next online order, Google the company you’re buying from, followed by the word “online coupon code”. For example: “Home Depot online coupon code”. You never know what offers the company may be running that can save you money on your purchase.
    
2.  Research Lower-Cost Replacement Options. In our world of high innovation and competition, there are frequently many options that will do just as good of a job or better than the high-priced name-brand items. Many times, these “high-end” products simply come from corporations with large marketing budgets, even though the technology making up the product may be the same. It is common for large discount retailers to contract with well-known manufacturers to produce the same product for the retailer with a “house” brand label on it.
   
   Pro Tip: Before you hop in the car to go to your local store to make your next purchase, pull up online retailers such as Amazon or eBay to see if you can find a replacement option for less.
   
3. Review Tax Savings Opportunities. From education credits to clean energy improvements, to child tax credits, there are a plethora of ways to get a break on your tax bill. If you aren’t working with a professional who is helping you with tax planning, now is the time to look for someone who does. Here at Evergreen, we take the time every spring to review your prior year taxes to make sure you are capitalizing on every opportunity you’re eligible for.
   
4. Review Your Tax Allocation. It’s not what you earn on your investments, but rather the amount you keep after taxes that counts. In that vein, placing the appropriate investments in the proper accounts/types is important to achieving optimal after-tax returns. This typically involves assigning goals and timeframes to the various types of assets and accounts you own. Then, the right investments can be purchased to match those respective goals. This results in the most tax-efficient overall portfolio that capitalizes on the respective strengths of each type of investment and account. For a full breakdown on Tax Allocation, review our previous post titled “Mastering Retirement – Understanding the Four Key Asset Buckets.”

Minimize the Impact and Tailor Your Finances to You

The economy may seem like rocky terrain, especially if the financial impact is foreign to you.

To learn more about how you can minimize the impact of tariffs, register for our upcoming webinar and find out how you can use the tools available at your disposal to fight back against rising costs.

Our mission is to not only simplify the jargon but also make a customized plan to support your financial goals. Your future starts here, and we’d love to support you every step of the way, giving you the tools to succeed. 

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This content is developed from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Evergreen Financial Group, LLC is a registered investment advisor offering advisory services in Montana, Utah, Wyoming and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision. All opinions and estimates constitute Evergreen Financial Group’s judgement as of the date of this communication and are subject to change without notice. Evergreen Financial Group does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk.