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Fiscal Limits to Protectionism: The 2025 U.S. Tariff Laffer Curve

Pau Pujolas, Jack Rossbach

Abstract

We quantify the Tariff Laffer Curve for the U.S. using a multi-sector Ricardian model calibrated to the 2025 US trade war. We find revenue-maximizing tariffs of 20--30 percent and welfare-maximizing rates of 0--10 percent. We define the Marginal Fiscal Efficiency Index to partition tariffs into welfare-improving, trade-off, and revenue-decreasing regions. Expanding the trade war to more partners raises peak revenue even under retaliation, whereas coordinated retaliation sharply erodes welfare. By January 2026, 20 percent of U.S. tariffs exceed their Laffer peaks. Inverse-optimum estimation reveals diminished U.S. concern for foreign welfare, punitive treatment of China, and rising revenue motives.

Fiscal Limits to Protectionism: The 2025 U.S. Tariff Laffer Curve

Abstract

We quantify the Tariff Laffer Curve for the U.S. using a multi-sector Ricardian model calibrated to the 2025 US trade war. We find revenue-maximizing tariffs of 20--30 percent and welfare-maximizing rates of 0--10 percent. We define the Marginal Fiscal Efficiency Index to partition tariffs into welfare-improving, trade-off, and revenue-decreasing regions. Expanding the trade war to more partners raises peak revenue even under retaliation, whereas coordinated retaliation sharply erodes welfare. By January 2026, 20 percent of U.S. tariffs exceed their Laffer peaks. Inverse-optimum estimation reveals diminished U.S. concern for foreign welfare, punitive treatment of China, and rising revenue motives.
Paper Structure (41 sections, 5 theorems, 52 equations, 21 figures, 6 tables)

This paper contains 41 sections, 5 theorems, 52 equations, 21 figures, 6 tables.

Table of Contents

  1. Introduction
  2. Model
  3. Data and Calibration
  4. Quantitative U.S. Tariff Laffer Curves
  5. U.S. Bilateral Tariff Laffer Curves
  6. Marginal Excess Burden and the Marginal Fiscal Efficiency Index
  7. Laffer Curves for a Trade War with Multiple Partners
  8. The 2025 U.S. Trade War
  9. Inferring the U.S. Government Objective Function
  10. Government Objective Function and the Shadow Wedge
  11. Decomposing the Shadow Wedge
  12. Results
  13. Concluding Remarks
  14. Marginal Excess Burden, Marginal Cost of Public Funds, and the MFEI
  15. Definitions and Accounting Identities
  16. ...and 26 more sections

Key Result

Proposition 1

The MFEI maps the unbounded marginal excess burden into a bounded index $\text{MFEI}(\tau) \in [-1, 1]$ that cleanly partitions the tariff schedule into five distinct fiscal regions:

Figures (21)

  • Figure 1: U.S. Laffer and Welfare Curves: European Union and China Changes Relative to U.S. Bilateral Free Trade Baseline
  • Figure 2: Marginal Welfare Cost Measures of U.S. Tariff Revenue Changes Relative to U.S. Bilateral Free Trade Baseline
  • Figure 3: U.S. Laffer and Welfare Curves: Multiple Trading Partners Changes Relative to U.S. Free Trade Baseline with All Partners
  • Figure 4: U.S. Inverse-Optimum Policy Weights
  • Figure B.1: U.S. Laffer Curve with E.U. and China ($\theta^s=4$)
  • ...and 16 more figures

Theorems & Definitions (11)

  • Proposition 1: Fiscal Regions of the MFEI
  • proof
  • Remark : Extension to Externality-Correcting Taxes and Subsidies
  • Proposition 2: Limiting Behavior as the Revenue Weight Varies
  • proof
  • Proposition 3: Monotonicity Properties
  • proof
  • Proposition 4: Welfare- and Revenue-Maximizing Tariffs
  • proof
  • Proposition 5: Strict Monotonicity and the Fiscally Optimal Tariff
  • ...and 1 more