“Bust or boom?” That’s the big question at the heart of UBS’ big forecast for the U.S. Economy for 2026 through 2028. But the team led by economist Jonathan Pingle also tackles a question that economists have been raising throughout 2025: the fact that tariffs amount to a large tax increase in all but name. Their analysis finds that the tariffs are acting as a substantial drag on growth and are actively contributing to persistent inflation, eroding real income gains for consumers.
TL;DR
- UBS analysis indicates Trump's tariffs are a substantial tax hike for U.S. consumers.
- Tariffs act as a drag on growth, contributing to inflation and eroding real income gains.
- Households face rising prices, with many less equipped to handle inflation than before.
- Proposed tariff dividends are mathematically unfeasible, with costs exceeding tariff revenue.
“The tariffs are a big tax increase,” the report states simply. According to UBS, the current tariff policies imply a weighted-average tariff rate of 13.6%, based on 2024 import shares, a fivefold jump from just 2.5% at the beginning of the year. This steep rate effectively translates to a tax on imports representing 1.2% of GDP.
The most immediate impact of the trade regime is felt in rising prices, which are “keeping things elevated.” UBS estimates that the new trade regime will add 0.8 percentage points to core PCE inflation in 2026, enough to erase a year’s worth of disinflation progress and keep prices climbing at roughly 3.5% even if other pressures like housing or energy ease.
UBS projects that over an extended period, tariffs will contribute a combined direct effect of 1.4 percentage points to core PCE by 2028. This figure is anticipated to climb to approximately 1.9 points when secondary impacts, such as supply chain adjustments and domestic price hikes due to tariff shielding, are considered. In essence, tariffs alone might explain almost two-thirds of the difference between present inflation rates and the Federal Reserve's 2% objective.
Households Feel the Pinch of Rising Prices
The impact of this tariff-driven price increase is already being felt by American families. Given that average hourly earnings have seen their growth decelerate to approximately 3.5% annually over the last half-year, and total payroll income is advancing at about 3.25% annually, this inflationary wave is proving expensive. Analysts anticipate that quarterly annualized PCE inflation will range from 3% to 4% in the upcoming two quarters, thereby negating those income increases.
According to the report, a majority of families are less equipped to handle inflation today compared to two years prior. Although affluent households benefit from AI-boosted equity market assets, those outside the top fifth of income earners are experiencing historically depleted liquid savings. Increasing expenses, combined with a weakening job market, are negatively impacting consumers' outlook on future possibilities.
This headwind is especially worrying given that the U.S. Economic expansion is already marked by “narrowly driven” and “precarious.” The present economic forecast is largely characterized as “a big bet on AI,” with growth primarily seen in AI-driven software and computer investments, alongside consumption bolstered by the wealth of the upper-income equity market. “A decent chunk of the US economy is in recession,” UBS notes that sectors such as real residential investment and non-residential construction are either in recession or experiencing a decline.
Returning funds to the public?
With inflation pressures increasing, President Donald Trump is promoting his tariffs, presenting them as both a safeguard for American businesses and a novel method for generating household income. He has floated the concept of a “tariff dividend”—a disbursement of “at least $2,000 a person (not including high-income people!)”—asserting that the rise in tariff income is substantial enough for direct distribution to Americans.
The headline numbers are certainly striking. The Treasury took in $195 billion in tariff revenue in fiscal 2025, up 153% from $77 billion the year before. The Committee for a Responsible Federal Budget projects that Trump’s broad “reciprocal tariffs” could raise $1.3 trillion through 2029 and $2.8 trillion by 2034. That would lift tariffs from about 2.7% of total federal revenue to nearly 5%, roughly comparable to imposing a new payroll tax or trimming one-fifth of the defense budget.
But analysts say the math behind Trump’s proposed dividend doesn’t hold up. John Ricco of Yale’s Budget Lab estimates a $2,000 payment for every American would cost around $600 billion, far more than the government’s tariff take.
“The revenue coming in would not be adequate,” Ricco told the Associated Press. Even Treasury Secretary Scott Bessent appeared caught off guard, telling ABC’s This Week that he hadn’t discussed the idea with Trump and suggesting any “rebate” would more likely appear as a future tax cut.
Economists also caution that although tariffs produce income, they achieve this by increasing costs. Importers generally transfer those expenses to shoppers, causing the policy to operate more like a regressive tax than a handout.
Economists observe a developing feedback loop: tariffs intended to bolster industrial capacity are now contributing to persistent inflation, which subsequently diminishes real income growth and limits the consumers the policy aimed to support. UBS refers to this as a “narrow expansion,”, though it might be more precisely described as an economy reliant on AI investments and government revenue generation schemes as opposed to rather than the widespread purchasing power of its populace.