Americans have suffered a financial squeeze over the last several years.
President Donald Trump plans to impose 25% tariffs against Canada and Mexico and a 10% tax on imports from China. “You see the power of the tariff,” Trump told reporters January 31, according to Time. “Nobody can compete with us because we have by far the biggest piggy bank.”
Indeed, starting February 4, Canadian goods exported to the U.S. will be subject to a 25% tariff, “with the exception of Canadian oil, which will be hit with a 10% tariff,” reported the New York Times.
While tariffs formerly provided most U.S. revenue, that is no longer the case. Between 1790 and 1860, tariffs accounted for 90% of federal revenue, Dartmouth College economist Douglas Irwin told the Associated Press.
In 1913, the U.S. instituted an income tax which now accounts for the vast majority of U.S. revenue. For the fiscal year ending September 30, 2025, income, Social Security, and Medicare taxes accounted for $4.2 trillion in revenue – dwarfing the $80 billion raised from tariffs and fees, noted AP.
Higher tariffs could squeeze American families by increasing their taxes, lowering their income, and requiring them to pay more for tariffed goods. The resulting increase in inflation could drive the Fed to raise interest rates.
American Families Have Been Squeezed
Many workers experienced an economic squeeze between 2019 and 2023, While the average wage increased 12% — from about $54,100 to $66,622, according to the Social Security Administration’s Average Wage Index — prices of significant family expenses increased far more, as I wrote in a November 2024 Forbes post.
Between 2019 and 2023, here are three of the largest expenses that increased and how much those expenses represented as a percent of average wages:
- Average monthly rent increased 38% and took a bigger bite out of wages to 37% in 2023. Average monthly rent rose from $1,483 in June 2019 to $2,047 in September 2023, according to Zillow. In 2019, a year’s worth of rent was $17,796 — or 33% of the average wage. By 2023, annual rent had risen to $24,564 — 37% of the average wage.
- Average transportation costs for a U.S. family increased 41% and took a bigger bite out of wages to 20% in 2023. The average transportation costs for a U.S. family increased 23% from $781 to $1,098 between 2019 and 2023, according to the Bureau of Transportation Statistics. In 2019, a years’ worth of transportation cost $9,372 — or 17.3% of the average wage. By 2023, annual transportation costs had risen to $13,176 — 20% of the average wage, BTS noted.
- Average prices of a grocery basket increased 23% and took a 15.6% share of the average wage in 2023. The actual dollar amount increased from $156.50 to $193.20 between 2019 and 2023, according to Statista. Assuming a family buys such a basket every week, the actual cost increased from $8,138 in 2019 to $10,046.40 in 2023 — while rising slightly from 15% to 15.6% of the average wage. In 2023, the lower a family’s income, the more it spent on food as a percent of income — from about 32% for the lowest quintile to 8% for the highest one, reported the United States Department of Agriculture’s Economic Research Service.
Tariffs Could Cost Families More In Taxes And Increase Prices
Tariffs would lower economic output in the U.S. and increase taxes on American households. More specifically, the tariffs would reduce U.S. economic output by 0.4% and increase taxes by $1.2 trillion between 2025 and 2034 – adding $830 to the average household tax bill in 2025, according to The Tax Foundation.
Companies importing products from Mexico and Canada will pay the tariffs and are likely to raise consumer prices. U.S. consumers will likely pay more for automobiles, oil and natural gas, food (notably fresh fruits and vegetables), and beverages (such as beer and tequila), noted CNN.
Imports from Mexico and Canada accounted for 30 percent of U.S. imports in 2024. The U.S. imported $87 billion worth of motor vehicles and $64 billion worth of vehicle parts from Mexico last year, CNN reported. Motor vehicles were also the second-largest good the U.S. imported from Canada through November 2024, for a total of $34 billion. Canada’s top export to the U.S. in 2024 was oil and gas—amounting to $97 billion worth.
The U.S. imported $46 billion of agricultural products from Mexico, according to U.S. Department of Agriculture data. That includes $8.3 billion worth of fresh vegetables—including $9 billion worth of avocados, $5.9 billion of beer, and $5 billion of distilled spirits, noted CNN.
Some analysts estimate tariffs could increase taxes on consumers, boost prices of imported goods, and lower after-tax family income even more than does the Tax Foundation.
How so? Forbes reported the tariffs could increase the amount middle-class U.S. households pay in taxes by $1,700, reduce their after-tax income by 3.5%, and potentially add more than $3,900 to what consumers pay for goods being tariffed.
Higher Inflation Could Send Interest Rates Up
With tariffs taking a bigger bite out of family budgets, inflation could rise. The average household earned $101,805 in 2023 before taxes and spent $77,280, according to a survey by the most recent Consumer Expenditure Survey. The $3,900 increase in consumer spending would boost the average family’s spending by 5%.
Proposed tariffs on Canada and Mexico could add to inflation – which was 2.9% in the most recent report. Specifically, the inflation rate could rise as high as 3.4% since the tariffs on those two trading partners could “increase inflation by as much as 0.5 percentage points,” according to data from the economics division of Nationwide insurance featured by AP.
With consumers expecting a 3.3% inflation rate, according to Time, the Federal Reserve will be under great pressure to raise interest rates to meet its 2% inflation target. If the Fed raises rates, consumers with variable rate debt would be squeezed further.
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