President Donald Trump’s tariffs won’t deliver the tax revenue he suggested in his speech before a joint session of Congress Tuesday night. The rates are simply too high.

But tariffs have never solely been about raising money. They are also supposed to protect American industries and workers, reasserting U.S. economic leverage and reshaping trade relationships. Those are worthy goals, but the administration’s current approach needs refining.

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WHICH ITEMS WOULD BE AFFECTED BY TRUMP’S PROPOSED TARIFFS ON CANADA AND MEXICO

Some argue tariffs can both protect workers and generate revenue for the Treasury. In theory, that’s possible. In practice, it’s a trade-off. To raise significant tariff revenue, the U.S. needs a high volume of international trade to tax. To protect domestic industries, tariffs must reduce the amount of foreign goods entering the market. The more aggressive the tariffs, the lower the trade volume — and the lower the tax revenue.

The Laffer curve famously revealed that taxation is most effective at moderate rates. A 5% tariff on a trillion dollars of trade brings in $50 billion. Yet raising that tax to 10% — if it shrinks trade volume to $400 billion — yields only $40 billion. A 25% tariff that slashes trade to $100 billion collects just $25 billion. This is not a theoretical problem. It’s an economic reality that the administration should recognize. If raising revenue is also a goal, we should be hearing more about optimal tariff rates, not just higher ones.

That’s why domestic sales taxes rarely reach extreme levels. State sales taxes in the U.S. range from 0% to 7.5%, with local rates rarely exceeding 10%. Why? Because higher sales taxes discourage spending. The same principle applies to tariffs. If the administration is serious about using tariffs to fund tax cuts, then it should approach them the way states approach sales taxes: keep rates both low and broad-based to maximize revenue while minimizing economic disruption.

Beyond revenue, the way tariffs are being implemented creates uncertainty and market instability. Unlike a consistent, transparent tax code, these tariffs shift unpredictably. 

One day, it’s a 25% tariff on Canada and Mexico. The next day, it’s postponed. Then it’s back again, but with different rates depending on industry or country. Tariffs on steel, aluminum, energy imports — each decision appears arbitrary, shifting with political winds rather than according to a coherent, apparent strategy. Markets—and the businesses that drive job creation — thrive on predictability.

Imagine if domestic sales taxes were handled this way. A 12% tax on General Mills, but 22% on Post? One rate for cereal, another for oatmeal, yet another for candy bars? The process would be chaotic and open to political manipulation. Worse, imagine if a governor could raise or lower these taxes at will, announcing new rates on a whim, only to change course days later. This is effectively what the administration is doing with tariffs. While well-intended, this kind of policymaking creates uncertainty and inefficiencies that hurt businesses and consumers alike.

Trump is right to challenge the status quo on trade. For decades, global competitors have taken advantage of the U.S. through one-sided agreements and predatory economic policies. Tariffs can be a powerful tool for fighting back. But they should be wielded with a clear, consistent strategy — one that maximizes economic leverage without creating unnecessary disruption.

REPUBLICANS SEEK TARIFF WAIVERS AS TRUMP ESCALATES TRADE WAR

If the administration is using tariffs as a negotiating tactic, it should say so clearly. If the purpose is to protect certain industries, then the strategy should be openly debated. Justifying the current policy primarily as a revenue-raising mechanism, however, doesn’t hold water. A smarter approach would involve lower, more predictable tariffs that generate revenue while reducing market distortions.

Trump’s instincts on trade resonate with many Americans. He has repeatedly shown that he’s willing to fight for American industry and workers. But to make tariffs a lasting success, his administration must refine its approach by turning a blunt instrument into a precise tool that supports his agenda of fiscal responsibility and economic dynamism.

Paul Mueller, PhD, is a Senior Research Fellow at the American Institute for Economic Research.