In a recent New York Times essay, Josh Lipsky argues that tariff revenue has become important enough to federal finances that bond markets will make President Trump’s tariffs difficult for a future administration to unwind.
There is a simple arithmetic point behind the argument. Tariffs now raise a larger share of federal revenue, and refunding illegally collected duties or repealing tariffs without offsetting spending cuts or other revenue would increase the deficit.
But that argument pushes simple budget arithmetic into doing far too much work. Bond investors are not attached to customs duties as a line item revenue source. They care about the government’s overall fiscal position and about how policy affects economic growth, inflation, interest rates, and the cost of servicing the debt. Once those broader effects are considered, the market’s behavior over the past 18 months looks less like an addiction to tariffs than a response to the ever-changing size of the tariffs themselves.
Collecting tariffs from the pockets of US consumers and businesses has real, negative economic effects. It does raise some money, but relative to the government’s underlying fiscal outlook, tariff revenue is a side hustle. And the Trump administration has already promised to dole out the funds through schemes like tariff dividend rebates, farm subsidies, and pay-fors on tax cuts or other spending. The new tariff money, in other words, has already been spent several times over, not put towards deficit reduction.
Lipsky nevertheless emphasizes that tariff money is coming into the Treasury “every day.” Leaving aside that court-mandated tariff refunds have momentarily caused net US customs duty revenue to turn negative (and that more refunds are on the way, see Figure 1), Lipsky is generally right. But this is also true, in much larger amounts, for every other kind of federal revenue stream. During fiscal year 2025, the federal government collected an average of about $7.3 billion per day in individual income taxes, $4.8 billion in payroll taxes, and $1.2 billion in corporate income taxes. Customs duties averaged about $534 million per day. Individual and corporate income taxes alone generated roughly 16 times as much revenue.
Money arriving every day is what a government with a $5.2 trillion annual revenue stream looks like. The economically relevant question is not whether customs checks keep arriving. It is whether the tariff regime improves the government’s overall capacity to service its debt after accounting for its effects on growth, inflation, interest rates, and the rest of the tax base.
That means that forward-looking bond investors care about the federal government’s overall fiscal position. In practice, this means expected future deficits, economic growth, inflation, borrowing costs, and whether policymakers appear capable of managing any of them. They have no attachment to a dollar collected by Customs and Border Protection rather than one from the IRS.
To put these amounts in perspective, net interest on the federal debt reached $970 billion in fiscal year 2025, absorbing 18.5 percent of federal receipts. Customs duties accounted for only 3.7 percent of receipts—and that was before refunds (see Figure 2). Setting tariffs to zero and eliminating customs revenue with no replacement source would raise net interest as a share of the remaining revenue from 18.5 percent to 19.2 percent. Tariff revenue is simply not large enough to transform the government’s fiscal trajectory.
The market behavior around all the tariff volatility since 2025 has a simpler explanation: the tariffs changed, not the bond market’s underlying priorities.
The tariffs announced on Liberation Day were enormous and indiscriminate. They could have generated substantial revenue, but they were also likely to have significant, self-defeating aggregate economic effects. Large tariffs affect consumer prices, production costs, investment decisions, supply chains, and the expected returns to doing business in the United States.
Stock and bond markets are forward-looking. The stock market reacted negatively because tariffs large enough to generate truly enormous revenue would also be large enough to inflict substantial economic damage.
The administration then retreated. Tariffs were paused, reduced, exempted, renegotiated, or replaced with narrower measures. After the Supreme Court invalidated the IEEPA tariffs, the administration assembled a new collection of duties under other statutes. But the resulting tariff regime was substantially smaller than the wall threatened at the peak of Liberation Day. None of this significantly affected bond markets.
The administration also tried to convince the Supreme Court that invalidating the IEEPA tariffs would trigger a financial crisis. But as the Cato Institute argued in its amicus brief, there was never credible evidence that high or low tariffs contributed to bond market dysfunction. Net tariff revenue even turned negative in June after refunds. As predicted, there was no crisis following the Court decision—because the United States’ fiscal trajectory is a problem with or without tariffs (see Figure 3).
The scaled-back replacement tariffs are having the same non-effect. They are more than a nuisance, especially with the ever-changing rationale and authorities used to levy them, but they generate too little revenue to transform the country’s fiscal trajectory. The damage to specific industries and firms operating in targeted sectors and countries is real but concentrated, while aggregate macroeconomic effects have been more muted.
That gives us a simpler explanation for the bond market’s behavior. Markets objected when tariffs were large enough to threaten growth and trigger inflationary price increases, then mostly shrugged when the administration scaled them back enough that their aggregate effects were smaller. That is not evidence that investors became dependent on tariff revenue. It is evidence that markets care about the overall economic consequences of policy.
The real bond-market concern is a large and growing interest bill, persistent budget deficits, and a political system unwilling to bring spending and revenue into alignment. Tariffs may reduce the deficit at the margin—but only to the extent that the revenue is not offset by more spending, weaker growth, and lower tax receipts elsewhere in the economy. And the same tariff dollar cannot simultaneously reassure bond investors, finance tax cuts, subsidize favored industries, and reduce debt.
The bond market is not addicted to tariffs. It is worried about whether the United States can manage its fiscal position. And with or without tariffs, the Trump administration and Congress give it plenty of reasons to worry.
