Tariffs and Tax Cuts: Everything You Need to Know

Key Takeaways

• Tariffs vs. tax cuts: Tariffs raise import costs and drive up prices, while tax cuts lower business and individual tax liabilities, often producing conflicting economic effects for both consumers and businesses.
• Sector impacts vary: Industries like manufacturing, agriculture, retail, tech, and automotive face unique benefits from tax cuts but also suffer supply chain and pricing pressures from tariffs.
• Macroeconomic trade-offs: While tax cuts aim to boost growth and investment, tariffs can trigger inflation, complicate trade dynamics, and reduce the overall stimulus effect.
• Strategic response is essential: Businesses should engage in scenario planning, diversify supply chains, and monitor policy developments to manage risks and adapt to legislative changes.
• Professional guidance matters: Partnering with tax experts can help businesses stay informed, compliant, and strategically prepared amid evolving tax and trade policies.

Congress and the White House are pursuing a sweeping tax package, regularly dubbed the “Big Beautiful Bill”, which has a number of components. It aims to make the enhanced standard deduction and child tax credit permanent, along with the 20–23% pass-through business deduction from the Tax Cuts and Jobs Act (TCJA). This bill also seeks to extend the lower corporate and individual rates that were set to expire at the end of 2025. A large part of this is a series of tariffs and tax cuts. But all this comes at a cost. The Joint Committee on Taxation estimates a $4 trillion revenue loss in the next nine years. 

But what does this mean for you and your business? In this blog, we’ll guide you through the various implications of tariffs and tax cuts, and how to factor them into your strategic planning. 

Understanding Tariffs and Tax Cuts

It’s important to understand the difference between tariffs and tax cuts. Tariffs are taxes levied on imported goods, either as a percentage of value or a fixed amount per unit. They raise the price of foreign-made products to generate revenue, protect domestic industries, correct unfair trade practices (like dumping), and can even serve geopolitical strategies. There are two types: protective tariffs aim to protect domestic producers from foreign competition, and revenue tariffs serve mainly to raise government funds.

Tariffs are paid by importers, at the border. This means that importers usually pass the higher costs on to you as a consumer through increased prices on what you’re buying.

Tax cuts, on the other hand, come in several forms. These include: 

• Corporate tax rate reductions, such as lowering corporate rates from 35% to around 21% under the TCJA.
• Income tax relief, by reducing personal income tax rates or expanding credits and deductions.
• Other fiscal incentives, like increased depreciation allowances or temporary credits to promote investment.

There are many reasons that tax cuts are introduced. For instance, they allow for increased investment through lower corporate and capital-gains taxes, which cut the cost of capital. Or they can lead to higher consumer spending, by raising disposable income. Tax cuts are also a great way to create jobs and increase wages, through more hires to cope with increased consumer spending. 

But while these measures seem to be a good thing, as their aims are to improve the economy, there are a number of factors to consider. 

The Conflict Surrounding Tariffs and Tax Cuts 

One of the main arguments against these measures is the trade-off between costs and savings for businesses. Tax cuts reduce operating costs for businesses by lowering tax liabilities on profits. After all, reductions in the corporate tax rate boost your after‑tax income, freeing up cash for investment, hiring, expansion, or research and development (R&D). But at the same time, tariffs actually increase the cost of imported inputs and raw materials. This raises production costs for manufacturers that rely on global supply chains, and to offset these costs, downstream industries have to absorb higher input prices.

So ultimately, businesses enjoy savings from tax cuts, but they also have to deal with increased input costs due to tariffs.

And it’s not just businesses who have to deal with the effects of tariffs and tax cuts. These measures also affect you as a consumer. While tax cuts aim to raise disposable income and help you spend more, tariffs have inflationary effects, by driving up prices of goods and services.

This means that while tax cuts temporarily boost your personal financial well-being, tariffs diminish that gain by driving up prices.

Do tariffs and tax cuts send mixed signals to the market?

One of the reasons for upset about these measures is that these seemingly contradictory policies worry businesses and investors. This is because they pose a number of operational challenges, like how to set pricing models and hiring policies, and difficulties with supply chains. 

Of course, another drawback of tariffs in particular is that foreign governments are responding in kind, making business even more complicated for international businesses, and those in certain sectors.

Sector-Specific Effects of Tariffs and Tax Cuts

Industries that will be directly impacted by these measures include manufacture, agriculture, retail, as well as technology and automotive. These effects are summarized below:

Macroeconomic implications 

Tariffs and tax cuts aren’t only specific to certain industries. Because tariffs act like implicit taxes on imports, they push up prices across the economy. As such, they’ve been flagged as a key risk to inflation. And even though tax cuts aim to stimulate growth, their positive impact can be offset by these rising prices, ultimately undermining the economic gains of tariffs.

Tariffs can also change trade dynamics and exchange rates, and not always in a predictable way. This is because even though they can temporarily improve the trade balance, they often harm export sectors and fuel currency appreciation.

Strategic Considerations for Businesses

It’s important to have a strategy in place for dealing with tariffs and tax cuts, so that no matter what changes happen to any bills, your business can still thrive. And there are three main ways to do this. 

Scenario planning

Creating strategies for the best- and worst-case scenarios that could result from changes to tax bills is a great way to see how your business will be able to respond to different circumstances. To do this, outline possible triggers, such as tariff hikes, tax cut passes or fails. Then, define how your business can and should respond to these triggers. For instance, you may need to cut costs, consider production delays, or move inventory.

Supply chain diversification

Given the effects tariffs and tax cuts can have on supply chains, this is a crucial consideration. Your business might need to investigate reshoring and nearshoring, in which you shift your sourcing to local or international sources to reduce exposure. 

Another option is to explore alternative sourcing paths in local and foreign markets which are not affected by tariffs. Alternatively, you could consider tariff engineering, or tweaking product designs to shift tariff classifications. However, this requires careful planning and transparency to avoid being seen as tax evasion. 

Advocacy and policy monitoring 

The best way to plan for possible changes in tax laws is to be aware of the changes as they happen, and how these can impact your business. This can be done by engaging with various associations relevant to your business and industry. Alternatively, you can pair up with tax experts to track legislative changes and factor them into your tax strategy. 

Firms like Fusion CPA can help you with this. Our team of tax experts are well aware of the many changes to tax laws, and can help you create a tax planning strategy to not only address them, but to stay successful. 

For assistance navigating tariffs and tax cuts, or help with tax planning, schedule a free Discovery Call with our team today. 

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This blog does not provide legal, accounting, tax, or other professional advice. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.