First, tariffs have the most significant revenue upside potential and allow the Executive branch the most control. In fiscal year 2024, total tariff revenue tallied just $87 billion, compared to $2.4 trillion in revenue from individual income taxes. More than a few friends have mentioned that “the U.S. government used to fund itself almost entirely from import duties.” Yes, in the 19th century, when the federal government was a fraction of its current size. However, as the economy grew, tariffs shrank to 2% of total federal revenue after 1945 (see Figure 2). 

Ahead of the highly anticipated April 2nd tariff announcement, how high would tariff rates need to be to cover the foregone revenue from the proposed tax cuts and bring the deficit to 3% of GDP? An effective tariff rate of ~40% would yield ~$1.6 trillion increase in import customs collected, assuming no changes in spending patterns by importers and consumers (big assumptions!).³

Second, as we highlighted in a recent note, “Will DOGE Derail Growth?” the DOGE spending cuts have failed to alter the budget big picture. DOGE aims to reduce spending by $1 trillion by the end of the 2025 fiscal year.⁴However, DOGE won’t be able to cut actual mandatory expenditures required by the U.S. Constitution, which makes up 60% of total federal spending. So far, as part of the budget negotiations, Congress has tasked the Energy and Commerce Committee in the House, which notably oversees Medicaid and Medicare, to reduce spending by $88 billion annually on average over the next 10 years, although the method to do so is still unclear.

But for now, despite all the hoopla, the U.S. Treasury is still spending $29 billionper day on average, excluding debt-related payments, slightly higher than the pace of 2024 and 2023 (see Figure 3)!⁵

Third, clients have asked about other proposed tax initiatives, such as the “golden visa (Trump Card),” repealing green energy tax credits, repealing the state and local tax (SALT) deduction, eliminating home mortgage interest deduction, and an endowment tax increase.⁶The short answer is that repealing energy tax credits (~$80 billion annually), SALT deduction (~$100 billion annually), and home mortgage interest (~$100 billion annually) change the budget picture only on the margins. 

The other initiative impacting some of our clients is the endowment tax hike. Remember: The U.S. already has an endowment tax instituted under TCJA in 2017, a 1.4% tax on universities' endowment income. In 2023, about 56 universities in the U.S. were subject to the endowment tax (>500 students and endowment assets of over $500,000 per student). The total endowment tax revenue was a paltry $380 million in 2023. 

Current proposals regarding endowment taxes vary widely. Proposals range from raising the endowment tax rate (from 1.4% to 21%) to expanding the tax base to levy more private higher education institutions.⁷

However, the impact of the endowment tax on the budget deficit is minimal. The Tax Foundation estimates the new bill could generate $70 billion over the next 10 years or $7 billion annually, or an increase of total federal revenue by 0.14%.⁸

The bottom line is that the context matters for investors inundated with the flurry of daily headlines: the U.S. seeks to narrow the budget gap with a mix of spending cuts and revenue boosts. Unfortunately, the main initiatives underway may fall well short of the stated goal, but “going big” with tariffs provides the most significant potential revenue windfall, explaining the administration’s focus.   

The Payden Economics Team

1.  Assuming Q4 2024 nominal GDP remains flat.

2.  The FY2025 House Budget reconciliation and Trump Administration Tax Proposals: Budgetary, Economic, and Distributional Effects. The Budget Model. University of Pennsylvania. 

3.  Total imports in FY 2024 amount to $4.2 trillion.

4.  Fowler, S. (2025, March 6). Doge wants to cut $1 trillion this year. but it’s not looking at big spending drivers. NPR. 

5.  A more effective approach to spending cuts might be rescissions (not recessions!), a process by which the President and Congress work together to repeal spending law. However, that would require a more complicated legislative process and is beyond the scope of this note. 

6.  For example, the administration’s golden visa plan sounds attractive, as 10 million buyers of the “Trump card” would effectively generate $5 trillion in revenue. However, the Presdient doesn’t not have the constitutional power to shutdown the oringal EB-5 investor program, or to grant visas in excess of the EB-5 program’s annual cap of 9,940 immigrants. Further, there are 8.4 million people with a net assets of over $5 million in the world in 2023, so the $5 trillion goal would be hard to achieve.

7.  Congressman Troy Nehls proposed the Endowment Tax Fairness Act, which would raise the endowment tax rate to 21%. Congressman Mike Lawler proposed the Endowment Accountability Act, which would raise the endowment tax to 10% but lower the threshold of schools to those with assets of $200,000 per student.

8.  Assuming a 7.5% annual return on endowments, see G. Watson, D. Bunn. 28 January, 2025. “New Efforts on Taxing Endowments Raise Questions on Neutrality and Revenue Collection.” Tax Foundation.