Summary
SP Predicts Trump Tariffs to Counterbalance Tax Bill Effects on US Credit Rating
Standard & Poor’s (S&P) Global Ratings has projected that revenue generated from tariffs imposed under President Donald Trump’s administration will partially offset the fiscal impact of his extensive 2017 tax-cut and spending legislation, thereby supporting the United States’ credit rating. The tax bill, known colloquially as the “One Big Beautiful Bill Act,” involved permanent extensions of tax cuts alongside increased federal spending, which the Congressional Budget Office (CBO) estimated would raise the federal budget deficit by approximately $3.4 trillion between 2025 and 2034. Amid concerns about escalating deficits and rising national debt exceeding $37 trillion, S&P maintained the U.S.’s “AA+” sovereign credit rating, citing meaningful tariff revenues as a stabilizing factor.
President Trump’s tariff policies, particularly during his second term, expanded significantly compared to his first, with broad-based tariffs imposed on imports including automobiles, steel, and aluminum. These measures were designed not only to bolster domestic manufacturing but also to generate substantial government revenue, with tariff collections reaching record monthly highs and projections estimating revenue exceeding 1% of GDP by 2025. S&P’s assessment highlights the role of these tariffs in mitigating the fiscal pressures caused by the tax and spending legislation, providing a unique fiscal offset uncommon in U.S. economic history.
However, this fiscal optimism is tempered by widespread concerns from economists and other credit rating agencies about the broader economic consequences of relying on tariffs. Critics warn that tariffs increase costs for American households, distort markets, provoke retaliatory trade measures, and could ultimately reduce overall economic output and tax revenues. Moody’s downgrade of the U.S. credit rating earlier in 2025 underscored these risks, pointing to the large and growing national debt and the lack of sustainable fiscal reforms. Moreover, S&P itself cautioned that failure to address medium- and long-term budgetary challenges and political uncertainties could jeopardize the U.S. fiscal profile and credit standing in the future.
The interplay between tariffs, tax policy, and credit ratings during the Trump administration represents a complex and contentious chapter in U.S. fiscal management. While tariff revenues have provided a notable revenue stream that helped stabilize the U.S. credit rating in the short term, significant uncertainties remain regarding their long-term economic impact and sustainability as a fiscal strategy. The debate continues over the balance between generating revenue through trade measures and ensuring responsible, durable fiscal governance to maintain the country’s creditworthiness.
Background
Credit rating agencies such as Fitch, Moody’s, and Standard & Poor’s (S&P) assess the creditworthiness of debt issuances from sovereign nations, municipalities, and corporations, providing investors with a measure of risk. These ratings typically range from a high of AAA to D, with ratings below BBB- often categorized as “noninvestment grade” or “junk.” The U.S. government holds a top Aaa rating from Moody’s and second-tier AA+ ratings from both Fitch and S&P.
In recent years, the U.S. fiscal outlook has been shaped by a combination of tax-policy decisions and increased government spending. Short-term tax revenues declined notably due to a severe recession and various policy choices, while expenditures rose to cover wars, unemployment insurance, and other safety-net programs. Additionally, long-term spending on healthcare programs such as Medicare and Medicaid is expanding faster than the overall economy, driven by demographic changes.
In 2017, the Trump administration enacted a significant tax-cut and spending bill known as the “One Big Beautiful Bill Act,” which included provisions to make the 2017 tax cuts permanent. This legislation involved both cuts to federal spending and reductions in tax rates. However, the Congressional Budget Office (CBO) projected that the law would result in a net increase in the federal budget deficit of $3.4 trillion between 2025 and 2034, due to a $1.1 trillion decrease in direct spending and a $4.5 trillion decrease in revenues.
Amid concerns over the fiscal impact of this legislation, President Donald Trump also implemented tariffs intended to generate revenue. S&P Global affirmed the U.S.’s “AA+” credit rating in part because of the meaningful tariff revenue that was expected to offset the negative fiscal effects of the tax and spending bill. Analysts noted that the rise in effective tariff rates would help counterbalance the fiscal deficits associated with recent legislation.
Despite this, some experts caution that relying on tariffs to “pay for” permanent individual tax provisions may lead to reduced tax revenues and economic output, as well as disproportionately increase the tax burden on lower- and middle-income taxpayers. Consequently, fiscal responsibility requires lawmakers to find more sustainable methods to finance spending priorities rather than depending on tariffs.
Standard & Poor’s Assessment of Tariffs and Tax Bill Effects
Standard & Poor’s (S&P) affirmed its AA+ credit rating on the United States, citing that the revenue generated from President Donald Trump’s tariffs is expected to offset the fiscal impact of his extensive tax-cut and spending legislation. The tax bill, known as the “One Big Beautiful Bill Act,” which Trump signed into law in July, included permanent extensions of the 2017 tax cuts and introduced new tax breaks. Despite concerns about the resulting increase in the federal deficit, S&P analysts noted that the rise in effective tariff rates would generate meaningful tariff revenue, which could counterbalance the weaker fiscal outcomes tied to the recent fiscal legislation.
S&P highlighted that the recent fiscal legislation entails both tax cuts and spending increases, which on their own would likely lead to a significant deficit rise. The Congressional Budget Office (CBO) estimated that the bill would cause a net increase of approximately $3.4 trillion in the federal budget deficit from 2025 through 2034, driven by an estimated $4.5 trillion reduction in revenues partially offset by $1.1 trillion in spending cuts. However, S&P maintained a stable outlook, explaining that tariff revenues would generally offset these deficit pressures, thus supporting the AA+ rating for long-term U.S. sovereign debt and the A-1+ rating for short-term unsolicited sovereign credit.
The affirmation by S&P came despite Moody’s downgrade of the U.S. sovereign credit rating earlier in the year, which had lowered the triple-A rating by one notch due to rising debt levels. The U.S. national debt surpassed $37 trillion, marking a record high. Market reactions to S&P’s decision were muted, with some experts interpreting the rating affirmation as an acknowledgment of the meaningful tariff revenue generated to date. Overall, S&P’s assessment reflects confidence that tariff income will play a crucial role in offsetting the deficit-raising aspects of the recent tax and spending legislation, thereby maintaining the country’s strong creditworthiness despite fiscal challenges.
Trump Administration Tariff Policies
During his second term, President Trump significantly expanded tariff measures compared to his first administration, aiming to boost domestic manufacturing and increase federal revenue. A key move was the closure of the USMCA exemption on April 3, 2025, which led to a new 25% tariff on all imported cars, including those from Mexico and Canada. Economist Arthur Laffer estimated that this would raise car prices by $4,711, nearly doubling the projected increase of $2,765 had the exemption remained in place. The White House projected the tariffs would generate $100 billion in tax revenue and emphasized that approximately 50% of the 16 million cars purchased by Americans in 2024 were imported.
Trump’s first-term tariff policy was characterized by lower and more targeted tariffs with many exceptions. However, his second-term approach involved higher rates, broader impacts, and fewer exemptions. According to the Tax Foundation, while the first administration imposed tariffs on about $380 billion worth of imports, the second administration’s tariffs covered at least 71% of goods imports, amounting to $2.3 trillion by May 2025.
On February 10, 2025, Trump renewed the 25% tariff on all steel imports originally imposed during his first term and increased aluminum tariffs from 10% to 25%. Although some countries had previously received exemptions, Vietnam was not among them, and the tariff increase further strained its industries and exporters. Vietnam’s large trade surplus with the U.S. made it a target for these reciprocal tariffs.
The administration also adjusted tariffs in other sectors. For example, the U.S. exempted some electronic imports from China from tariffs as both countries made incremental moves to ease trade tensions. China responded with 125% tariffs on U.S. goods, although talks continued around potential exemptions. Lumber tariffs, first introduced at 20% in 2017 and reduced to 8.5% by April 2022, were criticized by the National Association of Home Builders for exacerbating the U.S. housing affordability crisis.
Tariff revenues have become an increasingly important component of the U.S. fiscal outlook. In July 2024, customs duties reached a record $28 billion in monthly revenue. Treasury Secretary Scott Bessent projected that total tariff revenues for 2025 could exceed 1% of GDP, a substantial increase from previous estimates of $300 billion. Analysts noted that tariff revenues would help offset the fiscal impacts of recent tax and spending legislation, contributing to a stable long-term credit rating outlook.
However, tariffs have also provoked retaliatory measures. Targeted U.S. tariffs on steel and aluminum have led to retaliatory tariffs against American products valued at over $6 billion, with estimated taxes totaling approximately $1.6 billion. Despite this, studies have suggested that tariffs have been effective in strengthening U.S. national security and achieving economic and strategic goals during Trump’s first term.
Economic analyses indicate that while tariffs generate significant government revenue, they also increase costs for U.S. households. For example, a 10% tariff could raise taxes on U.S. households by an average of $1,253 annually, while a 20% tariff could increase this figure to $2,045. Policymakers have considered using tariff-generated revenue to offset revenue losses from extending provisions of the 2017 Tax Cuts and Jobs Act (TCJA).
Fiscal and Economic Analysis
In the short term, the U.S. government has experienced significant declines in tax revenues due to a severe recession and various tax-policy decisions, while expenditures have simultaneously increased because of wars, unemployment insurance, and other safety net programs. Long-term concerns focus on rapidly growing healthcare-related expenditures, such as Medicare and Medicaid, which are outpacing overall economic growth as the population ages. In this context, the U.S. credit rating faced pressure, with S&P issuing a “negative” outlook on the country’s “AAA” sovereign debt rating in April 2011 for the first time since the agency’s inception, highlighting risks related to fiscal management and debt trajectory.
More recently, the introduction of President Trump’s tariff regime has generated a significant surge in tariff revenues. As of mid-August 2025, the U.S. collected approximately $130 billion in tariff revenues, marking an increase of 131.2% compared to the same period in the previous year. This substantial rise in tariff income has been interpreted by S&P Global as potentially offsetting weaker fiscal outcomes from recent tax and spending legislation, which includes both tax cuts and spending increases. S&P analysts have stated that meaningful tariff revenue appears capable of counterbalancing the deficit-raising elements of the recent budget legislation, despite the overall growth in the federal budget deficit and rising interest payments on the public debt.
However, this optimism is tempered by the broader fiscal challenges faced by the U.S. government. The Congressional Budget Office estimated that recent legislation would increase the federal budget deficit by $3.4 trillion over the 2025–2034 period, primarily driven by $4.5 trillion in decreased revenues and $1.1 trillion in decreased direct spending. Moody’s has expressed concern over the already large U.S. debt, which exceeds $36 trillion, and the lack of decisive congressional action to curb persistent annual deficits. Moody’s also projected that extending the 2017 Tax Cuts and Jobs Act would add roughly $4 trillion to the federal fiscal deficit over the next decade, exacerbating fiscal pressures.
While tariffs have contributed positively to government revenues, their broader economic impact is complex. Studies suggest that tariffs can be effective tools in addressing national security threats and achieving strategic economic objectives. Nevertheless, tariffs also lead to increased costs for consumers; for instance, estimates indicate that a 10% tariff on all U.S. exports could dynamically reduce tax revenues by over $190 billion across ten years and increase average household taxes by $1,253 in 2025, with higher tariffs imposing even greater burdens. The imposition of tariffs on imported automobiles—such as the 25% tariff introduced after the expiration of the USMCA exemption—has been projected to raise car prices substantially, with estimated increases of $4,711 per vehicle, while purportedly supporting domestic manufacturing and generating significant tax revenue.
Economic modeling further highlights the detrimental effects of tariffs on growth and wages. For example, the Penn Wharton Budget Model projects that Trump’s tariffs could reduce U.S. GDP by approximately 8% and wages by 7%, resulting in a lifetime income loss of $58,000 for a middle-income household. These losses are notably more severe than those caused by an equivalent revenue-raising corporate tax increase. Moreover, the trade war has negatively impacted business sentiment, though this risk is somewhat mitigated by favorable global financial conditions.
Credit Rating Agency Perspectives
Credit rating agencies play a critical role in assessing the creditworthiness of sovereign debt issuances, providing investors with standardized evaluations. Agencies such as Fitch, Moody’s, and Standard & Poor’s (S&P) assign ratings that typically range from AAA, the highest quality, down to D, indicating default. Ratings below BBB- are generally considered “noninvestment grade” or “junk.” The United States currently holds a top Aaa rating from Moody’s and AA+ ratings from Fitch and S&P, reflecting its strong credit profile despite some concerns.
However, these agencies have highlighted significant fiscal challenges facing the U.S. government. Fitch has expressed concerns about a “marked increase in general government debt,” largely due to the failure to address medium-term public spending and revenue challenges. The agency noted that rising interest rates and an expanding debt burden will increase interest payments, while demographic shifts and growing healthcare costs will elevate spending on the elderly absent meaningful fiscal reforms. Moody’s downgraded the U.S. credit rating in May, citing rising debt levels exceeding $36 trillion and the lack of congressional action to curb annual deficits. It also warned that extensions of the 2017 Tax Cuts and Jobs Act could worsen the fiscal outlook by adding roughly $4 trillion to the deficit over the next decade.
S&P, in particular, has taken a nuanced stance regarding the interplay between the U.S. fiscal policy and trade measures under the Trump administration. Despite affirming the U.S. AAA rating with a stable outlook, S&P acknowledged a “material risk” that policymakers might fail to reach agreements on addressing medium- and long-term budgetary challenges. The agency warned that a failure to implement reforms by 2013 would weaken the U.S. fiscal profile relative to other AAA-rated sovereigns. In 2011, S&P had issued a “negative” outlook for the U.S. AAA rating for the first time since 1860, citing long-term expenditure growth in healthcare and expanding safety net programs combined with declining tax revenues during recessionary periods.
S&P also highlighted that political developments could undermine the strength of American institutions, long-term policymaking effectiveness, and even the Federal Reserve’s independence. Such risks could jeopardize the U.S. dollar’s status as the world’s leading reserve currency, which remains a crucial credit strength for the United States. Notably, S&P recognized that tariffs imposed by the Trump administration have generated meaningful tariff revenue, which partially offsets fiscal pressures stemming from tax cuts. Market reactions to S&P’s rating affirmations have been muted, with experts like James Ragan from D.A. Davidson acknowledging that tariff revenues play a role in stabilizing the U.S. credit outlook amid rising debt levels.
Political and Public Reactions
The S&P Global Ratings report highlighted significant concerns regarding the U.S. fiscal outlook, warning of a “material risk” that policymakers might fail to reach a consensus on medium- and long-term budgetary challenges by 2013. The agency emphasized that the absence of an agreement and meaningful implementation by that time could weaken the U.S. fiscal profile relative to other ‘AAA’ sovereigns. This warning sparked debate among political leaders and fiscal policy analysts about the urgency and feasibility of addressing the national debt and deficit issues.
S&P also cautioned that political developments could undermine the strength of American institutions and the effectiveness of long-term policym
Limitations and Uncertainties
S&P Global’s assessment of the impact of President Trump’s tariffs on the U.S. credit rating contains several notable limitations and uncertainties. One key concern expressed by S&P is the risk that U.S. policymakers might fail to reach an agreement on medium- and long-term budgetary challenges by 2013. Without such an agreement and meaningful implementation, S&P warns that the U.S. fiscal profile could weaken significantly compared to peer AAA sovereigns.
While the increase in effective tariff rates is expected to generate meaningful revenue that could offset weaker fiscal outcomes from recent tax and spending legislation, this expectation depends on a number of assumptions about future tariff collections and their persistence. S&P acknowledges that the recent fiscal legislation contains both tax cuts and spending increases, which have complex and potentially opposing effects on the deficit. The Congressional Budget Office (CBO) projects a substantial increase in the deficit arising from decreases in both direct spending and revenues, underscoring the uncertainty in balancing these fiscal dynamics.
Furthermore, although some studies have supported the effectiveness of tariffs as tools for achieving national security and economic objectives, the broader economic impacts and potential retaliatory measures remain uncertain. The degree to which tariffs will continue to generate revenue without harming trade relations or economic growth is not guaranteed, introducing further ambiguity into the long-term fiscal outlook.
Finally, it is important to note the inherent differences between specifications and standards in government and industry procurement contexts. While this distinction is not directly related to the tariff issue, it highlights the complexity and variety of regulatory frameworks that can influence fiscal and economic policies. Overall, the combination of political, economic, and methodological uncertainties tempers the confidence in tariff revenues fully counterbalancing the fiscal impacts of recent legislation.
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