Making the Best of a Bad Situation: A Thought on Tariffs, Inflation, and Consumption

This week, I’m drawing musical inspiration from Ray Stevens’ 1986 hit “Makin’ the Best of a Bad Situation.” The reason? The growing concern among economists and media pundits regarding the potential inflationary impact of tariffs scheduled to take effect later this summer.

On the surface, their argument appears valid—tariffs are effectively a tax on imported goods, raising the baseline cost of those products. Conventional wisdom suggests that these higher costs will be passed on to U.S. consumers, stoking inflation and potentially slowing economic growth.

But that narrative is only part of the picture—and perhaps not the most likely outcome. Here’s where I try to make the best of this “bad” situation.

As I’ve pointed out before, a price increase only results in sustained inflation if consumers are willing and able to absorb that higher cost. If they are, then yes, inflation takes hold. But the assumption that U.S. consumers will continue purchasing goods at any price is flawed. In reality, when prices rise, consumers often reduce consumption, seek alternatives, or stop buying altogether. That’s the basic principle of price elasticity.

And this elasticity is more relevant than ever. Today’s U.S. consumer is under considerable financial pressure—record-high credit card balances, elevated interest rates, and limited savings are forcing more prudent spending choices. In that context, many price hikes, even if tariff-driven, may be absorbed by retailers or eliminated altogether through reduced demand, limiting their inflationary impact.

There’s another angle to consider: Where does the revenue from these tariffs go?

If implemented effectively, this could serve a broader fiscal policy goal—perhaps even funding the reduction or elimination of federal income taxes. Imagine replacing income taxes with a broad-based consumption tax collected via tariffs. For many Americans, that could result in a significant increase in take-home pay—potentially $15,000 or more annually for someone earning $100,000.

Even if some of that additional income were redirected toward slightly higher-priced goods, the net benefit to the average worker could still be meaningful. More importantly, a tariff-based system would be universally applied—everyone pays when they consume. No loopholes, no deductions. Even undocumented individuals, who may currently pay little or no federal income tax, would contribute through their purchases.

In essence, a tariff-based system functions as a universal consumption tax—a model that could simplify the tax code and make tax collection more equitable and transparent. While I’m not an elected official, I would support exemptions for essentials like food and clothing up to a reasonable threshold—ensuring fairness and preserving access to necessities for all.

As Ray Stevens put it: sometimes all you can do is make the best of a bad situation. And with some creative thinking, perhaps what looks bad at first glance could become an opportunity for structural reform and economic resilience.