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Trump’s tariffs raise tax-cut stakes with recession fears rising

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President Donald Trump’s much bigger-than-expected tariff hikes increase the urgency of the Republican tax-cut package now in negotiation, while threatening to undermine its boost to business and consumer confidence.

With the biggest selloff on Wall Street since the COVID crisis showcasing investor concerns about Trump’s plans to jack up U.S. tariffs against all trading partners, the stakes are now higher for the GOP tax package. A simple extension of the 2017 income-tax cuts that are set to expire at the end of this year would offer no new fiscal stimulus.

“The main question is what do they do that goes beyond extending the 2017 cuts?” said Alec Phillips, chief U.S. political economist at Goldman Sachs Group Inc. “The tariffs that are being discussed look like they are on a larger scale than the net tax cut that seems to be under consideration in Congress.”

Republicans appear aware of the potential trade-off. Senate GOP members this week unveiled a budget blueprint that provided for $1.5 trillion of extra tax reductions, on top of a $4 trillion extension of the 2017 measures. Treasury Secretary Scott Bessent, one of Trump’s main negotiators, said the administration wants to incorporate Trump’s campaign pledges of ending taxes on tips and overtime pay, added relief for seniors and deductions for purchases of U.S.-made cars. Lawmakers are also aiming to include business-tax breaks viewed among the most pro-growth of the proposals.

The White House chief economist, Stephen Miran, also argued on Friday that the administration’s planned wave of deregulation will have a “powerful, and arguably much more powerful,” effect than tariffs.

But the danger is the ramp-up in import levies tips the economy into a downward spiral that makes it tough for tax cuts, a reduced regulatory burden and even lower interest rates to quickly reverse. Bloomberg Economics estimated that, with the panoply of measures Trump has announced, the average U.S. tariff rate is poised to climb to almost 22%, or the highest in roughly a century.

The tariffs aren’t yet fully in place, and may be subject to negotiation. If they do proceed, most economists see a sizable boost to inflation. Federal Reserve Chair Jerome Powell Friday said the price effects could be temporary, or prove “more persistent.” With wage growth slowing, that implies a hit to household incomes. A consumption hit could in turn spur employers to lay off staff and curb investment — even in an environment of cheaper borrowing costs.

“Large shocks are usually associated with nonlinear effects and unintended consequences,” JPMorgan Chase & Co. economists led by Bruce Kasman wrote in a note to clients Thursday. The bank on Friday changed its call on the economic outlook and now sees the U.S. sliding into a recession this year — an outcome Bessent has rejected.

Then there’s the timing issue. The most powerful wave of tariff hikes yet is set to take effect April 9. But the tax-cut legislation is likely months away from passage. Bessent highlighted in a Bloomberg TV interview Wednesday that the Republicans have never been more united. Even so, the so-called reconciliation bill that Republicans are using to bypass Democrats involves a complicated process, requiring many steps before it’s enacted.

And even then, the tax relief is for next year’s income, while the tariff-related risks are surging in the here-and-now. 

“Whatever fiscal oomph that we may get is probably a 2026 reality, whereas the trade policy uncertainty is a headwind to growth is a 2025 reality,” said Richard Clarida, managing director and global economic adviser at Pacific Investment Management Co. and a former Treasury official in the George W. Bush administration. “In the narrow, limiting case, where you don’t do anything on tax on tips or this or that, then there’s essentially no real net stimulus.”

Bessent has repeatedly emphasized that the Trump administration’s priority is Main Street, not Wall Street, and he and the president have embraced the idea of a transition period to where the economy is propelled by the private-sector — rather than the government-led growth pattern they say prevailed under Joe Biden. High import levies could also offer a path toward better trade deals.

“Is this ugly right now? Is this distasteful? Absolutely,” said Phil Orlando, chief market strategist at the asset manager Federated Hermes. “But it was exactly the sort of thing they needed to do in order to get everyone’s attention and start to have a series of negotiations to try to level that playing field and boost economic growth through more normalized trade.”

The tariffs in the meantime will be bringing in fresh revenue to the government, which — while it cannot count toward paying for the tax cuts according to reconciliation-bill rules — may help reduce the outsize federal budget deficit. Bessent has estimated the tariff income at $300 billion to $600 billion a year.

A political risk for the Republicans, beyond any potential recession, is that import duties are regressive — disproportionately affecting lower-income buyers of overseas goods. That risks the working-class voters that helped the GOP secure both the White House and both chambers of Congress in November.

The Tax Foundation, a policy think tank, has estimated the announced tariffs will impose an average tax hike of over $1,900 per household for 2025. By comparison, Senate Majority Leader John Thune said a four-person household with $80,000 in earnings would avoid sending an additional $1,700 to the government next year thanks to the tax package.

The tariffs are “highly damaging and primarily burden low and middle income families,” said Samantha Jacoby, deputy director of federal tax policy at the Center on Budget and Policy Priorities. “Small targeted tax cuts for low income or middle income families doesn’t change that.”

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Accounting

IAASB tweaks standards on working with outside experts

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The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

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Accounting

Tariffs will hit low-income Americans harder than richest, report says

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President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

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Accounting

At Schellman, AI reshapes a firm’s staffing needs

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Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

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