Ever since Pliny the Elder coined the term tinnitus, the perception of sound in the absence of an external sound source has remained enigmatic. Traditional theories assume that tinnitus is triggered by cochlear damage, but many tinnitus patients present with a normal audiogram, i.e., with no direct signs of cochlear damage. Here, we report that in human subjects with tinnitus and a normal audiogram, auditory brainstem responses show a significantly reduced amplitude of the wave I potential (generated by primary auditory nerve fibers) but normal amplitudes of the more centrally generated wave V. This provides direct physiological evidence of “hidden hearing loss” that manifests as reduced neural output from the cochlea, and consequent renormalization of neuronal response magnitude within the brainstem. Employing an established computational model, we demonstrate how tinnitus could arise from a homeostatic response of neurons in the central auditory system to reduced auditory nerve input in the absence of elevated hearing thresholds.