Trump’s Tariff-for-Income-Tax Swap: Five Flaws 17

President Trump’s recurring proposal to replace the federal income tax with tariffs is riddled with practical and economic issues. While he suggests using tariff revenue to cut income taxes for those earning under $200,000, this idea is fundamentally flawed. Here are five key reasons:   

1. The Numbers Don’t Add Up:

The individual income tax generates significantly more revenue than tariffs. In 2021, income tax revenue was $2.2 trillion, based on $15 trillion in individual income, resulting in an average tax rate of 14.9%. In contrast, tariffs brought in $80 billion from $2.8 trillion in imports, an average tax rate of 2.9%.

To replace the $2 trillion income tax revenue with tariffs would require drastically higher tariff rates, which would severely reduce imports, making it impossible to raise the necessary revenue. Even eliminating income taxes for those earning under $200,000 would cost $737.5 billion in 2025 alone, while current tariffs generate only a fraction of that amount.  

2. Historical Context is Irrelevant:

Trump’s reference to historical tariffs as a revenue source is misleading. A century ago, the federal government was much smaller, with spending barely exceeding 2% of GDP. Today, federal spending is around 22.7% of GDP. Even a 100% tariff on all imports wouldn’t cover current spending levels.

3. Tariffs Burden American Consumers:

Tariffs are paid by U.S. importers, not foreign entities. The costs are then passed on to American consumers and businesses through higher prices. Studies show that the 2018-2019 trade war tariffs were almost entirely borne by U.S. businesses and consumers. Trump’s proposed 10% universal tariff, 60% tariff on China, and 200% tariff on electric vehicles would further inflate costs for Americans.   

4. Tariffs Harm the U.S. Economy:

Tariffs negatively impact the economy by raising prices for businesses and consumers, reducing the return on labor and capital, and potentially strengthening the U.S. dollar, which hurts exporters. Research, including studies by Federal Reserve economists, confirms that tariffs lead to job losses and reduced economic output. Trump’s tariff proposals would damage U.S. competitiveness and harm the overall economy.   

5. These Aren’t Sound Tax Reforms:

True tax reform should promote growth and competitiveness. Trump’s proposals, such as exempting tip income and a minor corporate tax rate cut, fail this test. Exempting tip income would create tax code distortions and revenue losses, while a small corporate tax cut wouldn’t offset the harm from higher tariffs.   

Principled tax reform aims to reduce distortions, not replace one distortionary tax with another. Trump’s tariff and tax ideas are economically harmful and lack sound policy principles.