Tariffs Can’t Replace the Income Tax
The 1870s were a golden age for tax policy—at least if you ask Donald Trump.
“The United States from 1870 to 1913 had all tariffs, and that was the richest period in the history of the United States, relatively speaking,” he said in a speech to the House Republican conference earlier this year.1 Speaking after the implementation of broad reciprocal tariffs in April, Trump stated that “our country was the strongest from 1870 to 1913. You know why? It was all tariff based. We had no income tax.”2
It’s true that the US had tariffs, and no income tax, in the late 1800s. It’s worth remembering what else the US didn’t have: Medicaid, federal assistance for primary education, the Environmental Protection Agency, the National Science Foundation, financial support for families struggling to pay the costs of food, utilities, and housing, and so much more.
In the absence of an income tax, the fiscal system of the 1890s relied on tariffs on a wide range of goods, including at various times basic essentials such as wool, cotton, and sugar (plus excise taxes on alcohol and tobacco).3 As well as raising far less revenue, the system put a greater share of the burden of financing the federal government on low- and middle-income people in the form of increased costs—and increased rather than reduced inequality.
In 1894, Congress enacted an income tax on high-income individuals and profitable corporations, with the intention of “shift[ing] the [tax] burden from the less wealthy to the wealthy.”4 But in 1895, the Supreme Court struck down that income tax as unconstitutional, a decision that the dissenting justices ridiculed as “nothing less than a surrender of the taxing power to the moneyed class.”5 It would be nearly another two decades, after the 16th Amendment to the Constitution effectively overruled the court’s decision, before the federal government would again enact an income tax in 1913.
More than a century later, the income tax raises more than half of all US federal revenue and is one of the most progressive parts of the tax code.6 Revenue raised by the income tax enabled major public investments such as Medicaid and primary education and shored up the dedicated revenue streams for other vital resources such as the federal highway system, Medicare, Social Security, and unemployment insurance.7 Despite these achievements, the income tax has become one of this century’s key battlegrounds between progress and regress.
President George W. Bush’s tax cuts in the 2000s shrank the income tax and made it less progressive, and President Trump’s 2017 tax cuts went after both individual and corporate income taxes. Both cut the estate tax, and both increased income, wealth, and racial inequality.8 Trump’s new twist is to ultimately swap the income tax for tariffs—and in gradual steps rather than all at once. But it leads to the same place of gutting the government and having workers and families pay the price.
It should come as no surprise that tariffs are an inadequate and shaky revenue source to replace the income tax. Targeted tariffs can sometimes be a tool for advancing national security and supply chain goals, and excise taxes such as nicotine and carbon taxes can correct for costs inflicted by the market. But the more successful targeted tariffs are at changing behavior—by reducing imports and purchases of goods and services subject to the tariff—the less revenue they will raise. Even massive across-the-board tariffs would replace only about 40 percent of income tax revenue.9 In the process, they would increase inequality: The burden of taxation would shift to low- and middle-income workers and families, simply because necessities consume a greater share of their incomes than they do for the wealthy.
The core goal of moving from income taxes to tariffs isn’t to fund the government but to shrink it, perhaps small enough to “drown it in a bathtub,” as some anti-tax activists have long dreamed.10 In the 1870s that Trump looks back on wistfully, all of government spending was 2–3 percent of GDP, or about one-tenth the size of today.11
Trump and his allies know it would be difficult to eliminate the income tax in one swoop. Instead, they appear ready to play a long, incremental game. They are promising, for instance, to exempt various kinds of income from taxation in ways that try to buy off various political constituencies. Trump has already proposed exempting from the income tax cryptocurrency capital gains, tips, overtime, and more, in addition to deep outright cuts in the corporate tax rate, the estate tax, and individual income taxes.12
But dialing the clock back to the 1870s hour by hour is just as harmful as doing it all at once.
Instead, we need a fiscal long game for a stronger income tax, supplemented with new revenue sources. That is the fiscal foundation needed to achieve higher levels of public goods, lower levels of inequality, fewer opportunities for cronyism and corruption, and broadly shared prosperity.
We May Be Watching The Death Of The Federal Income Tax
Think of the federal income tax as a patient with heart disease. But instead of treating the condition, the hospital removes the oxygen the patient needs to breathe, then fires the doctors who could unblock the clogged arteries.
The actions of President Trump combined with early policy initiatives in Congress threaten to kill the federal income tax. If these efforts continue unabated, the current revenue system could collapse, opening the door to two stated goals of many Trump supporters—deep federal spending cuts and some form of consumption tax.
Such a result would be consistent with multiple initiatives by Trump and his supporters. For example:
- Trump has vowed to replace the income tax with tariffs, though even his most aggressive import taxes would raise far less revenue than the existing system.
- Project 2025, the conservative manifesto for a second Trump term, proposed a two-step process for replacing the income tax with an unspecified consumption tax.
- Trump’s nominee for IRS commissioner, former GOP congressman Billy Long, sponsored legislation while in the House to abolish the IRS and replace the income tax with a national sales tax.
- The White House plans to cut IRS staff by at least 18 percent, which will limit compliance and taxpayer support and potentially undermine public confidence in the tax system.
- At the state level, conservative governors and legislatures have moved aggressively to shrink income taxes and replace the revenue with sales and excise taxes.
There are merits to a well-designed consumption tax. But destroying the existing tax system before a replacement is carefully crafted and without first developing a transition plan is dangerous and doomed to fail.
Congress isn’t going to vote any time soon to explicitly replace the income tax with a consumption levy. But aggressive efforts to dismantle the IRS combined with a hollowing out of the income tax base could render the existing revenue system unsustainable. And drive lawmakers to replace it with something else.
Revenue Shortfalls
The current tax system already falls far short of generating enough money to pay for what most Americans want. Last year, the federal government collected 17.1 percent of Gross Domestic Product in taxes yet spent 23.4 percent. Except for periods of war and recession, that gap is among the highest in history. Extending the 2017 Tax Cuts and Jobs Act without offsetting spending hikes or tax increases would widen this chasm substantially.
While the Trump Administration, led by the high-profile efforts of Elon Musk and the Department of Government Efficiency, has severely disrupted the federal regulatory and administrative system, it has yet to produce substantial spending reductions.
However, Congress seems well on its way to lowering even further the amount of revenue the existing tax system can collect. And many in the GOP believe that will give them a new opportunity to enact deep spending cuts or, as some say, “starve the beast.”
A Long Wish List
If Congress extends the expiring provisions of the TCJA later this year, it will reduce projected federal tax revenues by at least $4 trillion over the next decade. Trump’s many campaign-related tax cut promises, including proposals to make income from tips, overtime, and Social Security benefits tax-free; lower the corporate income tax rate; and raise the state and local tax deduction cap could more than double that revenue loss, according to the Committee for a Responsible Federal Budget.
On top of that, Capitol Hill Republicans reportedly have a wish list of more than 200 additional tax cuts they hope to roll into any end-of-year revenue bill. While the congressional GOP leadership has yet to place a top-line limit on the size of all that largess, it likely will be hefty.
Congressional Democrats will have no say in this year’s tax bill. However, they made no real effort to bolster the income tax when they controlled the White House and Congress earlier this decade.
IRS Cuts
On top of more tax cuts, Trump and Hill Republicans have slashed IRS resources and its tax compliance efforts. Congress has rolled back nearly all the funds it approved in 2022 to buttress IRS enforcement. The Administration says it has fired nearly 7,000 IRS staff and at least another 5,000 have resigned or retired in the past few months. And it plans to reduce the agency’s total workforce by thousands more by mid-May. In total, the White House hopes IRS staff will shrink by at least 18 percent in what it calls “Phase 1,” according to a document obtained by The Washington Post.
These cuts already have resulted in the agency dropping audits of high-income households, partnerships, and corporations, according to published reports.
Public confidence in the IRS’s ability to collect taxes fairly is critical to people’s willingness to pay their own taxes. Even before these cuts, people worried that corporations and the wealthy paid less tax than they should. Slashing IRS staff could reduce taxpayer services as well as compliance by those who aggressively game the system, knowing they will be unhindered by audits.
On April 15, I’ll be participating in a Tax Policy Center event that will illuminate many of these issues.
We don’t know if the steps we’ve seen so far are part of a deliberate strategy by Trump to replace the income tax. But if that was my goal, this is exactly how I’d go about it.
Trump has said tariff revenue may allow Americans to stop paying income taxes. The math doesn’t add up
President Donald Trump has recently claimed his tariffs will generate so much money that Americans could soon stop paying federal income taxes. But experts say he’s overpromised.
“Over the next couple of years, I think we’ll … be cutting income tax — could be almost completely cutting it, because the money we’re taking in is going to be so large,” Trump told service members in a Thanksgiving video.
He repeated the idea in a Dec. 2 Cabinet meeting.
“I believe at some point in the not too distant future, you wouldn’t even have income tax to pay because the money we’re taking in is so great,” Trump said. “It’s so enormous that you’re not going to have income tax to pay. Whether you get rid of it or just keep it around for fun or have it really low, much lower than it is now, but you won’t be paying income tax.”
This isn’t the first time Trump has promised Americans a windfall from his tariffs, which represent the most extensive levies on foreign products seen in the U.S. in decades. In November, Trump promised Americans $2,000 each from tariff revenue, a pledge that hinges on questionable math.
Replacing federal income tax revenue with tariff revenue is even more daunting.
The U.S. has collected about $257 billion in tariff revenues so far this year, and $167 billion of that stemmed from tariffs Trump has imposed in his second term.
The federal income tax, meanwhile, brought in about $2.4 trillion in 2024, which is more than 14 times what Trump’s second-term tariffs are generating.
“It is not remotely possible that tariffs could be used to eliminate the income tax,” said Steve Ellis, president of Taxpayers for Common Sense, a group that tracks the federal budget.
The White House did not respond to our request for details on how the math could work.
The math of a tariffs-for-income-tax trade
In 2024, individual income taxes accounted for just under half of the federal government’s revenue. The second-largest share, at about 35%, came from payroll taxes, which are withheld from workers’ paychecks to fund Social Security and Medicare. Corporate income taxes came in third, at about 11%. Tariff revenue was way down the list.
Individual income taxes account for roughly half of all federal revenue
2024 data, millions of dollars
To replace what the federal income tax currently covers, tariff revenues would need to grow to nearly half of all federal revenue, or about $2.4 trillion.
But Trump’s increased tariffs haven’t netted anything near that amount, and they aren’t projected to exceed $260 billion a year as far as the eye can see.
If Trump’s tariffs remain in place for all of 2026, they would generate $191 billion in revenue that year, according to the center-right Tax Foundation. If the tariffs remain in place through 2034, the U.S. would take in $256 billion that year, though a pending Supreme Court challenge could jeopardize Trump’s plan.
Still, $256 billion a year is peanuts compared with the nearly $2.43 trillion collected in federal income taxes last year.
There are several paths to eliminating the federal income tax with the help of tariff revenue, but none of them are palatable.
- Borrow more money. The current level of federal revenue already falls about $1.8 trillion short of covering the government’s expenses. Getting rid of income taxes without replacing them with tariff revenues, dollar for dollar, would greatly widen that gap, adding to future generations’ debt burden.
- Shrink the federal government. In the 19th century, tariffs funded most of the government, Ellis said. But the government was much smaller then, and Americans today show no appetite for giving up benefits they’re accustomed to, from Social Security to Medicare to a muscular military.
- Increase tariffs enough to equal income tax revenue. That would mean setting tariff rates “incredibly high — well over 60%,” said Douglas Holtz-Eakin, president of the American Action Forum, a center-right think tank. Tariffs that big, he said, would “radically distort production and purchase patterns and diminish the amount of imports. As a result, tariff rates would have to rise further.”
Could a consumption tax be feasible?
The idea of switching from a largely income-based tax system to one that’s more dependent on consumption has been debated for decades. Many European countries levy a value-added tax, which is essentially a sales tax broken into several pieces at various stages, from a product’s creation to its final sale.
This idea faces challenges in the U.S. Many states already tax retail sales, so a new federal tax layered on top would pose an extra burden, especially for lower-income families that have to spend larger percentages of their income than wealthier families do (and who often pay relatively little in federal income tax under the current system).
The sales tax “would have to be around 40%, and there would be a lot of evasion at that rate,” said Dean Baker, co-founder of the liberal Center for Economic and Policy Research.
It’s Time the US Abolished the Income Tax
In December, the US Supreme Court began hearing oral arguments in Moore v. United States. The case specifically involves the “mandatory repatriation tax,” a one-time tax levied as part of the 2017 Tax Cuts and Jobs Act. But the implications are larger, as it is testing the legal waters of whether a wealth tax is constitutional.
This issue has, naturally, been contorted into legalisms: What the heck does apportionment mean in the 16th Amendment? How is income defined legally? I won’t wade into that. What are the economic issues? What’s the right thing to do here, leaving aside the legal minutiae?
The right thing is to stop taxing income altogether. The income tax itself is inefficient, and it leads to mountains of additional inefficiencies.
Why we tax income
The most important principle underlying taxation is simple and doesn’t involve fancy economics: the government taxes what it can get its hands on. The economists’ analysis of incentives—whereby the government tries to tax in such a way that it does not set off a rush to avoidance, either legal (using complex structures to avoid taxes) or economic (not doing the thing that gets taxed, such as earning income)—comes later. Economists should focus on incentives; our opinion of what’s “fair” is no better than anyone else’s.
With that in mind, why does the government tax income? Because, circa 1913 (the year the 16th Amendment was ratified, giving Congress the right to levy an income tax), income was easier to measure than sales, value added, consumption, or other economically better concepts. When money changes hands, it’s relatively easy for the government to see what’s there and take a share. Tariffs really start from the same concept. It’s not that hard to see what’s going through the port and demand a share—Adam Smith, David Ricardo, and free trade be damned. But the federal government wanted more money than tariffs could provide.
Even if it were a good economic idea to tax wealth, there is not necessarily any cash around where there is wealth or unrealized capital gains. When you sell an asset, you get some cash, and it’s easy for the government to demand it. When you do not sell an asset, you have no extra cash. It’s a paper profit. What are you going to pay the government with?
This problem pervades estate taxes. We have a 40 percent top marginal rate wealth tax right now. (Technically it is a “transfer” tax, which is why it is legal.) But private businesses, family farms, and the like don’t have 40 percent of their value sitting around in cash. Unless you carve out a Swiss cheese of loopholes and enable complex legal structures, heirs to such enterprises have to break them up or sell them to get the cash. That’s why the estate tax has the Swiss cheese.
A similar issue has come up in the news lately with some executives at internet companies who got big stock grants at the top of the market. If the market crashes, they still owe tax on the value of the stock when it was granted, but no cash.
Property taxes can share the problem as well. (They are state and local, not federal, hence legal). People can own a house but not have the money to pay the property tax.
Wealth and unrealized capital gains are also troublesome to tax because in many cases it’s hard to know exactly how much money is there. Just what is the value of a house, a building, or a privately held business? Accountants can disagree, especially if taxes are at stake. Accountants also can get creative about corporate structure to game valuation rules—voting versus nonvoting shares, debt with embedded options, options to buy that are never exercised, interlocking trusts, and so forth. See the aforementioned estate tax Swiss cheese.
Moreover, market values change. If I pay tax on unrealized appreciation this year, do I get my money back when the value goes down next year?
You can see how the current system makes sense: if we want to include “investment income” as “income,” tax it when the assets have a definite value—the market sale price—and tax it when there is some cash around to grab—when the income is realized.
I hope that the Supreme Court does blow up the income tax system. It’s a bloated crony-capitalist mess.
A century of cat and mouse
The income tax has led to a century of cat and mouse. Suppose we tax direct income and realized capital gains. Well, it’s reasonably easy to turn actual income into an unrealized gain. Suppose you have some income stream, and you don’t plan to spend it right away. You want to reinvest it. Rather than pay income tax on the income, and then additional income tax on the interest or dividends over time, and then more income tax on any appreciation when you finally sell it, create a corporation or other entity and let the income flow into the corporation, which reinvests it. The “corporation” could just be a shell to receive income and put it in a mutual fund. Yes, you’ll still pay capital gains tax when you sell, but that’s a lot less. And delaying taxation is always great.
Now you know why we have a corporate income tax at all. There is no economic point to corporate taxes. Having “corporations pay their fair share” is nonsense. Every cent of corporate income tax revenue comes from higher prices, lower wages, or lower payouts to stock and bondholders. We should tax those people. And if you want redistribution—taxing the “right” people—that’s a lot easier to do when you tax people. But if there is no corporate tax, lots of people will incorporate to avoid income taxes. So we tax corporate income and then your payout.
Thousands of pages of tax law and regulation have followed to plug one hole after another. After 100 years of patchwork, including some taxing of unrealized gains, we’d managed to maintain some degree of balance in the system, a sort of equilibrium of not overdoing it.
But people keep inventing new ideas to shield income from taxes, and the concept of income has grown in complexity along with the global economy. Moore v. United States involves domestic owners of a foreign corporation and the treatment of the income received into that corporation abroad. By itself it’s not a big deal.
But the pro-tax arguments before the court reveal that the government has already stepped over the line to taxing a good deal of unrealized income. And plans to greatly increase wealth taxation are already on their way. Not overdoing it, obeying norms and gentlepersons’ agreements, is going out of style these days. As the Wall Street Journal editorial board argues:
The Ninth Circuit’s opinion opened up a freeway to tax wealth and property. And wouldn’t you know, President Biden’s budget this year includes a 25% tax on the appreciation of assets of Americans with more than $100 million in wealth. . . .
Justice Samuel Alito asked: “What about the appreciation of holdings in securities by millions and millions of Americans, holdings in mutual funds over a period of time without selling the shares in those mutual funds?” Ms. Prelogar replied: “I think if Congress actually enacted a tax like that, and it never has, that we would likely defend it as an income tax.”
Well, it’s also called an estate tax, and it exists already!
There you have it. The Biden Administration believes the Sixteenth Amendment lets Congress tax the unrealized appreciation of assets. As Justice Neil Gorsuch noted, when the Supreme Court opens a door, “Congress tends to walk through it.” The Justices should close the wealth-tax door.
Moore v. United States brings up another uncomfortable question. The couple behind the case invested their money, and then the Internal Revenue Service changed the rules and told them to pay taxes now on decades’ worth of past earnings. Surely if they knew this rule, the couple would have arranged their business differently.
Here there is an awkward truth of taxation. Unexpected, “just this once and we’ll never do it again” wealth taxes are economically efficient. The problem of taxation is disincentives. If you announce a wealth tax in the future, people respond by not accumulating wealth. They go on round-the-world private jet tours instead of investing and building companies. But if you tax existing wealth, and nobody knew it was coming, there is no disincentive.
This is, however, one of the most misused propositions in economics. That “just this once and never again” promise isn’t credible: if the government did it once, why not again? And it feels horribly unfair, doesn’t it, grabbing wealth willy-nilly? Unpredictability is not something responsive, rule-of-law democracies can or should do.
In any case, as with corporate income, taxing investment income also makes no sense. You earn money, pay taxes on it, and invest it. If you choose to consume later rather than now, why pay additional tax on it? One of the main don’t-distort-the-economy propositions is that we should give people the full incentive to save by refraining from taxing investment income.
So why do we tax investment income? Again, because once you tax income, you have to start plugging holes. Many people can shift labor income to investment income. If you run a business, don’t take a salary but pay yourself a dividend. If you’re a consultant, incorporate yourself and call it all business income. In the 1980s, even cab drivers incorporated to get lower tax rates.
A more meaningful tax
The income tax is the original sin. Taxing income made no sense on an economic basis. The government only did it because it was easy to measure and grab, at least before people started inventing a century’s worth of clever schemes to redefine “income.” It has led inescapably to more sins, such as the corporate tax and the tax on investment income. And now the repatriation tax on accumulated foreign earnings.
What’s the solution? Well, duh. Tax consumption, not income or wealth. Get the rich down at the Porsche dealer. Leave alone any money reinvested in a company that is employing people and producing products. Now we can do it. And we can then throw out the income tax, corporate tax, and estate tax.
Income is really meaningless. You earn a lot of income in your middle years, but little early and late. The year you sell a house, you’re a millionaire, but then you’re back to low income the rest of the time. Yet the US government hands out more and more benefits on the basis of income as if it were an immutable characteristic. It is not. Consumption is a lot more meaningful.
Consumption taxes inspire common objections, but they are easily addressed. One is that the tax rate would have to be very high—in excess of 40 percent to fund current federal, state, and local spending. But if the government spends 40 percent of GDP, taxes have to be 40 percent of GDP. That’s what you’re paying now; we’re just making it more efficient. And a bit more transparent, where voters can decide if this is really what they want. Spreading tax revenues out over numerous different taxes doesn’t make taxation less costly, only more complicated.
Retirees and other long-time savers will complain that they have already been taxed on their income and would now be taxed on the consumption of their savings. But that double taxation is offset by some benefits, such as the absence of the capital gains tax and estate taxes, and the likely market boom if the US were to replace our current tax code with a consumption tax. If the tax is figured into the Consumer Price Index, Social Security will also be adjusted up to account for it. And older people have benefited enormously, at the expense of younger people, from booming house prices, soaring stock prices, and benefit increases. Still, cash heals all wounds. If, on balance, retirees end up being penalized by the implementation of a consumption tax, the government can offset the harm.
A flat consumption tax is not progressive. But it’s easy to make consumption taxes progressive. And not every element of federal policy needs to be separately progressive. If flat taxes pay for immense subsidies, the system as a whole can be as progressive as you like.
Thus, I hope that the Supreme Court does blow up the income tax system. It’s a bloated crony-capitalist mess. Most people suspect that others with clever lawyers are getting away with murder, which is corrosive to democracy. If the friends of the court are right that the tax system will not survive a narrow definition of income, that might be a great thing, not a disaster, as it might force a fundamental reckoning.
We need reform from the ground up. Not every decision taken in 1913 has to last forever. Let the income tax implode, and bring on a consumption tax.
Can Trump replace income taxes with tariffs?
No, and trying would be regressive and harm economic growth.
n the list of untested policy ideas from former President Donald Trump, scrapping the federal income tax and replacing it with revenues from sky-high tariffs on imports is one of the most harmful. Trump floated this fiscal swap when he met with Congressional Republicans last week, but it’s a deeply problematic idea for several reasons. For starters, it would cost jobs, ignite inflation, increase federal deficits, and cause a recession. It would also shift the tax burden away from the well off, substantially increasing the tax burden on the poor and middle class.
If pursued, this policy would antagonize US allies and partners, provoking worldwide trade wars, damaging global economic welfare, and undermining national security. It would also likely destabilize the global financial system.
To be sure, when Trump vents before friendly audiences, one has to take it with a large grain of salt. But a partial substitution of tariffs for income tax revenues is nearly inevitable under a Trump presidency. He has repeatedly proposed increased tariffs, including a 10 percent across-the-board tariff on all trading partners as well as 60 percent or higher tariffs on goods from China. He has also called for extending the tax cuts enacted in 2017, which are due to expire next year, a step that could easily cost as much $5 trillion over ten years. And Trump has suggested further cuts, particularly on the corporate side.1 The dangers of these specific actions are outlined in a recent policy brief here.
But let’s take Trump seriously, because it can be dangerous not to. Exactly how far could Trump take the logic of replacing income taxes with tariffs?
Can tariffs replace the income tax?
Simply put, no. Tariffs are levied on imported goods, which totaled $3.1 trillion in 2023. The income tax is levied on incomes, which exceed $20 trillion; the US government raises about $2 trillion in individual and corporate income taxes at present. It is literally impossible for tariffs to fully replace income taxes. Tariff rates would have to be implausibly high on such a small base of imports to replace the income tax, and as tax rates rose, the base itself would shrink as imports fall, making Trump’s $2 trillion goal unattainable.
A recent Peterson Institute policy brief calculated that revenues from Trump’s 10 percent/60 percent tariff proposals would total about $225 billion per year in current dollars. This figure is certainly an overestimate because it does not account for lower economic growth due to the inevitable economic shocks caused by retaliation against US exporters and the losses suffered by the import-dependent manufacturing sector. Exporters would also be hit by an appreciating dollar, as discussed below.
Here, we use the same technique as in the policy brief to consider revenue but ignore the negative “offset” effects on revenue elsewhere in the system, since we assume the tariff increases are paired with equal and offsetting income tax cuts. Using the same standard import-sensitivity of 1 (which assumes that a 10 percentage point increase in tariffs reduces imports by 10 percent), figure 1 shows the resulting tariff Laffer curve; we also illustrate other import sensitivities in the figure.2 For the assumed import response to the tariff, the rate that maximizes tariff proceeds is 50 percent, and tariff revenues peak at about $780 billion. 3 When tariff rates increase beyond the peak of the curve, tariff revenues actually fall, since the negative effect of reduced imports outweighs the higher tariff rates.
At the revenue-maximizing tariff rate of 50 percent in figure 1, tariff revenues are less than 40 percent of what income taxes bring in. Again, this analysis ignores negative effects on economic growth, which would be dramatic with a 50 percent across-the-board tariff rate, reducing revenues substantially.
Another consideration that comes into play is that the United States already raises about $50 billion from tariffs on imports. That amount reduces the revenue potential of new tariffs relative to figure 1. In addition, a tariff as large as 50 percent would create very large distortions in Americans’ economic activity (moving resources away from sectors where the United States has a comparative advantage and toward sectors where it is less efficient), while increasing tax avoidance and evasion (including shopping abroad, smuggling, lobbying government officials for exemptions, etc.).
What if tariffs are pushed to the limit?
As a thought experiment, let’s continue to ignore growth effects and assume that a sum of $780 billion from tariffs each year could finance a large income tax cut. 4 What would be the consequences of such a fiscal shift?
First, while one could debate the merits of switching from an income to a consumption tax base, tariffs are a particularly distortionary form of consumption tax. Because they only tax imports, tariffs shift the production in the US economy away from things it does well (e.g., export goods like airplanes and light trucks) and toward goods in which the United States has no comparative advantage (e.g., clothing and furniture).
Second, even a straightforward consumption tax has important effects on the distribution of the tax burden, since poorer households save very little and consume more traded goods as a share of their income than do richer households, who save far more and consume relatively few traded goods as a share of their income. In a recent policy brief, we showed that tariff burdens are therefore starkly regressive, even as they make all households worse off.
Imagine Trump pushes his policy to the maximum, raising $780 billion in tariff revenue and cutting income taxes by $780 billion, in proportion to the current income tax burdens of individuals and corporations shown in Cronin (2022). This policy experiment appears revenue-neutral, but it would actually lose revenue because of the contractionary consequences of such high tariffs, which we do not model. However, if such a policy were enacted, the distributional consequences, without considering growth effects, are shown in figure 2.
The consequences of this shift are dramatic. Under such a scenario, the bottom quintile loses 8.5 percent of their after-tax income with no offsetting income tax cut. The middle quintile loses about 5 percent on net, with a small compensating income tax cut that is insufficient to compensate for a larger tariff increase. The top quintile loses 4 percent of income to the tariff increase but is compensated with a 6 percent tax cut, coming out 2 percent ahead. The top 1 percent nets an 11.6 percent increase in after-tax income.
Some have argued that the increased consumption tax burdens might be worth it to workers who benefit from an industrial renaissance due to the protection of high tariffs. Yet neither the economics nor experience supports this view. The US economy is already at full employment, so expanding production in tariffed sectors inevitably draws resources away from other sectors in the economy. This process makes the US economy less efficient, as activity moves toward sectors where productivity and wages are typically lower. At the same time, new shocks will be introduced by the inevitable retaliation by US trade partners alongside the massive disruption to supply chains that 50 percent tariffs would entail. As multiple studies show, the first round of Trump tariffs harmed both job growth and industrial competitiveness. 5
The dollar’s exchange rate would rise, hurting US exports
A less well understood but no less important consequence of these changes is the effect on the dollar’s exchange rate. A range of macroeconomic models predict that permanent tariffs on US imports would cause the dollar to strengthen in the foreign exchange market. Trump has touted the idea that tariffs will reduce the US trade deficit. However, a stronger dollar would add to the trade deficit by making US exports of goods more expensive abroad and making foreign production relatively cheaper. With a 50 percent tariff, the dollar’s appreciation could be massive—a substantial fraction of the huge tariff hike. 6
The dollar’s appreciation after a generalized US tariff increase is necessary to maintain equilibrium in global goods markets. In its absence, there would be an excess supply of foreign goods (and an excess demand for US goods) because a US tariff switches US residents’ demand from imports to American goods. However, a stronger dollar raises the relative international price of US goods, encouraging global consumers and firms to shift away from US exports and toward the products of their own countries. This shift helps to restore the global balance between supply and demand.
But it is not the end of the story. In response to Trump’s tariffs, foreign central banks would feel compelled to cut their interest rates to offset the loss of exports to the United States, also driving dollar appreciation. Anticipating this outcome, global investors would immediately bid up the dollar’s value as they all move to add dollar assets to their portfolios. Those moves, in turn, will make US exports yet more expensive abroad, reducing the global demand for them even more. This destructive cycle would further dampen the increase in US aggregate demand due to US residents switching from imports to (more expensive) substitutes produced at home. That US consumers and businesses would face higher prices than before the tariff, despite a stronger dollar, would further constrain consumption and investment. To be sure, the federal government could try to offset negative demand effects by lowering taxes on individuals and businesses, but the relief would be only partial because of the distributional effects discussed above that favor well-off high-saving households.
As for Trump’s professed goal of reducing the US trade deficit, these factors make such an outcome uncertain. To address persistent trade deficits, the Trump administration might then turn to capital import taxes, as some on his team have suggested. This is a bad idea that would dramatically lower investment, growth, and innovation, as argued in a recent commentary.
Unlike the United States, most countries experiencing currency appreciation benefit from a lower price of imports, which are typically invoiced in major foreign currencies, predominantly the dollar. But the United States does not enjoy that advantage because almost all of its imports are invoiced in its own currency, the dollar. As a result, the US price level would not benefit from a sharp, immediate fall in import prices resulting from the dollar’s strength, so the inflationary impact of a big tariff increase would be severe, and especially severe given that the United States is currently at full employment. Foreign suppliers might lower their dollar prices in time, but such responses would occur slowly. 7
These problems would be compounded if, as is likely, US trade partners retaliated with tariffs of their own. An IMF study focusing on a more limited tariff increase than the one Trump is proposing—a tariff increase of 20 percent on goods from East Asia only—projects that US GDP contracts by more than a percentage point in a scenario with retaliation by trade partners. Based on that finding, Trump’s far more ambitious tariff proposals could spark a generalized trade war and severe stagflation at home and abroad.
Trump’s tariff and tax ideas are a dangerous, backward move to the 19th century
Trump’s latest musings may be just that—musings. But his statements show he is serious about shifting the revenue base from income to imports, building on his prior record of substantially higher tariffs and large, regressive tax cuts. Leaving aside his dreams of replacing the income tax, his concrete tariff proposals enunciated so far would affect more than $3 trillion in trade, nearly 10 times the trade targeted by his China trade war.
By contrast, while President Biden has kept most of Trump’s tariffs, his recently announced new tariffs affect only $18 billion in trade, less than 1/150th of the trade Trump’s proposals would target. Biden’s trade policies are more narrowly targeted at particular strategic aims rather than an embrace of tariffs writ large.
This all-out embrace of higher tariffs is dangerous. It is bad fiscal policy, since tariff revenues will fall far short of candidate Trump’s tax cutting ambitions, and switching the fiscal burden from the income tax toward tariffs harms most Americans, benefiting only those at the top of the income distribution. Beyond these fiscal effects, high tariffs are likely to worsen macroeconomic imbalances, harm exports, diminish economic growth, and create new economic shocks, including higher inflation.
When the 16th Amendment to the US Constitution was ratified in 1913, the United States moved from a public revenue model based on tariffs to one reliant on a graduated income tax. Not only did this make the tax structure more progressive, it also opened the US economy and positioned the country for the global leadership role it would assume in the following century. Trump’s ideas about tariffs and taxes return the United States to the 19th century, a backward move that is dangerous and regressive.
Trump’s Plan to Eliminate Income Tax: 7 Things to Know Now
The potential consequences of eliminating taxes in favor of Trump tariffs could impact everything from inflation to Social Security and might give some U.S. taxpayers pause.
Since the start of his second term, President Donald Trump has repeatedly proposed abolishing federal income tax in favor of tariff revenues. As Kiplinger has reported, he has spoken about jettisoning taxes completely and mused about eliminating tax on the first $150,000 of income.
In a November Thanksgiving video, Trump said, “Over the next couple of years, I think we’ll … be cutting income tax — could be almost completely cutting it, because the money we’re taking in is going to be so large.”
Maybe you’re someone who thinks eliminating the tax is a good idea. Who likes paying income taxes? Not to mention the extra cash that would be in your pocket if you didn’t have to pay taxes on your hard-earned income.
But while eliminating income tax might sound appealing, some of its consequences might make you reconsider.
Income taxes brought in about $2.7 trillion to the federal government in 2025, according to the U.S. Treasury. That amount towers over tariff revenues of only $257 billion raised this year. A big question is how the U.S. government would make up the difference.
Something else to consider is that for every country to which the U.S. imposes a tariff on imports, each of those nations could impose a retaliatory tariff on U.S. exports. That means some consumer goods might be priced out of buying range or not available on the market. Depending on what product you have your sights on, that could put a crimp in your shopping budget.
Basically, if Trump eliminates federal income tax, the fallout would likely be wide-ranging and could have profound impacts on everyday life. Here are seven key things you need to know.
What happens if Trump eliminates income taxes?
1. Inflation. Tariffs raise the cost of imported goods, and the U.S. is a net importer of consumer goods. To help offset the loss of the income tax, tariff rates would have to skyrocket to levels “well over 60%,” as Douglas Holtz-Eakin, president of the policy organization American Action Forum, told Louis Jacobson of PolitiFact. Imports are likely to diminish, forcing tariff rates to rise higher.
Everyday consumer items such as electronics, clothes and cars would likely become further out of reach for U.S. buyers.
2. Impact on domestic industries. Some domestic industries stand to gain from eliminating federal income tax.
The steel and aluminum industries have reportedly complained for decades that cheap imports undercut domestic production. Without imports from China and Latin America, the U.S. textile and garment manufacturing industries might revive due to reduced competition.
Still, it’s a mixed bag. Besides the steel and aluminum industries, U.S. automakers could benefit from higher tariffs on foreign cars and parts. But they import many of the components built into their own autos, and they’ll likely pay tariffs on those. U.S. appliance makers such as Whirlpool and smaller electronics manufacturers could see benefits. However, they also rely on global supply chains and will be impacted by foreign tariffs.
3. Food. The U.S. imports a significant amount of fresh produce to guarantee a year-round supply. Although we might not realize it, much of the fruit we eat is seasonal.
Grapes are an example. In the U.S., grapes aren’t normally available in the winter months. The grapes you buy in December and January come from South America. But if grower nations impose retaliatory tariffs, it could likely make grapes and other seasonal fruits unattainable, due to price or availability.
Not just tariffs: Unintended costs of a U.S. government cash shortfall
Although not a direct result of the U.S. imposing tariffs on imported goods, the following are consequences of the inability of tariff revenues to cover the loss of income taxes.
4. Social Security and Medicare. These programs wouldn’t disappear because they’re funded in significant part by other sources.
But when there are revenue shortfalls, federal income taxes help to cover the gap (PDF). What it means is that if there were no federal income tax in the U.S., monthly Social Security benefits could shrink, and Medicare premiums could rise.
5. Defense. Unlike Social Security and Medicare, defense spending has no backstop. It lives and dies on general revenues. The government could borrow to maintain defense spending but would sharply increase the deficit.
If Trump eliminated federal income taxes, the government would likely have to scale back operations (PDF), reduce troop levels, delay or eliminate weapons programs and possibly more.
Additionally, several policymakers suggest that from a global perspective, a weakened defense budget would likely reduce U.S. influence abroad, including limiting NATO commitments, and slow the modernization of military technology.
6. National Debt. Debt interest payments, such as defense, are funded by federal income tax revenue. The immediate threat of eliminating interest payments is the risk of the government’s default.
According to several reports, the economic fallout could be dire, including things such as spiked interest rates, a weakened dollar and the destabilization of financial markets worldwide.
7. Discretionary spending programs. These are the types of government expenditures that we take for granted. Infrastructure projects such as highways, bridges, airports and others could stall without sufficient revenue to fund them.
Federal support for education and affordable housing could disappear, widening the inequality between the wealthier and poorer regions of the United States.
Agencies such as NASA, and the National Institutes of Health (NIH) depend on discretionary spending. Without it, funding for medical research and technological innovation could shrink, reducing U.S. leadership in science and slowing progress in health and technology.
These are only a few of the programs affecting our daily lives that could be adversely impacted if federal income taxes went away.
Eliminate federal taxes? Bottom line
Eliminating federal income tax might sound like a good idea on the surface. Some taxpayers might have visions of dollars fattening their wallets.
But data and studies show that more tariffs will likely raise the cost of everyday consumer goods, maybe to the point of unaffordability. Other impacts, though indirect, could also conspire to keep taxpayer wallets flat.
Resources
–https://rooseveltinstitute.org/blog/tariffs-cant-replace/, “Tariffs Can’t Replace the Income Tax.” By Chye-Ching Huang;
–https://taxpolicycenter.org/taxvox/we-may-be-watching-death-federal-income-tax, “We May Be Watching The Death Of The Federal Income Tax.” By Howard Gleckman;
–https://www.pbs.org/newshour/economy/trump-has-said-tariff-revenue-may-allow-americans-to-stop-paying-income-taxes-the-math-doesnt-add-up, “Trump has said tariff revenue may allow Americans to stop paying income taxes. The math doesn’t add up.” By Louis Jacobson;
–https://www.chicagobooth.edu/review/its-time-us-abolished-income-tax, “It’s Time the US Abolished the Income Tax.” By John H. Cochrane;
–https://www.piie.com/blogs/realtime-economics/2024/can-trump-replace-income-taxes-tariffs, “Can Trump replace income taxes with tariffs? No, and trying would be regressive and harm economic growth.” By Kimberly Clausing and Maurice Obstfeld;
–https://www.kiplinger.com/taxes/tax-law/trump-plan-to-eliminate-income-tax-what-to-know-now, “Trump’s Plan to Eliminate Income Tax: 7 Things to Know Now: The potential consequences of eliminating taxes in favor of Trump tariffs could impact everything from inflation to Social Security and might give some U.S. taxpayers pause.” By Roxanne Bland;