In his State of the Union Address, President Trump repeated a frequent, and dramatic, promise: “As time goes by, I believe the tariffs, paid for by foreign countries, will, like in the past, substantially replace the modern-day system of income tax, taking a great financial burden off the people that I love.”
Trump often has said he wants to return to a 19th century revenue system that was built on import duties. But he is profoundly wrong when he claims his own tariffs will get him there.
Not Enough Revenue
First, import taxes, in any conceivable form, raise vastly less revenue than the income tax. The Congressional Budget Office estimates the US will collect about $40.5 trillion in corporate and individual income taxes over the next decade (roughly $35.5 trillion in individual income taxes and about $5 trillion in corporate income levies).
Trump’s broad-based tariffs that have been declared illegal by the Supreme Court would have raised about $2.2 trillion over the next 10 years, according to the Tax Policy Center. But even they would have offset a bit more than 5% of the income tax.
Trump’s surviving tariffs plus those he’ll use to replace those now prohibited by the High Court would generate much less: About $960 million over the next decade, or roughly 2% of the income tax.
In One Pocket, Out The Other
Second, tariffs are not “paid by foreign countries,” as the President frequently asserts. They are paid almost entirely by US businesses and consumers. Thus, overall, any tariff revenue the government does collect comes from the same people and firms who pay income taxes. Or to put it another way, to the degree that import duties could offset any income taxes, all the government would be doing is taking money from your left pocket and putting it in your right.
But there would be one difference, and that is: Who benefits?
While progressives hate to admit it, the income tax is quite progressive so that low- and middle-income people pay a smaller share of their income in taxes than high-income people.
On the other hand, tariffs are regressive. Because low- and moderate-income households spend a larger share of their incomes than those with higher incomes (you can buy only so many yachts), they pay a bigger percentage of that income in tariffs, on average, than those at the top.
The Tax Policy Center estimates that Trump’s latest, post-Supreme Court tariffs would boost average federal tax rates by 1.1% for the lowest-income households, 1% for middle-income households and by 0.6% for the highest income 0.1 percent (those making $5 million or more).
Over Time?
Well, you might say, Trump has modified his promise by carefully adding the qualifier, “As time goes by.” Perhaps he could find a way to raise future tariff rates even higher, and thus further lower income taxes.
There are two problems with that argument: One, the Supreme Court has constrained his ability to raise import taxes. The replacement levies he announced last week can remain in place only for 150 days. And it will not be easy for Trump to use other authorities to raise tariff rates substantially from the levels he announced in the past.
The second problem is the Laffer Curve. That is, economists believe that once government raises tax rates too high, levies generate ever-lower revenue because taxpayers stop engaging in the taxed behavior.
For example, if labor is taxed at 100%, people will stop working. And while economists argue over the correct revenue-maximizing rate for various taxes, few dispute the principle. And it surely applies to import taxes. As the rate rises, people are less likely to buy imported goods.
That, in fact, is what Trump often says he wants from tariffs. Among his many goals: To convince Americans to shift their consumption from imports to products made in the US. He wants Americans to stop buying a South Korean-made refrigerator and, instead, purchase one made in America.
But the more they do that, the less the government will collect in tariffs.
In addition, because Trump has imposed tariffs on foreign parts and materials that are used by US manufacturers, those import levies reduce business profits and, in turn, business taxes. The higher the rate, the lower their profits and the less tax they pay.
Eventually, they may source those materials from producers in the US or in lower-tariffed countries. But they’ll pay higher prices, make lower profits, and pay fewer taxes.
In the end, there is no plausible tariff that could come even remotely close to replacing the income tax, now or in the future.
The federal government might consider other forms of consumption taxes that could live side-by-side with a much lower income tax. Well-designed value-added taxes or cash-flow taxes all could fit the bill. Even wildly unfashionable carbon taxes could do it. But not tariffs.
Read the full article here