President Donald J. Trump reiterated an audacious goal on Sunday evening: eliminating federal income taxes and replacing them with revenue from tariffs. Speaking before boarding Air Force One after attending Pope Francis’ funeral in Rome, Mr. Trump suggested that his administration’s trade policies could generate enough revenue to phase out income taxes entirely.
“We’re going to make a lot of money, and we’re going to cut taxes for the people of this country,” Mr. Trump said. “It may take a while, but it’s possible we’ll do a complete tax cut, because I think the tariffs will be enough to cover all of the income tax.”
The idea, while appealing to those weary of tax season, faces formidable economic and practical hurdles. Replacing income tax revenue with tariffs would require astronomical tariff rates, potentially destabilizing the economy and driving up consumer prices.
The federal government collects roughly $3 trillion annually from income taxes, according to the Congressional Budget Office. The United States imports approximately $3 trillion in goods each year, meaning tariffs would need to average 100% on all imports to match current income tax revenue, said Torsten Slok, chief economist at Apollo Global Management, in a note to investors.
Current U.S. tariffs, already among the highest in the developed world at an effective rate of 22.8% according to Fitch Ratings, would need to quadruple to meet this threshold. Such an increase could exacerbate inflationary pressures and risk tipping the U.S. and global economies into recession, as evidenced by recent corporate earnings reports citing higher costs and reduced consumer spending on goods from airline tickets to fast food.
Raising tariffs to such levels is not as simple as doubling import prices. Higher prices typically reduce demand, shrinking the volume of imports and, consequently, tariff revenue. Mr. Slok estimated that tariffs might need to reach 200% to compensate for this decline, potentially quadrupling the cost of imported goods.
Mr. Trump, in a recent Time magazine interview, described tariff rates as high as 50% within a year as a “total victory,” predicting that “the country will be making a fortune.” Yet, even this level falls far short of the rates needed to replace income taxes.
A Contradictory Goal
The plan’s challenges extend beyond economics. Mr. Trump has championed tariffs to encourage domestic manufacturing, aiming to reduce reliance on imports. But if imports plummet, so would tariff revenue, undermining the plan’s foundation. This tension was evident in Mr. Trump’s remarks on Sunday, when he noted that a 145% tariff on Chinese goods has virtually halted trade with China, generating little revenue.
“You know, people talk about going cold turkey with China,” Mr. Trump said. “Now they’re not doing any business with us, because at 145%, you can’t do business.”
Corporate income taxes, which account for just 6% of federal revenue compared with 41% from individual income taxes, according to the Tax Foundation, are unlikely to bridge the gap. Mr. Trump’s proposal to lower corporate tax rates further complicates the math.
Commerce Secretary Howard Lutnick has echoed the goal of replacing income taxes with tariffs, framing it as a shift to an “External Revenue Service.” In a February Fox News interview, he said Mr. Trump’s aim was “to abolish the Internal Revenue Service and let all the outsiders pay.”
Mr. Trump acknowledged on Sunday that eliminating income taxes might not happen immediately. He proposed starting with tax cuts for those earning less than $200,000 annually while using tariff revenue for other priorities, such as reducing the national debt.
“We have a lot of debt that’s been left to us, unfortunately, over many years,” Mr. Trump said. “We’ll take care of that with the tariffs.”
Economic and Political Realities
Economists warn that such high tariffs could lead to widespread price increases, disproportionately affecting lower- and middle-income households. The complexity of balancing revenue needs with consumer demand and trade dynamics underscores the plan’s impracticality.
While Mr. Trump’s vision taps into populist frustration with taxes, its execution would require navigating a labyrinth of economic trade-offs. For now, the promise of a tax-free America remains more aspirational than achievable.
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