Trump’s recent proposals to replace the federal income tax with new tariffs and eliminate taxes on tipped income have stirred significant debate. While these ideas aim to simplify the tax system and boost competitiveness, they lack the seriousness and merit required for fundamental tax reform. The implications of such changes could be far-reaching and detrimental to American workers and businesses.
The Math Doesn’t Work
The individual income tax raises significantly more revenue than tariffs. In 2021, American taxpayers reported nearly $15 trillion in income, paying $2.2 trillion in taxes. In contrast, total imports were $3.4 trillion, with tariff revenues amounting to just $80 billion. To replace the $2 trillion raised by the individual income tax with tariffs would necessitate astronomically high tariff rates, which is unrealistic. Noncompliance and behavioral responses would further reduce potential revenue.
Tariffs Were a Main Source of Revenue for a Drastically Smaller Government
Historically, tariffs were a primary revenue source when federal government spending was a small fraction of GDP. Today, government spending is much higher, accounting for 22.7% of GDP in 2023. Major programs alone consume more than 14% of GDP, making it impossible to rely on tariffs for current spending levels.
Higher Tariffs Would Raise Costs for Americans
Tariffs increase costs for American consumers and businesses. When the U.S. imposes a tariff, the importer pays it, not the foreign country or business. Studies show that U.S. importers bear nearly 100% of the tariff burden, leading to higher prices for consumers and businesses.
Higher Tariffs Would Harm American Workers and Businesses
Tariffs have a net negative impact on the economy. They can lead to higher prices for parts and materials, reducing private sector output, or higher consumer prices, reducing after-tax income. Alternatively, a stronger dollar could make it harder for exporters to compete globally, lowering revenues and output.
Tariffs and Income Tax Exclusions Are Not Tax Reforms
Tax policy changes should aim to boost growth and competitiveness. While reducing the individual income tax burden is part of fundamental reform, exempting specific income categories is not a principled approach. Lowering the corporate income tax rate by one percentage point could improve investment incentives but would not offset the damage caused by tariff hikes.
Policymakers should reconsider Trump’s tariff and tax ideas to avoid squandering opportunities for meaningful tax reform.
