Why Experts Say Trump Plan To Replace Income Taxes With Tariffs Is ‘Impossible’
Written by
Andrew Lisa
Edited by
Cory Dudak
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
President Donald Trump campaigned on tariffs as the central thesis of his trade policy, and wasted no time imposing them on friend and foe alike after taking office.
However, the “Liberation Day” implementation of nearly universal import duties triggered steep stock market losses and revealed the administration’s fundamental misunderstanding of how deeply and potentially disastrously the bond market is tied to import tariffs.
Public and political pressure forced Trump to delay most of his new tariffs for three months, with the notable exception of China. He has stated that, once implemented in full, he expects the windfall from import duties to be massive enough to replace the federal income tax.
However, at least one economist says the numbers simply don’t add up.
‘A Complete Tax Cut’
CNN quoted Trump as saying, “We’re going to make a lot of money, and we’re going to cut taxes for the people of this country. It’ll take a little while before we do that, but we’re going to be cutting taxes, and it’s possible we’ll do a complete tax cut, because I think the tariffs will be enough to cut all of the income tax.”
It Would Require 100% Tariffs on Every Import — at Least
Torsten Sløk, chief economist at Apollo Global Management, believes Trump’s plan sounds nice — after all, no one wants to pay income taxes — but that basic arithmetic exposes it as an economic pipe dream.
He wrote in a note to investors that income taxes currently raise roughly $3 trillion, and that total U.S. imports also combine for approximately $3 trillion. Therefore, replacing income taxes with import duties would require at least 100% tariffs on all imported goods.
In Reality, It Would Probably Be More Like 200%
China is producing well-built, practical and cheap electric vehicles. You’ve never seen one on American roads because former President Joe Biden imposed a 100% tariff on Chinese EVs to protect the U.S. auto industry from competition it can’t currently beat.
This is relevant because it proves a basic fact about trade policy: When prohibitively high tariffs slow or stop imports, the importing nation never collects the duty.
According to vice president of federal tax policy at the Tax Foundation Erica York, the notion of tariffs replacing income taxes flies in the face of pure numbers.
“It’s mathematically impossible to do that,” York said, as current tariffs account for a mere $170 billion in annual revenue according to Tax Foundation estimates. In addition, reduced demand for goods at higher price points would mean the money brought in would be nowhere close to the amount of federal income taxes paid in the U.S. Essentially, said York, “given higher prices result in lower sales, it may require as much as 200% tariffs on all imported goods for the total tariff revenue to replace income taxes.”
In short, the real-world impact of Trump’s tariff policy will soon be revealed, but it probably won’t get you off the hook with the IRS.
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
More From GOBankingRates
Sources
- CNN, “Trump says he’ll eliminate income taxes. There’s a problem with that.”
- Apollo, “Challenging to Replace Income Taxes with Tariffs”
- NPR, “What Biden’s tariffs on Chinese EVs and other products mean for U.S. consumers, jobs.”
