CNN
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President Donald Trump on Sunday night reiterated an extraordinary ambition he and members of his administration have voiced from time to time throughout his young second term: One day, Americans won’t pay any more income tax, and you’ll have Trump’s tariffs to thank for it.
“We’re going to make a lot of money, and we’re going to cut taxes for the people of this country,” Trump said before boarding Air Force One for his return from Pope Francis’ funeral in Rome. “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.”
No one likes paying income taxes. But any plan to replace them with tariffs as a source of government revenue would be riddled with problems.
To start, tariffs would need to be exceedingly high — significantly higher than the already historic levels at which the Trump administration has set them today.
The federal government raises about $3 trillion a year from income taxes. The United States also happens to import around $3 trillion worth of goods annually. So that means tariffs would have to be at least 100% on all imported goods for the levies to replace income taxes, said Torsten Slok, chief economist at Apollo Global Management, in a note to investors.
The United States’ effective tariff rate now stands at 22.8%, according to Fitch Ratings. So to take the place of income taxes, tariffs would need to be more than four times higher than they are now — and America’s new tariff rate is already by far the highest of any developed country and has threatened to plunge the US and global economies into a recession.
But replacing all that tax revenue is not even as simple as doubling the price of everything that comes into America, Slok notes: As prices rise, demand trails off. That’s why America’s largest companies this earnings season have said that Trump’s trade policies are raising costs and leading consumers to spend less on practically everything — from airline tickets to burritos.
So the government would have to find the right fulcrum point to balance its revenue needs with consumer demand. That could mean much higher prices.
“The challenge is that it is unclear what will happen to sales if all imported products double in price,” Slok said. “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 other words: To fully replace income taxes, tariffs may need to be set so high that they quadruple the price of everything that comes into the country from abroad.
Trump in an interview with Time last week suggested that tariff rates as high as 50% a year from now could be considered a “total victory,” because “the country will be making a fortune.”
Even if consumers were to accept much higher prices in exchange for zero income taxes, the plan still faces another potential problem: One of Trump’s stated reasons for higher tariffs is to incentivize companies to make stuff in America. If that happens en masse, and imports fall through the floor, where will America’s revenue come from?
Trump highlighted that problem before boarding Air Force One Sunday. The massive 145% tariff America placed on most Chinese goods is so astronomically high that trade with China has come to a virtual standstill. The means basically no one is paying that tariff — America isn’t getting any revenue that can replace income taxes.
“You know, people talk about going cold turkey with China, just forget about it,” Trump said. “Now they’re not doing any business with us. You know, because, not because of them, because of me, because at 145% you can’t do business.”
Although corporate income taxes may help make up some of the difference in lost revenue, businesses’ income taxes make up just 6% of all US tax revenue compared with 41% from individuals’ income taxes, according to the Tax Foundation. And Trump wants to lower the corporate tax rate.
The notion that tariff revenue could fully replace income taxes isn’t new. Commerce Secretary Howard Lutnick has repeatedly said that was one of the administration’s objectives.
“Donald Trump announced the External Revenue Service, and his goal is very simple: to abolish the Internal Revenue Service and let all the outsiders pay,” Lutnick told Fox News in an interview in February.
Trump acknowledged Sunday that income tax elimination is a goal but not necessarily one that could be achieved overnight.
“I’ll be able to reduce taxes to a very large extent and maybe almost completely,” Trump said.
The president said his administration would begin by cutting taxes for people who make less than $200,000 a year.
But he acknowledged that tariff revenue would also need to be used for purposes other than replacing income taxes. For example, Trump said tariffs would need to be used to pay down America’s debt, too.
“Now, we have a lot of debt that’s been left to us, you know, unfortunately, over many years,” Trump said. “We’ll take care of that with the tariffs.”
