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Goodbye Income Tax and Hello Tariffs? Weighing Trump’s Plan

The dollars and cents of abolishing the income tax and imposing tariffs.

by | Jun 18, 2024 | Articles, Good Reads, Opinion, Taxes

Will former President Donald Trump return the US tax code to where it was before 1913? The presumptive Republican presidential nominee briefly floated the idea of putting the kibosh on the income tax and replacing it with a tariff. While an unlikely public policy proposal, it does generate exciting possibilities for the United States economy and the millions of people who see their hard-working dollars and cents confiscated by Uncle Sam every paycheck.

Various media reports have suggested that the 45th president proposed implementing an “all tariff policy” that would prompt Washington to ditch the income tax. He reportedly touched upon the subject in a meeting with GOP lawmakers at the Capitol Hill Club in the nation’s capital on June 13.

Rep. Thomas Massie (R-KY) confirmed the reports, writing on X that “Trump briefly floated the concept of eliminating the income tax and replacing it with tariffs.” Rep. Marjorie Taylor Greene (R-GA) also corroborated the reporting on social media.

Brief History of the Income Tax

Before 1913, the federal government did not maintain an income tax, though there was a brief period during the Civil War when there were two income tax brackets of 3% and 5%. Tariffs on manufactured goods accounted for as much as 95% of Washington’s revenues. By the early 20th century, there was an appetite to say goodbye to these import levies because of the immense industrial expansion that no longer required lawmakers to shield domestic industry from foreign competition. Instead, officials introduced an income tax that only impacted 2% of the population, with rates between 1% and 6%.

Of course, as the government grew larger over the years, politicians extracted more wealth from millions of taxpayers in all income brackets. Today, the income tax has become a major source of revenue generation for the United States, and abolishing the penalty would force policymakers to consider their options, including 100% tariffs on nearly all imports that arrive on America’s shores.

The Reaction

The real estate billionaire mogul’s tax policy proposal was rebuked by many. Treasury Secretary Janet Yellen criticized the plan as harming working-class Americans and US businesses and agreed that it would not be “remotely feasible.” She added: “It would require tariffs well over 100 percent.” CNBC contributor Ron Insana argued that this was Trump’s “’be careful what you wish for moment” because replacing the income tax with tariffs on imports “could rattle” the US economy amid various unintended consequences.

Ultimately, opposition came down to two things. First, abandoning the income tax and implementing an all-tariff policy would weigh on low- and middle-income households and primarily benefit the wealthy. Second, repealing the 16th Amendment would leave a Godzilla-sized hole in the $7 trillion federal budget, which is primarily funded through three mechanisms: payroll taxes, corporate taxes, and financed by deficits.

Weighing the Advantages and Drawbacks

Last year, the income tax generated approximately $2.2 trillion in revenues for the federal government. The Monthly Treasury Statement suggests officials anticipate the policy will create roughly $2.5 trillion in receipts this fiscal year. By comparison, the US imports nearly $4 trillion in goods and services. In 2023, the federal government received about $80.3 billion in tariff revenue, accounting for about 1% of total tax receipts.

The former president, who referred to himself as “Tariff Man,” has previously suggested instituting a 10% across-the-board tariff. Washington would earn about $400 billion a year in revenues from this plan if nothing changes in global trade. Indeed, crunching the numbers and carrying the one would reveal $4 trillion in revenues for Republicans and Democrats to spend on welfare and warfare should Trump’s likely off-the-cuff comments become official policy.

Let’s say the income tax is abandoned and the tariff is installed, there would be issues of conflict, particularly on the inflation front. A recent study by the left-leaning Center for American Progress suggests the tariff policy proposal would cost consumers around $1,500 per year. For example, a tax on food and clothing imports would ding Americans by $80 and $70 per year, respectively.

Then there are the geopolitical ramifications. If Washington agreed to a 100% all-tariff public policy, what would prevent China or Europe from retaliating with their own levies and restrictions? Put simply, there would be an outright worldwide trade war that would also reignite price pressures.

Fiscal Reality

Conservative economists and groups contend that introducing a 10% flat income tax would be a more realistic approach to altering current tax policy. No matter how much the deck chairs are rearranged, Washington still hangs off the fiscal cliff. The US does not have a revenue problem; it has a spending problem. Consider this. In May, 80% of individual income taxes collected went to service the national debt. The US government collected $129.618 billion in May and made $103.045 billion in interest payments. With the national debt eyeing $50 billion in the coming years and Washington running perpetual $1 trillion annual deficits without a recession, searching for new or improved revenue tools might be a futile endeavor.

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