In recent discussions, President Donald Trump suggested that there is a possibility of replacing federal income tax revenue with tariff income. This statement has sparked a wave of skepticism among economists and policy experts who question the viability of such a shift. They make the important point that tariff revenue is dwarfed by federal income tax revenue. This begs the question of how feasible the proposal actually is.
No government in history has ever collected taxes on more than $20 trillion in incomes. This increase raises significant dollars by turbocharging the income tax system. By comparison, tariffs collected from imported goods amount to an extremely limited financial base. In 2023, the U.S. imported approximately $3.1 trillion worth of goods, yet economists like Kimberly Clausing, a senior fellow at the Peterson Institute for International Economics, emphasize that “the tariff tax base is a lot smaller than the income tax base.”
Concerns Over the Feasibility of Tariff Revenue
As Clausing and other economists make clear, imposing higher tariff rates can actually reduce intended tariff revenue. Several economic factors are behind this impending drop in the U.S. government’s tax collections. As Moody’s chief economist Mark Zandi told CNBC last week, these revenue projections are completely unrealistic and in fact nonsensical. He stated that reaching between $100 billion to $200 billion from tariffs would be “pretty lucky,” adding that higher figures “are not even in the realm of possibility.”
The skepticism surrounding tariff revenue stems from the understanding that direct tariff income can be diminished by behavioral changes and other economic factors. Zandi noted that the administration seems to think it can raise revenue without any additional tariff increases by just increasing the average tariff rate. He is skeptical of this reasoning. The truth, experts argue, is that such assumptions simplify and misrepresent the complicated economics involved and how the market would react to a major hike in tariffs.
The Peterson Institute for International Economics came out with a great report focused on the interaction between tariffs and income taxes. The results suggest tariffs are sometimes increased because they are expected to raise government revenue. They are certainly not meant to supplant the robust income tax revenue we’re all still counting on. The report points out how economists are calling for wildly differing figures for new tariff revenue. They can’t all agree that tariff revenue is insufficient in comparison to income tax.
What The Author Thinks
Replacing federal income tax revenue with tariff income is an impractical proposal that fails to account for the economic realities of tariff revenue limitations. The skepticism from economists is well-founded, as tariff income is nowhere near sufficient to replace the vast sums collected from income taxes. Even with tariff rate increases, the effects of consumer behavior, market dynamics, and trade relations make such a shift unrealistic. This proposal oversimplifies complex economic interactions and could lead to unintended negative consequences.
Featured image credit: Simon R. Minshall via Pexels
Follow us for more breaking news on DMR