Eliminate The Income Tax with Tariffs?

The idea of eliminating the income tax is far from practical. Recently, former President Donald Trump suggested replacing the federal income tax with tariffs on imports. In a private meeting with GOP lawmakers, Trump floated the idea of a so-called “all-tariff policy.” Broadly, the concept aligns with Trump’s long-standing protectionist trade agenda.

Tariffs can be thought of as taxes imposed on imported goods. They are ostensibly paid by importers. But the costs are typically passed down to consumers through higher prices. When tariffs are applied broadly, as Trump appears to be suggesting, the price increase affects a similarly broad set of goods. Retailers and wholesalers will pass on those added expenses to consumers, leading directly to higher prices.

Source: https://www.financialexpress.com

Such price hikes in everyday goods disproportionately impact low and middle-income households. This converts a progressive income tax into a regressive tax, akin to a sales tax. As such, in the near term, the only groups benefiting from the elimination of a broad-based income tax and the ratcheting up of tariffs are those folks at the higher end of the socioeconomic spectrum.

Everyday necessities, like clothing, food, and household goods, as well as significant purchases like electronics, vehicles, and equipment, will immediately increase in price. Even goods entirely produced domestically, and thus not directly subject to tariffs, may see price hikes—as demand outstrips supply.

For example, if a broad 25% tariff on all imported goods is placed, the cost of every imported good will go up by at least 25%. Retailers and manufacturers will have passed that added expense on to consumers. This will cause consumers to choose domestically-produced lower cost goods, to the extent they are available. As demand shifts to American made goods, in the absence of a matching level of increased production in every sector of the economy all at once, there will be more demand for domestic goods than supply. Prices will increase just as they did during past supply chain crunches.

In essence, tariffs act as a regressive tax. They were broadly eliminated in favour of an income tax in the late 19th century for just that reason. Their regressive nature means that lower and middle-income consumers would bear the brunt of the cost of financing the public services.

In 2024, the U.S. federal government has collected $3.29 trillion. In 2023, imports totaled approximately $3.9 trillion. A back of the envelope math will quickly illustrate that replacing the former with a tax on the latter is infeasible. An average tariff rate of nearly 85% on all imports would be required to replace income tax revenue with tariffs.

Export countries would unquestionably retaliate with their own tariffs, potentially leading a worldwide trade wars that further increase the costs of goods and further damaging the global economy. The fluctuation in import volumes based on economic conditions would make tariff revenue unreliable compared to the comparatively more stable income tax system—potentially leaving the federal government unable to fund basic services.

The U.S. has been there before. The Smoot-Hawley Tariff Act of 1930 raised U.S. import duties with the goal of protecting American farmers and other industries from foreign competition. The Smoot-Hawley Tariff Act is now widely blamed for worsening the severity of the Great Depression in the U.S. and around the world. The law is commonly referred to as the Smoot-Hawley Tariff or the Hawley-Smoot Tariff. It was sponsored by Sen. Reed Owen Smoot (R-Utah) and Rep. Willis Chatman Hawley (R-Ore.).

• The Smoot-Hawley Act was created to protect U.S. farmers and other industries from foreign competitors.

• The Smoot-Hawley Act increased tariffs on foreign imports to the U.S. by about 20%; at least 25 countries responded by increasing their own tariffs on American goods.

• Global trade plummeted, contributing to the ill effects of the Great Depression.

• Prior to signing the Act, more than 1,000 economists urged President Hoover to veto it.

• Hoover's successor, President Franklin D. Roosevelt worked to reduce tariffs and was given more authority to negotiate with heads of state under the Reciprocal Trade Agreements Act of 1934.

So, the dumb and demented Trump is at it again. And the Democrats have a “ghostly” Joe Biden who couldn’t finish sentences at the last debate. When will America wake-up, two silly clowns to choose from? It impacts the world not just America!

References:

Can Trump eliminate the income tax? Maybe with an 85% tariff, Andrew Leahey, Forbes, 14 June 2024

What is the Smoot-Hawley Tariff Act? History, Effect and Reaction, Will Kenton, Investopedia, updated 23 May 2024-07-02