Trump Floats Radical Swap of Income Tax for Tariffs
Economists warn the proposal is fiscally unworkable and would shift the tax burden to consumers through higher prices on imported goods, sparking inflation fears.
Former President Donald Trump has floated a radical overhaul of U.S. fiscal policy, suggesting the federal government could “completely” or “substantially” cut income taxes by replacing the lost revenue with steep tariffs on imported goods. The proposal, a cornerstone of his economic message, has been met with significant skepticism from economists who warn it is mathematically unfeasible and would likely trigger higher inflation and global trade wars.
The core of the plan involves a fundamental shift in how the U.S. government is funded, moving away from taxing domestic income and toward taxing foreign goods. However, the numbers highlight the scale of the challenge. In fiscal year 2023, the federal government collected approximately $2.18 trillion from individual income taxes. By contrast, revenue from customs duties, or tariffs, amounted to just $80.3 billion, a figure representing less than 4% of income tax collections.
Analysts at the Tax Foundation have called the idea of a one-for-one replacement "mathematically impossible," stating it would require "astronomically high tariff rates" on a much smaller tax base. The Peterson Institute for International Economics (PIIE) echoed this sentiment, calculating that even a new 10% universal tariff combined with a 60% tariff on Chinese goods would only generate a fraction of the revenue needed to make meaningful cuts to the income tax.
Beyond the fiscal math, economists widely view tariffs as a regressive form of taxation that would disproportionately impact low- and middle-income households. Unlike income taxes, which are scaled to earnings, tariffs are paid by importing companies and are typically passed on to consumers in the form of higher prices for goods. This functions as a consumption tax that hits households that spend a larger portion of their income on essential goods the hardest.
An analysis from the Institute on Taxation and Economic Policy suggests such a policy would effectively increase taxes for low-income families at a rate more than three times higher than for the wealthiest Americans. “[The plan] would cost jobs, ignite inflation, increase federal deficits, and cause a recession,” warned PIIE analysts in a recent blog post, adding it would also antagonize U.S. allies and undermine national security.
The proposal marks a doubling-down on the protectionist trade policies that defined Trump's first term. While proponents argue that tariffs protect domestic industries and can be used as leverage in trade negotiations, the previous trade war with China demonstrated that U.S. consumers and businesses bear the majority of the cost. A study from the Penn Wharton Budget Model projected that new broad-based tariffs could reduce long-run GDP by about 6% and wages by 5%.
While the U.S. government did rely heavily on tariffs for revenue before the modern federal income tax was established in 1913, experts contend that the structure of the 21st-century global economy makes that model obsolete. As the Brookings Institution notes, tariffs are now seen as a "damaging and inefficient way to raise funds" because they distort economic activity and invite retaliation. As the election cycle progresses, investors and businesses will be closely watching how this ambitious, yet contentious, proposal evolves and what it signals for the future of U.S. economic and trade policy.