 "Trump suggests tariffs could end income tax in the US. Is this possible?")
US President Donald Trump has claimed that his tariffs could mean the end of income tax.
Trump, in a Fox News interview, has said that the money from the tariffs might be enough to do away with the need for income tax.
Trump during his campaign had promised to remove taxes on tips and Social Security.
Trump has issued a 90-day pause on his tariffs – with the exception of China on whom he has placed a tariff of 245 per cent – though he has said the base tariff of 10 per cent remains.
But what did Trump say? Is this really possible? What do experts think?
Let’s take a closer look:
What did he say?
“There is a chance that the money is so great that it could replace income tax,” Trump said as per the Wall Street Journal.
He was referring to the period in the late 1800s when tariffs were the primary source of income for the US government.
“It could replace the income tax, that’s the kind of money.”
“In the old days, about 1870 to 1913, the tariffs were the only form of money. And that’s when our nation was relatively the richest. We were the richest,” Trump claimed. “We were making two billion and three billion dollars a day. We never made money like that.”
Trump said a committee was formed in the late 1800s to get rid of income tax.
“And this committee’s sole purpose was how to dispose of it, who to give it to, what do we do? And then, brilliantly, in 1913, they went to the income tax system. Then around 1931 or 1932, they tried to bring back tariffs, but it was too late,” Trump was quoted as saying. “And they loved to blame tariffs for the Great Depression. But the Great Depression came before they put the tariffs on.”
Trump’s interview comes just weeks after commerce secretary Howard Lutnick claimed the president wanted to abolish the IRS.
“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 was quoted as saying by Economic Times.
Trump in January said he wanted to create the External Revenue Service.
“For far too long, we have relied on taxing our Great People using the Internal Revenue Service (IRS). Through soft and pathetically weak Trade agreements, the American Economy has delivered growth and prosperity to the World, while taxing ourselves. It is time for that to change. I am today announcing that I will create the EXTERNAL REVENUE SERVICE to collect our Tariffs, Duties, and all Revenue that come from Foreign sources,” Trump wrote on Truth Social.
Is it possible?
The problem for Trump is that the US Constitution gives Congress the power of the purse.
The US president has absolutely no control over the laws that Congress makes or the bills that are put up. He can either give them his assent or veto them.
Another problem for Trump is that tariffs were likely among the leading causes of the Great Depression.
In 1930, then President Herbert Hoover signed the Smoot-Hawley Tariff Act in 1930.
This even as many economists warned that the levies would prompt retaliatory tariffs from other countries.
Which is precisely what happened.
The US economy plunged deeper into a devastating financial crisis that it would not pull out of until World War II.
Most historians now look back on Smoot-Hawley as a mistake that made a bad economic climate much worse.
However, Trump insists this is not the case.
“The Great Depression came before they put the tariffs on,” he said.
What do experts think?
Experts have poured cold water over the idea.
“It’s just not a realistic proposal,” Alex Durante, senior economist at the Tax Foundation, told CNBC.
Durante pointed out that the the US federal government in 2023 spent 22.7 per cent of its gross domestic product, which is about 10 times the share of the economy, compared with when tariffs were a primary source of revenue.
“You can’t have 21st century government spending with a 19th century tax system,” Durante said.
As per CNBC, the IRS collected around $2.2 trillion in revenue from taxpayers.
Replacing that would require “astronomically high tariff rates,” Erica York, vice president of federal tax policy with the Tax Foundation’s Center for Federal Tax Policy wrote.
The math simply doesn’t add up.
Others agree.
“Tariff rates would have to be implausibly high on such a small base of imports to replace the income tax,” wrote Kimberly Clausing and Maurice Obstfeld, fellows at the Peterson Institute for International Economics.
“As tax rates rose, the base itself would shrink as imports fall, making Trump’s $2 trillion goal unattainable,” they wrote.
CNN quoted Torsten Slok, chief economist at Apollo Global Management as writing that the US imports around $3 trillion worth of goods every year. Which means means tariffs would have to be at least 100 per cent on all imported goods for tariffs to replace income taxes.
“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 per cent tariffs on all imported goods for the total tariff revenue to replace income taxes.”
“When the 16th Amendment to the US Constitution was ratified in 1913, the United States moved from a public revenue model based on tariffs to one reliant on a graduated income tax. Not only did this make the tax structure more progressive, it also opened the US economy and positioned the country for the global leadership role it would assume in the following century,” a piece in PIEE.com noted.
“Trump’s ideas about tariffs and taxes return the United States to the 19th century, a backward move that is dangerous and regressive.”
The final problem for Trump is the tariffs don’t even make sense long term.
As the CNN report pointed out, if Trump wants companies to return in the US and open factories here, imports will likely decrease substantially.
This in turn will dry up the tariffs.
So, with the money coming in from tariffs sinking and without an income tax, America will be left high and dry.
With inputs from agencies
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