Would Trump’s Plan to Replace Income Tax with Tariffs Work?

Summary

Replacing the $2.5 trillion income tax with tariffs would require a 65% tariff rate on the $3.8 trillion import base, up from the current 2%, assuming no reduction in import volume.
Historically, tariffs raised only 2-3% of GDP, while income tax currently raises 10% and payroll tax 5-6%, necessitating drastic federal spending cuts to replace income tax with tariffs.
High tariff rates create a conflict of goals for supporters, as they can reduce tariff revenue by shifting consumption from imports to domestic goods, contradicting the desire for both high revenue and reduced reliance on foreign goods.

The Smoot-Hawley Tariff of 1930, the highest tariff rate in US history up to that point, coexisted with enormous marginal income tax rates, illustrating the potential for a “worst of both worlds” scenario.
Tariffs have a built-in “escape valve” where excessively high rates cause people to switch to domestic goods, while income tax has fewer alternatives to avoid taxation, making tariffs a safer way to raise revenue.

Economists generally favor consumption taxes like tariffs over income taxes, as they lessen the tax burden on saving and capital formation, but tariffs’ narrower base requires higher rates to raise equivalent revenue.
Historically, economists focused on discrediting tariffs due to their potential to make countries poorer, countering the persistent narrative since the mercantilist era that tariffs create jobs and benefit workers.

To implement a tariff-based tax system, drastic spending cuts would be necessary to avoid skyrocketing federal debt or excessive money printing, which would lead to inflation and higher prices for goods.