Trump Proposes Ending Income Taxes
In idea whose time is gone.
NYT (“Trump Flirts With the Ultimate Tax Cut: No Income Taxes at All“):
Former President Donald J. Trump has spent much of the presidential campaign brainstorming new, and sometimes untested, ways to cut taxes. In the election’s final stretch, he raised the possibility of going even further: eliminating income taxes entirely.
During a Fox News segment on Monday, Mr. Trump took questions at a barbershop in the Bronx. When asked if the United States could potentially end all federal taxation, Mr. Trump said the country could return to the economic policies in the late 19th century, when there was no federal income tax.
“It had all tariffs — it didn’t have an income tax,” Mr. Trump said. “Now we have income taxes, and we have people that are dying. They’re paying tax, and they don’t have the money to pay the tax.”
In June, Mr. Trump floated the idea of replacing federal revenue from income taxes with money received from tariffs. Mr. Trump has not provided specific details of how that would work, and it is unclear if he wants to eliminate all federal taxes, including corporate income taxes and payroll taxes, or only end the individual income tax.
So, let’s stipulate: Trump is not a policy guy and, even by Trump standards, it’s not quite clear what he’s proposing. That said, he’s made reference to this idea repeatedly, either because he thinks it’s a good one, because he thinks it’ll resonate with voters, or both.
The obvious retort is that we started replacing a reliance on tariffs with a system of income taxation more than a century ago for a reason. Indeed, Congress considered doing so way back during the War of 1812 and did so during the Civil War. The Supreme Court, likely correctly, ruled that Congress lacked the Constitutional power to levy a tax on income in 1895, but eventually, a bipartisan consensus that one was necessary was reached and the 16th Amendment was passed through a two-thirds vote for both Houses of Congress and ratified by the requisite three-quarters of state legislatures.
As we’ve discussed many times before, the Framers intentionally made it quite difficult to amend our foundational document. But it had long since become clear that tariffs simply don’t provide enough revenue to fund a modern government. Further, they’re incredibly regressive.
As a July brief from the White House Counsel of Economic Advisors (“Tariffs as a Major Revenue Source: Implications for Distribution and Growth“) explains:
Tariffs have not provided a meaningful share of revenue for the US government since the early 1900s (see Figure 1a). Existing imports duties on goods raised $80 billion last year, about 2 percent of the $4.44 trillion in total Federal tax revenue (Figure 1b).[1] By comparison, the individual income tax was responsible for 49 percent of total Federal tax revenue, and an additional 36 percent was raised via social insurance (payroll) taxes, which are closely tied to individual income. In other words: more than three-quarters of federal tax revenue is linked to individual wage and non-wage income.
But this is circular, right? We bring in comparatively little in tariffs because we have low tariffs and high income taxes, right?
Not so fast, my friends.
It is mathematically unlikely that a broad tariff could ever replace the revenue raised by the individual income tax. For example, given the value of goods imports during FY2023 ($3.12 trillion), an across-the-board 70 percent tariff would be required to replace the equivalent revenue raised by the individual income tax under the overly simplistic assumption that consumers, producers, and our trading partners would have made no changes to their behavior in response to the tariffs. There are several reasons to believe, however, that this “static” exercise is a substantial revenue overestimate.
Ah, but that’s great, you say. After all, income taxes are paid by hardworking Americans like you and me, while tariffs are paid for by greedy foreigners (“FUR-in-urs”).
First and foremost, an across-the-board tariff is likely to spark retaliatory tariffs that reduce U.S. exports and subsequently induce transfers of collected duties to impacted U.S. businesses. For example, U.S. farmers facing retaliatory export tariffs during the 2018-2019 trade war received Federal subsidies that totaled 92 percent of the collected duties. Thus, even in the context of targeted tariffs impacting a relatively small fraction of overall imports, the Federal government ultimately collected only 8 percent of the tariff revenue. As the scope of this tariff increases, the scale of retaliatory tariffs and cost of offsetting subsidies for affected businesses is likely to increase. Moreover, consumption and production patterns are likely to respond to avoid the expense of this tariff, further reducing expected revenue. As a result, across-the-board tariff rates would likely need to be much larger than 70 percent to raise tax revenue that is equivalent to the individual income tax.
Further, this type of across-the-board tariff is likely to negatively impact the US macroeconomy. To begin, these tariffs will raise the prices of imported consumption goods and imported inputs used to produce output that is sold both domestically and internationally. A recent study found that a broad implementation of tariffs would raise the inflation rate by about ¾ percentage point relative to the current baseline (Zandi, Le Cerda, and Begley 2024 and correspondence with author). Clausing and Obstfeld 2024 concur that the inflation impact of an across-the-board tariff would be severe.
Okay, fine. But we can just quit buying crap from China (JIE-nuh) and start making things in the good ol’ US of A.
Crucially, the increase in imported input prices adversely impacts the efficiency of domestic production. Indeed, the evidence shows that large-scale tariffs result in significant declines in domestic output and productivity, higher unemployment, more inequality and real exchange rate appreciation implying a loss of international competitiveness, while having only small effects on the trade balance. Any increases in interest rates to combat transitory inflation due to rising prices will be contractionary, additionally contributing to a decline in real investment and output. These cumulative effects are likely to further depress the revenue raised by an across-the-board tariff.
This, apparently, involves some math. So, let’s move on.
Finally, relying on a tariff as a major source of tax revenue raises serious equity concerns. As noted, across-the-board tariffs would cause substantial pressure on consumer prices, either because consumers directly purchase imported goods or because businesses that rely on imported goods as inputs to their production increase prices. Because lower-income households spend a larger share of their income on consumption of these goods, they will be disproportionately burdened by a broad tariff. For example, CEA estimates indicate that introducing a 10 percent across-the-board tariff would impose a tariff burden of 2.3 percent of income for those in the bottom quintile compared to just 0.5 percent for households in the top 1 percent, following the methodology employed by Clausing and Lovely (2024)
Yeah, but 2.3 percent is great compared to the, what, 70% they’re paying in income taxes now?
In summary, they conclude:
Strategically targeted tariffs are an important tool to protect economic and international interests of the U.S. However, the potential for a broad tariff to serve as a major revenue raiser in a modern, global economy is limited. Moreover, elevating the reliance of the Federal government on tariff revenue would likely exacerbate long-running trends in income inequality by shifting more of the burden of taxation onto lower-income households. It is also highly like to generate large, negative distortions to the macroeconomy.
The NYT report reminds us that the income tax itself has changed a lot from its earliest days:
At first, it was narrowly targeted at wealthy individuals and corporations, but fighting two world wars and creating programs like Social Security was expensive. American policymakers turned to income taxes to pay for those priorities.
“It becomes a mass-based income tax for the first time during World War II,” said W. Elliot Brownlee, a historian of tax policy at the University of California, Santa Barbara.
Tariffs dwindled as a source of federal revenue while income taxes expanded. Today, tariffs make up just 2 percent of federal revenue, while income and payroll taxes make up about 94 percent. Overall, the tax system is progressive: In 2020, the top 20 percent of earners in the United States paid about 80 percent of all federal taxes, according to the Congressional Budget Office.
Whether the rich pay their “fair share” of taxes is infinitely debatable. But, currently, they pay the lion’s share of federal taxes. (Unlike most calculations, this explicitly includes Social Security taxes, which are actually somewhat regressive.)
I’ve read a decent amount about flat tax proposals, including one book by two gentleman who worked up a proposal that served as the basis for the Republican model that was being pushed a couple decades ago. The authors admitted that it was a non-starter because every analysis concluded that it would hit the middle class very hard and would be a windfall to higher income households.
Trump’s “proposal” is just more of I can give you free stuff nonsense.
Doing people’s taxes every year is big business. Not just for H&R Block* but for tax attorneys.
Then there are over 40 states in the country who also have a income tax. In some instances they copy** the federal returns. What do they do without a federal return?
Anyone who thinks the federal income tax will be abolished, I have a bridge to sell them.
*- I worked for Block every tax season from 1993 to 2001.
**- Inheritance tax reporting do similarly if I recall things correctly from when my father died in 1997.
Great for us. The big problem with going expat and getting out of this loony bin of a country is the US’s global taxation regime. No income tax? Beautiful. I can either choose my spot to be a tax resident abroad, or bounce around enough to avoid becoming a tax resident. We can buy a place in Czechia, establish tax resident status, pay a top rate of 23% and bop around the Côte D’Azur, San Sebastian, Lisbon, Seville. . .and all our purchases will be in those countries.
Giving fuck-all to the Trump regime while continuing to receive Social Security? We’d go from being relatively sizable contributors to being a net drain. Thank you Jack and JKB and whatever other MAGAts are hanging around. What’s more fun than screwing MAGAts from a hot tub on Santorini?
If foreigners pay the tariffs (spoiler alert: they don’t), and if things won’t change with tariffs (spoiler alert: they will), the the tariff rate should be like 1,000,000% (that’s ten thousand times the nominal sale price of a good or service).
So $3.12 trillion in imports time 1,000,000% is like $31,200 trillion. This would buy solid gold toilets for everyone!
I guess it’s fun to play with this as an idea, but I don’t think it deserves any attention.
I think “that can’t work” is exactly the response Trump is hoping to get from the likes of us. Which means we are “pro income tax”. We are such horrible people, after all,
And yet in Dr. Taylor’s tabs today, the Atlantic article noted that the Convention of States group that wants to rewrite the Constitution specifically targeted repeal income tax as a goal. The idea resonates unfortunately.
@Michael Reynolds: just make sure you end up in a country that has a double-taxation treaty with the U.S. so you can at least get some benefit.
It’s very telling that Trump’s idea of Shangri-La is the 1890’s, when life was pretty for everyone who wasn’t a rich white male.
@just nutha: I don’t think it does. It resonates with his maga base. IMO everyone else sees it for the nonsense that it is. Even the Republicans who aren’t maga who will vote for Trump understand that it is gibberish. His policy plans don’t really work with the non-maga crowd in general, he moves the needle with hate.
There’s a reason the era of robber barons coincides with higher tariffs and predates the modern income tax regime: it uses the power of the government to shield industrial profit at the expense of workers. Socialized costs, consolidated profits.
See, this is where the NYT is failing the American people. It’s treating Trump’s utterly inane, ignorant blather on a topic he has clearly demonstrated, on multiple occasions, he knows absolutely nothing about, as it would treat a policy proposal coming from a person who actually knows what the fuck they are saying.
“Mr. Trump has not provided specific details” because THERE ARE NO FUCKING SPECIFIC DETAILS because he’s just vomiting out whatever half-baked brainless imbecility is floating around his diseased cranium at any particular moment.
@Hal_10000: So weird!
The question isn’t whether the top 10% of earners pay 80% of the taxes in total but what proportion of the total wealth do they acquire? Sure, Warren Buffet may have a large, overall tax bill but the percentage of income he paid can be lower than his secretary’s.
If we shifted income taxes over to capital gains taxes, that might be ok.
By the way, one of the drivers for an income tax was the drive for prohibition. Alcohol taxes supplied a good chunk of taxes. So the good social engineers called prohibitionists worked to get the constitutional amendment passed so they could say that we could get rid of alcohol without ruining the Federal Budget. BTW, a good book on this subject is Last Call: The Rise and Fall of Prohibition by Daniel O’Krent is a highly readable history on the subject.
@Scott:
I’ve read that book, and I second the recommendation.
@Lucysfootball: I didn’t think that I was trying to say that it resonates with everyone but it does resonate with some, and many of those some are part of the movement to rewrite the Constitution. If you want to write them off as an insignificant minority of nutballs, go ahead. But then, go and read that Atlantic article Dr. T. posted in the tabs because the same group of insignificant nutballs is aligned with NAR–our most recent boogie man on the left.
Trump claims he wants America to manufacture everything it needs domestically. High tariffs will be an incentive for firms to move production back home, or start new businesses that would otherwise by uncompetitive.
If this were to happen, of course, tariff income would dry up, because there’d be no more imports. Mr Trump hasn’t explained how the federal government would be funded when that happened. But as he’s often said, only a fool signals his plans in advance.
@Gustopher:
Wouldn’t work.
Tax lawyers are inventive critters.
There’s no harm in c.g.t.; its a pretty sensible component of a tax policy (as is VAT).
10% to 25% is the normal range (some nominal rates are higher, but as soon as you look you find the headline rate drops off on assets held for over a few months etc).
So I think the US is around average; but I suspect a lot of loopholes and exemptions (see tax lawyers and congress playing games).
Generally any viable tax system for an advanced economy/polity requires the “four legs”: income tax, capital gains tax, corporation tax, VAT/consumption tax.
Trump is replaying another paleocon trope of long standing: back to tariffs and indirect taxation!
Similar to his isolationist inclinations, China focus, etc.
It’s long-standing pattern of his; and much of MAGA are paloecon-ism redivivus – apart from their fondness for social benefits as long as they go to them – so it’s always appealed to them.
I am shocked, SHOCKED that our one anti-anti-Trump voter who claims that only policies (not personalities) matter AND who also claims to be an expert on ECONOMICS has yet to weigh in on why we’re all libtards for not understanding why this is a good policy.
Of course, we also recently learned that his immigration policy preferences seem to be grounded in racism, xenophobia, and inflated claims about migrant crime and illness versus actual economic impact.
Well I don’t usually endorse or seriously consider proposals to eliminate the federal income tax, but … when I do … I consult a career criminal who has experienced 6 business bankruptcies including a casino, and who has a decades long record of white collar crime, and of sexually harassing women.