Can you imagine receiving your salary without federal income taxes being withheld? It sounds like the wet dream of any economic liberal who has read about the Austrian school of economics, but it has become President Donald Trump’s latest political promise. The US president has formally proposed the complete elimination of this tax in the very near future.
The president suggested that the administration could replace the billions of dollars in lost revenue with a wave of tariffs on imported goods. President Trump even suggested a two-year timeline for achieving this monumental change. Although this sounds great, and we would all like to be able to keep more of our paychecks, anyone who has studied math in high school and knows how to use a calculator would know that this is the same as promising everyone candy and lollipops. The fiscal reality is quite different. Here we explain what the president has proposed… and why it is not feasible.
Tariffs instead of income taxes
President Donald Trump’s proposal seeks to alter the U.S. government’s revenue system. We are talking about federal income tax, which is applied to wages, interest, dividends, and other earnings of citizens. The proposed plan would require the total elimination of this tax for all Americans. But if there are no taxes, how will the entire federal infrastructure be funded? The Trump administration suggests that all revenue should come from tariffs instead of taxes.
This would be a strategy to kill two birds with one stone: on the one hand, the revenue generated by tariffs would be “so large” that it would replace the need for income tax revenue. In addition, this new source of revenue—according to its promoters—would prevent an increase in the national deficit. Furthermore, this policy seeks to protect and promote domestic manufacturing, which has been moving overseas for decades to maintain good prices. By significantly increasing the cost of products imported from abroad, the goal is to motivate companies to produce within the United States.
This vision of tariffs providing a large part of the U.S. government’s revenue is not new; it dates back to the pre-1913 era, when the United States relied primarily on tariffs for funding. However, the size of the government was minuscule compared to today. In order to sustain the U.S. government, it would have to be dismantled and made much smaller than it has become in recent years.
The impossible math behind this dream
Although it sounds good on paper, the problem with this entire proposal is the enormous disparity between the amount of money it seeks to replace and the capacity to collect tariffs. Federal income tax alone collects nearly $2.4 trillion annually. In contrast, the country’s customs and tariffs generate “only” between $100 billion and $200 billion per year. Current tariff revenue represents barely 10% of the hole that would be created if we eliminated the federal income tax.
To replace all this money, economists have calculated that it would be necessary to increase tariff revenue tenfold, which would mean an estimated tariff rate of more than 100% on all products imported into the country. The current government structure, which requires trillions of dollars for defense, healthcare, and social services, is unsustainable without a massive source of revenue such as income tax. The only alternative to increasing tariffs would be massive—and incredibly controversial—cuts to essential federal programs.
Ultimately, US citizens see them as acquired rights, above their right to private property and low taxes, which were one of the cornerstones of the creation of this nation. The United States has become a country with tendencies toward a welfare state, which requires high tax revenues to maintain all this infrastructure (whether efficient or not).
After crunching some numbers, it’s clear that this promise (or project, if we are optimistic) is another of the many things that our president, Donald Trump, says without doing much calculation or consulting with experts on the subject before speaking. For now, we can only think about how nice it would be to receive 100% of our salary without having to pay taxes, but that liberal economic universe is not going to be created yet.