Barrons Independent

In recent months, President Donald Trump has repeatedly floated an ambitious fiscal policy proposal: eliminating federal income and corporate taxes and replacing them with tariffs on imported goods. When podcast host Joe Rogan asked Trump if he was serious about the idea, Trump replied, "Yeah, sure. Why not?" The proposal has since been mentioned in multiple campaign speeches and has evolved into a concrete White House initiative with the establishment of what Trump calls the "External Revenue Service."

While the idea of eliminating income taxes in favor of tariffs has generated political excitement among some, economic experts across the political spectrum have a clear answer to Trump's "why not" question: the math simply doesn't work. Here's a closer look at why replacing income taxes with tariffs is mathematically impossible and economically destructive.

The Revenue Gap - A Chasm Too Wide To Cross

One of the core issues with Trump's proposal lies in the vast difference between the current revenue generated by income taxes and the revenue that could realistically be collected through tariffs. The sheer size of the gap is critical in understanding why this plan cannot work.

Current Federal Revenue From Income Taxes

As of 2023, the U.S. federal government collects roughly $5 trillion in annual revenue. Of this amount, individual income taxes contribute approximately half. In 2021 alone, the IRS collected about $2.2 trillion from individual income tax payments. Corporate taxes add a significant amount to this total, but income taxes remain the backbone of the federal tax system.

This means that any attempt to replace income taxes with tariffs would need to make up for this $2.2 trillion annually in revenue.

Potential Revenue From Tariffs

By contrast, the total value of imports to the United States was approximately $3.1 trillion in 2023. Tariffs are taxes levied on imported goods, but the total value of imports is a key limiting factor here. Even if the U.S. government were able to tax every single dollar of imports (which is logistically impossible), the resulting tariff rate required to replace income tax revenue would be astronomical.

Alan Auerbach, a tax policy expert at UC Berkeley, estimates that in order to generate the same revenue currently brought in by individual income taxes alone, the U.S. would need to impose a tariff rate of about 70%. This figure assumes that 100% of imports are taxed at this rate, which is not only unlikely but virtually impossible in a globalized economy. In reality, tariff rates would likely need to be even higher to make up the gap.

The Tax Foundation, a leading think tank that analyzes tax policy, estimates that even a modest 10% universal tariff would generate just $2.2 trillion over the next decade (2034), which is far below the amount needed to replace annual income tax revenue.

The Impossibility Of Meeting Revenue Targets

To put this in perspective: in 2021, the U.S. generated approximately $2.2 trillion in individual income tax revenue. Even if the entire $3.1 trillion in imports were taxed at 70%, it would still fall short of the $5 trillion required. With tariffs on imports being impossible to raise high enough to match current income tax levels, the revenue gap becomes evident.

The Shrinking Tax Base Problem

As we consider this proposal further, another critical issue emerges: the more you raise tariff rates, the less volume of imports you will have to tax. This dynamic creates a "shrinking tax base" problem, which fundamentally undermines the viability of relying on tariffs for revenue.

How High Tariff Rates Lead To Reduced Imports

When tariffs are high, the costs of imports increase, and American consumers and businesses naturally reduce their demand for these imported goods. The higher the tariff, the less consumers are willing to pay for products from other countries. This phenomenon would lead to a dramatic reduction in the volume of imports.

For example, if tariffs were raised to 70%, many products would become prohibitively expensive. Some would likely be substituted with domestically produced goods, or supply chains could adjust to source materials from countries with lower or no tariffs. As a result, fewer imports would come into the U.S., meaning there would be less revenue generated from the tariffs.

The Deteriorating Tax Base

The most important consequence of this is that the base upon which tariffs are collected would continue to shrink. Imagine trying to extract the same amount of water from a sponge, but the sponge keeps shrinking every time you squeeze it. No matter how hard you squeeze, the amount of water you can get out will always decrease.

In this scenario, the government would be forced to keep raising the tariff rates on a shrinking base of imports. The more the tariffs increase, the fewer imports there will be, creating a feedback loop that makes it mathematically impossible to generate enough revenue to replace income taxes.

The Feedback Loop Of Increasing Tariffs

In a system where the tariff rate is increased to compensate for shrinking import volumes, the government would need to continuously raise the tariff rate higher and higher to make up for the lost revenue. Eventually, the tariff rates would reach levels so high that they would simply crush imports and cripple the broader economy. As imports dry up, the government would struggle to maintain the revenue needed to fund its operations.

The Modern Government Vs. 19th Century Funding

Trump's proposal often draws comparisons to the late 19th century, a time when tariffs were indeed the primary source of federal revenue. Trump has referenced this historical period, noting: "When we were a smart country, in the 1890s and all, this is when the country was, relatively, the richest it ever was. It had all tariffs. It didn't have an income tax."

However, this historical comparison ignores the vast differences between the economic structures of the late 19th century and today.

The Size And Scope Of Government Today

In the 19th century, the U.S. government was much smaller and more limited in its responsibilities. By contrast, in 2023, the federal government accounted for 22.7% of GDP, which is approximately 10 times the share of the economy compared to the 19th century. The size and complexity of modern government require far more revenue than tariffs alone could provide.

Historical Context Of Tariffs

In the late 1800s, the U.S. government did indeed rely heavily on tariffs, but the federal budget at the time was small compared to the massive scale of today's government. The revenue required to sustain the level of government spending in the modern era is far beyond what could be raised through tariffs alone.

As Alex Durante of the Tax Foundation put it: "You can't have 21st-century government spending with a 19th-century tax system." Modern government programs, such as defense, healthcare, social security, and infrastructure, require a much larger and more diverse revenue base than what was needed in the 1800s.

Economic Side Effects - A Recipe For Global Disruption

In addition to the mathematical impossibility of replacing income taxes with tariffs, there would be serious economic consequences. High tariffs would not just hurt imports, but would also trigger negative side effects across the global economy.

Regressive Taxation

Tariffs are inherently regressive, meaning they disproportionately affect lower and middle-income consumers. Unlike progressive income taxes, where higher earners pay more, tariffs hit everyone equally, the wealthy and the poor alike. However, since lower-income households spend a larger percentage of their income on goods, they are hit harder by the increased costs of imported products.

For example, a family of four with a modest income would spend a significant portion of their budget on imported goods like electronics, clothing, and food. With tariffs on these products, their cost would rise, putting a strain on their finances.

Economic Contraction

High tariffs would increase the cost of doing business for American companies that rely on imported raw materials, components, and finished goods. This would hurt the overall competitiveness of American industries, reduce consumer purchasing power, and potentially lead to job losses in sectors that rely on imports.

The Peterson Institute for International Economics warns that this plan "would cost jobs, trigger inflation, increase federal deficits, and likely cause a recession." In essence, replacing income taxes with tariffs could stifle economic growth, leading to widespread job losses and inflation.

Global Trade Wars

Massive tariffs would likely provoke retaliation from America's trading partners. Countries like China, the European Union, and Canada would retaliate with their own tariffs on U.S. exports. As a result, American exporters would face higher costs and reduced market access.

The Tax Foundation estimates that even partial retaliation from trading partners would offset more than two-thirds of any economic benefit from Trump's proposed tax cuts. The ensuing global trade wars would disrupt the international trade system, leading to even greater economic instability.

Financial Instability

The global financial system could experience instability as a result of major disruptions in trade. With shifting trade relationships and changes in currency values, financial markets could face volatility. Investmentswould be redirected, and economic growth could slow globally, leading to financial uncertainty.

A Comparison to Modern Tax Systems

Today, most developed economies structure their government revenue using a carefully balanced mix of various taxes. This includes individual income taxes, which are typically progressive in nature; corporate taxes, levied on business profits; and consumption taxes, such as Value-Added Tax (VAT) or sales taxes, applied to goods and services.

This multi-pronged approach ensures that government funding is more resilient, predictable, and responsive to economic shifts. Notably, no major modern economy relies primarily on tariffs to fund its government operations. Tariffs today serve more as tools for regulating trade policies or protecting specific industries, rather than being a cornerstone of national fiscal policy.

Attempting to fund a complex, modern government exclusively through tariffs, as proposed by Trump, would represent a stark departure from the global standard and would expose the economy to extreme volatility.

The Benefits of Diversified Tax Systems

Revenue Stability

Diversified tax systems provide greater stability for government budgets. When revenue is sourced from multiple streams, governments are better insulated against economic shocks. For instance, if corporate profits fall during a recession, consumption taxes and income taxes may still provide steady inflows, cushioning the financial impact. Relying on a single, volatile source like tariffs, which fluctuate with trade volumes, supply chain changes, and global demand, would leave government budgets highly vulnerable.

Fair Distribution of the Tax Burden

Diversification also enhances fairness within a tax system. Income taxes can be structured progressively, ensuring that wealthier individuals contribute a larger share relative to their earnings. Consumption taxes distribute responsibility more broadly among consumers. Corporate taxes ensure that businesses benefiting from public infrastructure and services also pay their share.

Flexibility and Economic Resilience

A mixed tax structure provides governments with the flexibility to adjust policies based on changing economic conditions. They can tweak corporate rates to encourage investment, offer income tax credits to support households, or adjust consumption taxes to manage inflation. A tariff-based system would drastically limit such options, tying government revenue almost entirely to the health of international trade, an area subject to geopolitical risks, trade disputes, and global economic cycles.

Risk Mitigation

Spreading revenue across different sectors of the economy reduces the risk of catastrophic budget shortfalls. If one sector underperforms, others can partially compensate. Tariff-only systems, by contrast, would be dangerously dependent on continuous, high-volume trade flows, which are neither stable nor guaranteed.

The Bottom Line

While the idea of eliminating income taxes has political appeal, the mathematical reality makes the proposal unworkable. Former Comptroller General David M. Walker, who served under both Democratic and Republican administrations, summarized the situation bluntly: "I don't think it's feasible to go from our current system to where we're totally relying on tariffs."

For this plan to work, tariffs would need to be implausibly high on an inevitably shrinking tax base. The economic disruption would be severe, the tax burden would shift to those least able to bear it, and the system would likely fail to generate sufficient revenue to fund the government.

In fiscal policy, as in physics, there's no escaping the fundamental laws of mathematics. The numbers simply don't add up.