Trump’s Claims About Tariffs and Income Tax

President Donald Trump has recently suggested that Americans might soon cease paying federal income taxes due to the revenue generated from tariffs. However, experts are skeptical of these claims, indicating they might be inflated.

“In the coming years, I think we’re going to cut income taxes, possibly almost entirely because the money we receive will be enormous,” Trump remarked in a Thanksgiving video to military personnel. This assertion was echoed during a cabinet meeting on December 2nd, where he elaborated that “the funds we’re collecting are so substantial that we won’t even need to pay income taxes.” He added that taxpayers wouldn’t be liable for income tax on it, whether they spend it or save it.

This isn’t the first time Trump has proposed benefits from tariffs, which represent a significant taxation on foreign goods in recent decades. In November, he promised Americans $2,000 each from tariff earnings, a claim based on dubious calculations.

Transitioning from federal income tax revenue to customs revenue appears complex. This year, the U.S. has gathered approximately $257 billion in tariffs, with around $167 billion attributed to tariffs enacted during Trump’s presidency. Conversely, federal income taxes are estimated to contribute about $2.4 trillion in 2024, dwarfing the income generated by tariffs.

Steve Ellis, president of Taxpayers for Common Sense, commented, “It’s quite unlikely that tariffs could fully substitute for the income tax.” The White House hasn’t clarified how such calculations might function.

Understanding Tariffs vs. Income Tax

In 2024, personal income taxes are expected to comprise nearly half of federal revenue, with payroll taxes representing about 35% and corporate taxes around 11%. Customs revenues are considerably lower on that list.

To fully replace what federal income taxes cover, customs revenue would need to nearly reach $2.4 trillion, yet Trump’s tariffs are projected to never exceed $260 billion annually.

According to the Tax Foundation, if Trump’s tariffs are maintained until 2026, they may yield $191 billion that year. If they persist until 2034, revenues could hit $256 billion, but ongoing Supreme Court challenges may threaten these projections.

This $256 billion is still quite small compared to the roughly $2.43 trillion from federal income tax collections last year.

There are a few proposed pathways for utilizing customs revenues to eliminate federal income taxes, but none seem particularly appealing:

• Increase borrowing. Current federal revenue is about $1.8 trillion short of meeting government expenses. Removing income taxes without a robust substitute would deepen the deficit and drop a heavier debt load on future generations.

• Scale back the federal government. Tariffs historically funded a much smaller government. Today’s citizens, however, generally resist any reduction in social benefits like Social Security and Medicare.

• Hike tariffs to match income tax revenues. This approach, as outlined by Douglas Holtz-Eakin from the American Action Forum, would require tariffs to reach “incredibly high levels, well beyond 60%.” Such extensive tariffs could distort economic patterns significantly and necessitate further increases.

Is a Consumption Tax Feasible?

There’s been ongoing discussion about shifting from an income-based tax system to one centered on consumption. Many European nations implement a value-added tax, which acts like a sales tax and is divided across different production stages.

This idea faces its own obstacles in the U.S. Many states already have retail sales taxes. Adding a new federal tax could disproportionately burden low-income families, who spend a higher percentage of their income compared to wealthier households and often pay less in federal income taxes currently.

Dean Baker, co-founder of the Center for Economic Policy Research, noted that a sales tax would need to be around 40%, which would likely lead to significant tax evasion.