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Trump’s plan to end income taxes would require tariffs ‘much higher than 70%’
It was during a recent visit to Washington that Donald Trump offered a seemingly improvised idea: abolish the income tax system and make up for lost money with higher tariffs.
Economic experts quickly came forward to question the math behind the plan. And on Friday, Joe Biden’s White House offered a new analysis to underline why he says the idea simply won’t work.
“It is mathematically unlikely that a broad tariff could replace the revenue raised by the individual income tax,” concluded the new report from Biden’s Council of Economic Advisers, the findings of which were first shared exclusively with Yahoo Finance.
The report looks at imports during fiscal year 2023 ($3.12 trillion) and finds that, at a minimum, replacing the income tax would require across-the-board tariffs of 70%. That would immediately raise prices for Americans on a wide range of consumer goods.
But it’s more than that, the report finds. The brief argued that a range of factors — from retaliatory tariffs to declining demand — would mean that these higher rates would generate less revenue for U.S. coffers than you might expect.
“Overall tariff rates would likely need to be much higher than 70 percent to raise tax revenue equivalent to individual income taxes,” he concluded.
To tariff — or not to tariff: President Joe Biden and former President Donald Trump debate on June 27. (ANDREW CABALLERO-REYNOLDS/AFP via Getty Images) (ANDREW CABALLERO-REYNOLDS via Getty Images)
The new report comes as trade and tariffs remain a central issue in the 2024 campaign. “Republicans will support basic tariffs on foreign-made goods,” the report said. Republican Party Platform revealed this week. Donald Trump himself has long advocated high tariffs as a way to protect the US economy and once called himself the “Tariff Man.”
Karoline Leavitt, Trump’s campaign press secretary, did not respond directly to the report when asked for comment, but told Yahoo Finance of Trump’s record that “by cutting regulations and taxes and using America’s leverage to negotiate better trade deals around the world, President Trump has built the strongest economy in American history.”
Joe Biden and his campaign often highlight Trump’s tariff ideas as part, they say, of a broader agenda that could spur new inflation if he wins.
Also on Thursday night, at a press conference, Biden highlighted Trump’s plan to impose a 10% tariff on imports and cited a report from the left-leaning Center for American Progresswho said Trump’s idea alone “would cost the average American working family another $2,500 a year.”
Why Tariff Returns May Be Decreasing
Tariffs are unpopular with many in the business community, with these fees paid by companies at U.S. ports of entry. Historically, the costs are more or less immediately passed on to consumers who purchase these goods.
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Furthermore: tariffs are also not a major revenue generator and currently represent less than 2% of Federal Government revenues.
What’s unclear is whether the books would ever balance if Trump were to win this fall — and actually attempt such an effort. But the chances of his plan ever happening are equally uncertain: Trump has not repeated the idea publicly since he first floated it in June. Nor was it included in the platform unveiled this week.
As the White House report noted, a giant tariff hike would almost certainly trigger retaliatory tariffs from U.S. trading partners, which would create a need for the government to spend money to compensate affected industries. A version of this phenomenon played out during Trump’s first term, when retaliatory agricultural tariffs from China forced Washington to spend billions to help farmers who suddenly lost a market for their products.
The report also suggested that “consumption and production patterns are likely to respond” to higher tariffs. In other words, the law of supply and demand would kick in.
What experts expect is that higher tariffs would lead to higher prices for imported goods. This would lead to less demand for them. This would lead to fewer imports and a decline in tariff revenue than would otherwise be expected.
The White House report reflects the views of other economic experts who have analyzed the topic.
Libby Cantrill, head of U.S. public policy at PIMCO, estimates that Trump’s idea, if implemented, would end up requiring tariffs of over 100%. “Trump would need Congress to gut the federal tax code and impose 100%+ tariffs, and that’s not going to happen,” she concluded in a recent note.
A Analysis of the plan by the Tax Foundation called Trump’s plan “completely unrealistic.”
Other macroeconomic effects
The White House report also sought to highlight other economic costs of Trump’s plan, including negative effects on economic growth and how the measure would shift the tax burden onto lower-income Americans.
The report further offered a defense of Biden himself. targeted tariff policycalling them a tool to protect US interests while avoiding “major negative distortions to the macroeconomy.”
Biden has largely kept Trump-era tariffs in place while adding strategically important duties on top of them. This week, the White House announced new measures around North American steel and aluminum markets with new actions to crack down on tariff evasion announced jointly with Mexico.
Ultimately, the report is clearly unlikely to dampen Trump’s years-long enthusiasm for tariffs. His plans for a 60% tariff on China and 10% duties on other goods remain at the heart of his campaign message, where he has frequently promised to double down on the trade policy he oversaw during his first term.
“China paid us hundreds of billions of dollars,” Trump said at a recent rally in Virginia during his term (misrepresenting who actually paid the tariffs), but added nonetheless, “It was because they respected our country.”
This post has been updated.
Ben Werschkul is a Washington correspondent for Yahoo Finance.
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