President Donald Trump's proposal to replace income tax with an "all tariff policy" has ignited a debate among economists and policy experts. On the campaign trail, Trump suggested that tariffs could become the primary source of federal revenue, potentially eliminating the need for income tax. However, recent developments, including Trump's decision to pause tariffs in Canada and Mexico for at least 30 days, have cast doubt on the feasibility of this policy.
Historically, tariffs served as a significant revenue source for the U.S. federal government in the 19th century. However, as federal spending increased over time, tariffs have accounted for only a small fraction of total revenue. According to the Congressional Research Service, tariffs have not exceeded 2% of total federal revenue annually in the past 70 years. In fiscal year 2024, the U.S. Customs and Border Protection collected $77 billion in tariffs, representing just 1.57% of federal revenue. In contrast, the IRS collected approximately $2.2 trillion from individual taxpayers during tax year 2021.
Economists from the Tax Foundation have analyzed Trump's proposal and concluded it is not feasible. The U.S. federal government spent 22.7% of its gross domestic product in 2023, a tenfold increase compared to when tariffs were a primary revenue source. To cover such expenses with tariffs alone would require "astronomically high tariff rates," according to their analysis.
"It's just not a realistic proposal," – Alex Durante, senior economist at the Tax Foundation.
"The math doesn't work," – Erica York, vice president of federal tax policy with Tax Foundation's Center for Federal Tax Policy.
Despite these challenges, Trump has moved forward with imposing tariffs on international trade partners. He signed orders instituting a 25% tariff on imports from Canada and Mexico and a 10% duty on goods from China. In response, China imposed retaliatory tariffs on select U.S. imports this past Tuesday. Furthermore, Trump hinted that the European Union could be the next target for tariff imposition.
The reliance on tariffs as a major revenue source remains uncertain. While a brief period in 2024 saw increased tariff revenues, experts argue that such a system cannot sustain modern government spending levels.
"You can't have 21st-century government spending with a 19th-century tax system," – Alex Durante, senior economist at the Tax Foundation.