Policy experts are expressing skepticism regarding the potential for tariff revenue to replace federal income tax, following recent statements from former President Donald Trump. At one point, he even floated the idea of tariff revenue supplanting the income tax. This concept got lots of economists thinking about how realistic the proposal really is.
The U.S. government has used this strategy of raising revenue through taxing imported goods through a process called tariffs. The numbers show that especially compared to federal income tax revenue, tariff revenue would leave us drastically underfunded. As of 2023, the federal government still taxes over $20 trillion of these incomes. As of July 2018, experts widely consider the administration’s projections of $100 billion to $200 billion of tariff revenue as unrealistic.
Kimberly Clausing, a senior fellow at the Peterson Institute for International Economics, emphasized the limitations of tariffs as a source of revenue. She noted that the tariff tax base is much smaller than the income tax base. This funding gap complicates collecting enough money through rates alone. Clausing stated, “Tariff rates would have to be implausibly high on such a small base of imports to replace the income tax.”
In 2023, the U.S. imported $3.1 trillion in goods. Increasing tariffs may still fall short of raising expected amounts of revenue for many behavioral and economic reasons. Changes in consumer behavior and shifts in international trade dynamics are all important factors. They directly affect the revenue that the U.S. government would collect through tariffs.
Mark Zandi, chief economist at Moody’s, added his voice to the choir of worry with Clausing. But he added that hitting tariff revenue in the range of $100 billion to $200 billion would be “doing pretty well to get lucky.” This alternative speaking truth to power highlights the implausibility of government turn to tariffs as a strong, stable revenue stream.
The Tax Foundation’s economist, Durante, joined the Twitter back and forth, calling out a common misunderstanding about how tariff revenue works. “The administration seems to think that every time it raises the tariff rate that it can collect more revenue,” he stated. For one, this perspective casts doubt on the wisdom of simply increasing existing tariffs without thinking about their economic effects as a whole.
The Peterson Institute for International Economics offers impressive insight on the impact of tariffs on the U.S. economy. Specifically, they show that the revenue that tariffs do produce is a drop in the bucket compared to what the federal income tax brings in. The institute’s report shows just how complicated it can be to use tariffs as the main method of funding government operations.
As policymakers consider various approaches to taxation and revenue generation, the feasibility of replacing income tax with tariff revenue remains heavily debated. Experts caution against assuming that increased tariffs will automatically translate into higher revenue without addressing the underlying economic factors at play.