Trump's Crazy Tax Plan Would Not Work (And Would Make Goods More Expensive)

Posted on the 30 October 2024 by Jobsanger

Donald Trump has said he would like to replace the income tax with a heavy tariff on all imported goods. That may sound good to the rich, but it would make life much more expensive for the poor, the working class, and the middle class.

That's because tariffs act like a sales tax. The tariff would be paid by the importer, who would then raise the price of the goods to cover that cost. Some might say just buy goods made in this country. That wouldn't work because many consumer goods are no longer made in the United States. For instance, no TV is assembled in this country. With a 70% tariff a $550 dollar TV would cost $850.

Also, the U.S. imports about 60% of fruits and 40% of vegetables so the price of groceries would skyrocket. 

But that's not the only reason the Trump plan wouldn't work. Economist Erica York explains in this Washington Post article.  Here is part of what she writes:

Donald Trump has floated a proposal to replace the U.S. income tax system with a new system of tariffs, moving the United States back to the tax mix of the late 19th century. The plan, simply put, is a mathematical impossibility.

Trump’s most obvious challenge would be in how to close the yawning gap between income tax revenue and duties. The U.S. Treasury collected $2.2 trillion from the individual income tax in fiscal 2023 and $80 billion from tariffs.

The gap isn’t, per se, the reason Trump’s vision cannot be realized. On paper, Trump could cover the shortfall with a 70 percent universal tariff on all imported goods.

But the proposal is unworkable because of the sharp difference in the size of the respective tax bases. The Congressional Budget Office projects $15.6 trillion of adjusted gross income in fiscal year 2023. Goods imports totaled about $3.1 trillion in calendar year 2023. Trump’s calculation ignores the precipitous drop in imports a tax increase of this magnitude would cause.

Based on historical data, we can expect imports to drop by 1 percent for every 1 percent increase in import prices. The projected total would fall to $930 billion. Because the base would be smaller, the higher tariffs would raise about $650 billion in revenue, not the trillions Trump projects.

Even adjusting for the inevitable drop in imports overstates the revenue potential of tariffs. No tax enjoys perfect adherence. And applying the stated tax rate to current import prices overstates how revenue would rise in real terms.

Under a full set of standard tax modeling assumptions, the revenue maximizing rate falls between 40 to 50 percent, resulting in revenue between $450 billion to $650 billion. Raising rates above that range would reduce the resulting revenue — meaning tariffs fall well short of what is required to replace $2 trillion of income tax revenue. . . .

Spending on discretionary programs and net interest combined equals 8.8 percent of GDP compared to goods imports at about 11.2 percent of GDP. It would take a nearly 80 percent tax on all goods imports — assuming (implausibly) that imports remain unchanged — to turn enough revenue to cover these major spending items. Applying the actual revenue maximizing tariff rate on imports would not even cover interest payments on the debt, projected to exceed $1 trillion annually by 2025. . . .

Currently, the United States maintains a highly progressive fiscal program, in which higher-income taxpayers generally pay substantially higher income tax rates and lower-income taxpayers receive more back in refundable tax credits than they owe in income taxes.

Tariffs, in contrast, impose a regressive burden on taxpayers. Indeed, this is why analyses of Trump’s proposed tax plan — which raises tariffs and substantially cuts (but does not eliminate) income taxes — would increase the tax burden on at least the bottom 40 percent of taxpayerswhile providing the largest cuts for the top 5 percent.