Trump Says He'd Replace Income Taxes With Tariffs: The Potential Economic Fallout

President-elect Donald Trump campaigned on placing high tariffs on competing nations and cutting taxes, so what should investors expect after Trump’s second inauguration?

Trump’s Policy: Trump’s specific plans concerning tariffs and taxes are unclear and have varied greatly. The 2024 Republican Party platform calls for “baseline Tariffs on Foreign-made goods.” According to the Tax Policy Center, Trump most often promotes a 10% worldwide tariff and a 60% tax on imported Chinese goods.

Trump supports extending his 2017 Tax Cuts and Jobs Act and further reducing taxes. He has also floated the idea of abolishing the federal income tax entirely.

What’s Next: Replacing federal income tax with tariffs would be an enormous policy shift that would likely require extensive legislative action and significant changes to the U.S. tax code.

To replace federal income tax with tariffs, Congress would need to pass legislation that either drastically reduces income tax rates or repeals them altogether. This legislation would require significant support in both the House and Senate. To generate revenue, Congress would need to enact new laws imposing or increasing tariffs on a wide range of imported goods.

Given that taxes are among the most complex areas of the law, the final version of Trump’s policy would likely differ from his campaign promises.

Potential Impact: The Tax Foundation estimated the economic impact following Trump’s victory.

The think tank forecast that, from 2025 through 2034, a 10% universal tariff would raise $2 trillion, while a 20% universal tariff would raise $3.3 trillion. A 10% tariff would increase average taxes on U.S. households by $1,253, while a 20% tariff would increase taxes on U.S. households by $2,045.

These potential tariff revenues would make up only a small fraction of total U.S. individual income tax collections. Thus, a sharp reduction in federal taxes would need to be supplanted by cuts to health care, Social Security, military spending or veterans benefits to limit the federal government deficit.

Is This Even Possible? Trump’s stated positions are more popular among the public than they are among economists.

The Peterson Institute for International Economics’s Kimberly Clausing and Maurice Obstfeld wrote in June that replacing income taxes with tariffs would harm economic growth.

“For starters, it would cost jobs, ignite inflation, increase federal deficits, and cause a recession. It would also shift the tax burden away from the well-off, substantially increasing the tax burden on the poor and middle class,” the economists wrote.

“If pursued, this policy would antagonize U.S. allies and partners, provoking worldwide trade wars, damaging global economic welfare, and undermining national security. It would also likely destabilize the global financial system,” they added.

Political opponent Bernie Sanders (I-VT) has voiced disapproval of Trump’s proposals, calling them “insane economics.”

"This would be the biggest transfer of wealth in the history of this country. It would mean the billionaire class, the millionaires, no longer pay a nickel in taxes,” Sanders wrote on X.

Also Read:

• Why Trump’s Boost To Treasury Yields, Inflation Expectations May Weaken Fed’s Efforts To Cut Interest Rates

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