Former President Donald Trump’s recent proposal to replace the U.S. income tax with a tariff on all imported goods is a twist on a clarion call from conservatives — and it could come with unintended consequences.
This week, Trump floated the concept of imposing an “all tariff policy,” ultimately to eliminate the income tax, sources told CNBC.
Entities like the Kemp Commission and Steve Forbes have commonly called to replace the income tax with a flat tax.
Historically, that flat tax, as it was proposed in years past, would retain a portion of the mortgage interest deduction and the ability to deduct state and local taxes while also pledging to be revenue-neutral A revenue-neutral flat tax would probably be close to a 22% rate, but that figure was from a debate now decades old.
Trump’s proposal brings a new wrinkle to the movement, as it would replace the income tax with a levy on all imported goods.
The complexity of replacing revenue
As of 2023, the U.S. imported about $3.8 trillion in goods and services from abroad.
So, the key question here is how large must the tariffs be to bring in $2.5 trillion in revenue that the government currently garners from income taxes?
Simple math would suggest that the government may need to impose a 65% tax on all imported goods and services to raise the needed $2.5 trillion.
Admittedly, that may not be the proper way to calculate the tariffs, but it may also understate the rate at which tariffs would be levied to capture that revenue, given that a decline in multilateral trade would be a likely outcome if such a proposal came about.
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