Trump: "Use Tariffs to Replace Income Taxes." Really?

By Hal Gershowitz

Multiple sources confirm that former President Donald Trump, during his recent soiree to the U.S. Capitol, floated the idea of replacing the federal income tax with robust tariffs on imported goods. Really???

In the interest of full disclosure, allow me to acknowledge that I'm not a fan of tariffs and consider tariffs to be a necessary evil at best and, at worse, bad habits to which the world is addicted. Tariffs drive up costs and protect inefficient industries from more efficient competition and nations with higher labor costs from countries with lower labor costs. To whatever extent goods cost more to compensate for the artificial cost imposed by tariffs on imported goods, those added costs are inflationary. I'll be the first to acknowledge that tariffs are necessary to mediate pricing when nations with low living standards and cheap labor want to compete with more developed countries with higher living standards.

Nonetheless, the prospect of replacing income taxes with tariffs, as Trump has floated, would no doubt appeal to many, at least at first blush. The big problem, of course, is that the numbers don't really work. Last year, tariffs and customs duties only amounted to $88.3 billion out of the $4.4 trillion in revenue the United States raked in. Given that income taxes brought in $2.2 trillion, talk of replacing income taxes with tariffs seems a bit farfetched and hastily considered…sort of like injecting bleach into the human body to fight COVID.

Speaking of injecting bleach into the human body, former President Trump, who likes to refer to himself as "Tariff Man," has been a greater fan of tariffs than any of our post-World War Two presidents. That is, until, perhaps, Joe Biden. If Trump and Biden agree on anything, it is that Free Markets are bad and Protectionism is good. Biden has not only kept Trump's tariffs on Chinese products—he has increased them.

Trump entered the White House determined to undo the North American trade deals with Mexico and Canada and jawbone China into buying more American farm goods. While Mexico and Canada were willing to revisit the North American trade deals, the horse was already out of the barn. Factory jobs made up a smaller share of U.S. employment than before Trump's presidency, and America's trade deficit didn't retreat at all during Trump's presidency.

Trump has threatened a 10% tariff on all imports in a second term and a 60% tax on imports from China. He likes to call his trade policy "Ring Around the Country." Not all economists are impressed. Moody's chief economist Mark Zandi says Trump's tariff plans would create higher inflation while reducing GDP and jobs. He predicts consumer prices would jump 0.7 percentage points. The Peterson Institute for International Economics estimates that families in the middle of the U.S. income distribution would see costs increase by at least $1,700 a year under the Trump plan.

President Biden is no slouch on tariffs either. He would also subsidize chipmaking and electric vehicle manufacturing. Biden's trade negotiator, Katherine Tai, is also taking a tough stance. She is investigating Chinese trade practices in the shipbuilding industry, which some observers predict foreshadows further sanctions on China.

"The laissez-faire economic model of trade wasn't working for the United States," said Elizabeth Baltzan, a senior adviser to Tai. Baltzan admits the Biden Administration is perfectly willing to be labeled "Protectionist." After all, she says, the people we would be protecting are working-class American families.    

Harvard economist Dani Rodrik, who is no fan of globalization, says he favors Biden's trade policies over Trump's. "Trump's was knee-jerk and incoherent, and there is little evidence that his trade restrictions on China did any good for workers or the middle class in the U.S."

More recently, China's rise as America's No. 1 geopolitical rival has created a bipartisan effort to reduce America's reliance on Beijing for supplies of everything from pharmaceuticals to "rare earth" minerals for electric cars and cellphones.

Though this policy shift may have started with Trump, discontent with free trade and an increasingly combative China had been building for years. One of Trump's first presidential acts was to dump a free trade agreement the Obama administration had negotiated with 11 Pacific Rim countries.

Once Trump started shredding free trade agreements, he pushed the pedal to the metal. He went after foreign washing machines and solar panels and imposed tariffs on steel and aluminum, calling their imports a threat to national security. Trump imposed tariffs on $360 billion worth of products produced in China. China, as might be expected, retaliated with tariffs targeting American farmers.

When all was said and done, Trump's tariff warfare with China neither raised nor lowered U.S. employment. Still, it did hurt American companies whose costs were affected when American steel companies were able to increase their prices to their American industrial customers. 

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