Yahoo Finance Should Trump Eliminate Income Taxes? Here’s What Tax Experts Say
Former President Donald Trump — and 2024 presidential candidate — recently floated an idea about eliminating income taxes and replacing them with tariffs.
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“Most intriguing policy idea from the GOP meeting at the Capitol Hill Club this morning,” Rep. Thomas Massie, (R-Ky.,) posted on X — formerly Twitter — on June 13. “Trump briefly floated the concept of eliminating the income tax and replacing it with tariffs.”
This was quickly reported by a slew of outlets, and economists and experts have been opining on the matter since.
Taxes are one of the key issues — and a major differentiator in this presidential cycle — between him and President Joe Biden, but whether Trump’s proposal would be feasible remains to be seen.
And when it comes to whether this could help Americans and the economy, experts are split.
‘It Won’t Work’ and Would Impact Poorer Americans
As enticing as it sounds to get rid of the Internal Revenue Service, it just won’t work, said Robert Persichitte, CPA, CFP, CFE, affiliate professor at Metropolitan State University of Denver and financial planner at DeLAGify Financial.
“Let’s do some simple math under the assumption that we don’t need to fix the deficit: Income tax gives us $3.29 trillion in revenue. Our total imports are $3.8 trillion,” he said. “Therefore, we would need nearly a 100% increase in tariffs without people switching to cheaper alternatives which is not a realistic outcome.”
This would also impact poorer Americans more, he added, noting that top earners would get the biggest benefit because they pay higher tax rates and tend to save more of their income.
“In this scheme, you would pay no taxes on saved income,” he added. “Poorer Americans pay lower taxes and in the case of many low-income seniors, they pay no taxes. Their income wouldn’t change but their bills would double.”
This view was echoed recently by the Peterson Institute for International Economics, which found that tariffs “would cost a typical household in the middle of the income distribution at least $1,700 in increased taxes each year.”
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A ‘Hit on the Economy’
Erica York, senior economist, research director at The Tax Foundation, recently wrote in a blog post that “to replace the roughly $2 trillion of revenue raised by the individual income tax with tariffs would require astronomically high tariff rates.”
And several experts agreed with this premise.
For instance, Bryan Riley, director of the National Taxpayers Union Free Trade Initiative, also said that this initiative wouldn’t “be possible.” According to him, in 2023, the individual income tax generated $2.2 trillion in federal revenue while Americans imported $3.1 trillion in goods — and based on that level of imports, it would take a tariff rate of 71% to generate $2.2 trillion in federal revenue.
“However, a tariff rate of 71% would dramatically reduce the volume of imports. As a result, the revenue generated would be nowhere close to $2.2 trillion,” he said.
Riley added that the revenue hit would be worsened by the massive economic disruption such a tariff would inflict on the economy, the resulting lost exports and global trade war, and the indirect impact of transitioning from a progressive individual income tax system to a regressive import tax system.
“Replacing the income tax with tariffs is a fantasy because it is impossible to generate $2.2 trillion from tariffs on merchandise imports,” he added.
Feasible Under Certain Conditions
Meanwhile, other experts noted that the elimination of income taxes can be feasible if the importation of goods coming from other countries levied with tariffs will be greater than the amount of revenue our government currently collects in income taxes.
“A tariff approach to revenue generation will foster more economic growth within our own country as workers will have more disposable income to spend on goods and services,” said Karla Dennis, founder and CEO at Karla Dennis & Associates.
According to her, for instance, this could help businesses generate more money to expand and pay wages.
“It will hopefully minimize the interactions that current taxpayers have with the IRS as most taxpayers are fearful of this government agency,” she added.
Yet, she also noted that the downside is prices will increase on products relying on imported goods.
“Additionally, the predictability of revenue from tariffs would be volatile as imports are based on demand,” she said. “During COVID-19, we could not receive our normal imported goods — this, it may not be a smart business decision to rely only on tariffs.”
Other experts noted that the feasibility of Trump’s plan ultimately rests on cutting government spending, not replacing one tax with another.
“Research shows that the Tax Cuts and Jobs Act would have been more successful in spurring growth and wage gains if President Trump had not waged a trade war,” said Thomas Savidge, an economist with the American Institute for Economic Research.
According to Savidge, if government spending can be cut in tandem with phasing out an income tax, there is a chance of success.
“Otherwise, Americans will be no better off with a different set of taxes (tariffs) and the government will face a budget crisis from status quo spending,” he added.
Finally, some experts– such as Paul Miller, CPA, founder at Miller & Company — did note that there are some benefits to the plan, such as simplicity as eliminating income taxes would simplify the tax system, reducing compliance costs. In addition, it could help savings and investment as more disposable income without income taxes could spur economic growth and there could also be potential for job creation.
Yet, despite these advantages, “the feasibility of replacing income taxes with tariffs is doubtful due to the regressive impact, inflation risks, potential trade wars, and insufficient revenue generation,” he added.
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This article originally appeared on GOBankingRates.com: Should Trump Eliminate Income Taxes? Here’s What Tax Experts Say
