In politics, fantasy often fills the space where fiscal reality should take center stage. For example, the left has long insisted that large new spending programs could be funded “if only the rich paid their fair share.”
But President Trump’s Republican Party now has its own new entry for biggest fiscal fantasy: “Tariffs can replace the income tax.”
Both are equally false. But it’s the second idea that is giving some anti-tax Republicans cover to support economically disastrous tax hikes.
The federal government spends a lot of money: about $6.8 trillion last year. There’s no way to fund a government that big with taxes on any narrow segment of Americans — not the wealthy, not corporations, and certainly not foreign importers. Yet few in Washington want to level with voters about that fact. It’s easier to peddle fiscal fairy tales.
Let’s start with the tariff innumeracy.
President Trump has repeatedly suggested replacing the income tax with the revenues from his tariffs. Most recently, he wrote that he’d start by eliminating taxes for people making less than $200,000.
Replacing the income tax altogether would require raising about $2.2 trillion in tariff revenue (that’s how much Americans paid in income taxes in 2023). Replacing it for those under $200,000 would require $700 billion.
The U.S. imported about $2.8 trillion worth of goods in 2023. So, in the simplest terms, you would need a tariff of about 80 percent to replace the income tax. That’s more than three times the applied tariff rate under Trump’s tariff announcements (as of April 18) and that assumes people don’t change their behavior, which we know they do.
But even then, trade volumes decline as tariff rates increase due to domestic substitution, rerouting through non-tariff channels, and retaliation from other countries. This dynamic underlies the well-known Laffer Curve, which says that raising tax rates imposes increasingly damaging economic costs, legal avoidance, and illegal evasion until, at some point, a higher tax or tariff rate leads to less revenue instead of more.
There is considerable uncertainty as to where the top of the tariff Laffer Curve lies. However, two professors recently estimated that even using the most tariff-friendly assumptions, the maximum gain in U.S. government revenue available from tariffs is about $500 billion a year. Trump’s tariffs, to date, would raise less than one-third of that amount.
Thus, there is no economically feasible scenario where tariffs can replace the current income tax or even the income taxes paid by those making less than $200,000.
The same is true for the left’s mantra of “just tax the rich.” It comes from a similar fiscal misunderstanding that will undoubtedly guide Democrats’ messaging over the coming years.
For example, a 100 percent tax confiscating every dollar of income earned over half a million would not even cover currently projected federal budget deficits, let alone any additional spending that liberals propose. And like the simple tariff example, taxing income at a 100 percent rate is economically infeasible. After accounting for local tax burdens, top income tax rates of about 50 percent are already demonstrably on the revenue-losing side of the Laffer Curve in 10 states.
What about taxing wealth, in addition to income? Kamala Harris’s proposed wealth tax, a policy likely to be revived whenever Democrats return to power, is optimistically projected to cover only about 3 percent of the federal government’s projected budget deficit.
The truth politicians aren’t willing to tell their voters is that big government is expensive. The only sustainable way to fund it is with high taxes on everyone — rich, middle-class and poor alike.
Europe is an instructive example. Recent data on tax rates across Europe and the U.S. show that an average American worker, living in Europe, would pay about $12,000 more in taxes each year, regardless of wealth, social status, or number of children. No other country has found a way to fund high levels of government spending without broad-based taxes on everyone. Europe does it with an average 20 percent value-added tax (basically a sales tax), higher payroll taxes and higher income taxes that reach much further down the income scale.
In the U.S., the Feds borrow about $2 trillion a year to keep spending high and growing while keeping taxes low. However, if spending remains on its current path, the U.S. government will eventually grow to the size of European governments, requiring European-style taxation.
If the U.S. wants to keep its competitive edge, it must keep taxes low. But this cannot be done without significant spending cuts — the type that politicians of both parties like to announce are “off the table.”
Serious reforms would be necessary to Social Security, Medicare and Medicaid. According to the U.S. Treasury, just two of these programs (Social Security and Medicare) account for more than 100 percent of the government’s future unfunded obligations.
No tax on imports or on any other narrow segment of Americans can fix the federal budget. Only spending reforms can right the ship.
Conservatives once rightly mocked “tax the rich” slogans as unserious and unsustainable. But now, they’re peddling fantasies of their own.
Adam N. Michel is director of tax policy studies at the Cato Institute.
