Trump’s plan for an external revenue service that would replace income taxes with tariff revenue is brilliant. It is a way for him to deliver on his promise to bring back manufacturing jobs and to do so without harming the purchasing power of the American people or causing serious economic dislocation.
On April 27, 2025, Trump posted the following on Truth Social:
“When tariffs cut in, many people’s income taxes will be substantially reduced, maybe even completely eliminated. Focus will be on people making less than $200,000 a year. Also, massive numbers of jobs are already being created, with new plants and factories currently being built or planned. It will be a BONANZA FOR AMERICA!!! THE EXTERNAL REVENUE SERVICE IS HAPPENING!!!”
First, the basics. A tariff is a tax on imports. In 2024, the United States imported about $3.3 trillion worth of foreign goods. Let’s say we put a 50% tariff on those goods.
That tariff would cause prices to rise across the board. Rising prices would, at least in the short run, harm the purchasing power of the American people. That would almost certainly cause a recession.
However, if these tariffs were accompanied by income tax reductions, then the effect of rising prices would be balanced out by giving Americans more of their own money back.
Back-of-the-envelope calculations reveal that tariffs alone could take income tax rates to zero for the entire American middle class.
A 50% tariff would probably cause imports, in the long run, to fall by about a third. Inelastic demand for certain goods—items that Americans will keep buying at the same rate even when they are more expensive—means that a 50% tariff won’t necessarily mean a halving of our imports.
A 50% tariff, therefore, would probably bring in about $1 trillion a year. That is on par with the total income tax burden of Americans making $500,000 a year or less. In effect, raising global tariffs to 50% would allow Trump to slash income taxes on the American middle class to zero.
Instead of paying income taxes, Americans would now pay only as much in taxes as they consume in foreign goods. If you don’t want to pay the tariff cost increases, then buy American.
This increase in the cost of foreign goods, combined with the increase in purchasing power by ordinary Americans, would make domestic manufacturers more competitive over time without reducing overall American purchasing power. In this new hypothetical tax regime, imports and foreign investment in American businesses would fall, and American manufacturers and domestic investment would rise as consumers, over time, switch from more expensive imports to now-competitive American-made goods.
This is a win for the Trump agenda. Raising tariffs and lowering the income tax is a way for the United States to diversify its economy and protect manufacturing while maintaining current tax revenue, de-risking against the Chinese, and eliminating the intrusive income tax surveillance system for most Americans.
All taxation involves social engineering. America’s current tax regime of high income taxes and low tariffs makes imports more competitive than they deserve to be. Foreigners should have to pay for access to the American economy so ordinary Americans don’t have to pay income taxes.
In the late 19th century, American tariff rates hovered just under 50%. Indeed, until the 16th amendment legalized the income tax in 1913, virtually the entire federal revenue came from tariffs, with a small percentage coming from excises (manufacturing taxes).
It was not until WWII that Americans began consistently and universally filing income taxes on a yearly basis.
The older American tax regime that left ordinary citizens alone and focused only on taxing imports and a handful of domestic industries (namely, tobacco and alcohol production) was much healthier for the Republic. It would be good to go back to that model as much as possible.
Trump’s idea for an “External Revenue Service” does just that.
It is insane that Americans pay high taxes on their hard-earned income, but foreigners can waltz into American markets with virtually no barrier to entry. This is precisely the opposite of what it ought to be.
Republicans and Democrats in Congress should work to enshrine Trump’s External Revenue Service into law. Instead of whining about tariffs, like Rand Paul, Republican senators should work within Trump’s framework. Trump wants tariffs—so give them to him! Putting tariffs and the income tax into a balance—every dollar in tariffs reducing income taxes by the same—is a path to a much better and healthier economy.