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NextImg:A shift away from income taxes is good, but Trump’s tariff math doesn’t add up - Washington Examiner

With primary provisions of the 2017 Tax Cuts and Jobs Act set to expire come 2025, either President Joe Biden or President Donald Trump will face a showdown in Congress to extend the tax cuts or let them die. But the former president has reportedly teased a plan to entirely sidestep this dilemma over his signature domestic achievement. In recent closed-door remarks to Republican lawmakers at the Capitol Hill Club, Trump proposed replacing our income tax leviathan with a massive expansion of tariffs on imports.

It goes without saying that as with all of his propositions, Trump’s scheme to replace personal income taxes with an expanded tariff regime is subject to change. It could be scaled back or even discarded at the pleasure of the presidential hopeful. But considering that Trump has not blasted reporting on this proposal as fake news, it’s worth evaluating it seriously.

As an abstraction, replacing the taxation of income with the taxation of consumption would increase broader economic growth without necessarily reducing government tax revenue. While personal income taxes punish earnings, consumption taxes penalize spending, which in turn means they incentivize saving and investment. Whereas the personal income taxation system puts the onus on individuals to tally up their tax bill under the penalty of potential prison time if they get it wrong, consumption taxes are paid at the point of purchase, meaning that companies, not consumers, would be responsible for levying the correct amount.

On its face, that seems a dramatic improvement over the current complexity of the federal tax code, which is so long that even the left-leaning PolitiFact concedes that “nobody’s sure of its length.”

Yet the math behind Trump’s proposal doesn’t add up even with the most conservative estimate. In practice, a universal tariff on imports would cost an increasing amount over time as it triggers inevitable trade wars and stokes dissension among U.S. allies.

In the last fiscal year, the federal government collected $4.4 trillion, and a whopping $2.2 trillion of that came just from federal income taxes. Another $1.6 trillion came from payroll taxes, $420 billion from corporate income taxes, and just $80 billion from customs or tariffs. This revenue totaled 16.5% of the United States’s gross domestic product, on par with the 16.6% average from 2003 to 2022.

Last year, the U.S. imported $3.9 trillion worth of goods. By my calculations, to replace $2.2 trillion in lost personal income tax paid to the federal government, we would need to tax $3.9 trillion of imports at an average rate of more than 60%. Liberal New York Times columnist and Nobel Prize-winning economist Paul Krugman says that to account for the reduced demand for imports that would result from tariffs, the average tariff rate would need to be 133%, but as usual, take anything and everything said by Krugman with a grain of salt.

Hypothetically, to entirely replace the revenue generated by personal income taxation, all imports would need to be tariffed at an average rate of more than 60%. Still, as other nations inevitably retaliate and our demand for imports drops, that average tariff rate would have to dramatically increase over time.

Creating other kinds of consumption taxes, such as value-added tax or luxury taxes, could work alongside tariffs on imports to much more realistically amount to the $2.2 trillion in lost revenue from federal income taxes. But as seen with Biden’s green subsidy regime for electric vehicles and the like, a consumption tax is much more subject to political manipulation than the income tax regime. Whereas an increase to a marginal tax rate must apply to all earnings within a certain tax bracket, you could imagine Democrats trying to pass an excise tax on firearms while Republicans try to pass one on lab-grown meat. While the courts would have to litigate whether a VAT violates the 14th Amendment in the case of disparate impact or the Second Amendment in the firearm example, the political theater alone could create chaos in the markets.

CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER

The real reason Trump’s plan falls flat is that it fails to address the spending problem slated to skyrocket. In the last fiscal year alone, federal outlays amounted to $6.1 trillion, $3.8 trillion of which was mandatory spending, entitlements such as Social Security and Medicare. And while we only spent $700 billion paying off our interest on the $35 trillion national debt, we’re on pace to spend a minimum of $1.2 trillion on interest this year thanks to bond market panic over Bidenomics and persistent inflation. By 2034, the nonpartisan Congressional Budget Office projects annual federal spending will surpass $10 trillion. A radically expanded tariff regime would likely reduce the total import base from $3.9 trillion, which is already too low, to replace the $4 trillion the CBO projects will be generated by personal income taxes in 2034.

Few would clamor to save an income tax system as complicated as ours. Yet mere mercantilism results in the least effective form of consumption taxation and not nearly enough revenue to be feasible in practice.