White House Economists Say Tariff to Replace Income Tax Would Have to Be Over 70%

Although it's possible presidential candidate Donald Trump was just riffing when he proposed eliminating the federal income tax and replacing the revenue with tariffs, the White House Council of Economic Advisers is countering the idea with a white paper it issued July 12.

The economists wrote that "tariffs remain an important and targeted tool, of course, to protect against unfair trade practices." But, they said, hiking tariffs high enough to replace or significantly reduce the income tax would increase inflation, harm middle and working class residents, and harm domestic manufacturing, one supposed aim of the proposal.

They explained that current tariffs bring in $80 billion, which is 2% of federal tax revenue; in comparison, the individual income tax contributes 49% of federal revenue.

"Given the value of goods imports during FY 2023 ($3.12 trillion), an across-the-board 70 percent tariff would be required to replace the equivalent revenue raised by the individual income tax under the overly simplistic assumption that consumers, producers, and our trading partners would have made no changes to their behavior in response to the tariffs," they wrote.

The paper built on a June analysis published by former Biden administration Deputy Assistant Treasury Secretary for Tax Analysis Kimberly Clausing, now a scholar at the nonpartisan Peterson Institute for International Economics. That paper, co-authored with an Obama-era White House economic adviser, noted that even a 10% tariff on all imports and 60% tariff on all Chinese imports would cause losses to manufacturers who import inputs as well as retaliation to U.S. exports. That action would bring in about $225 billion annually if the demand for imports didn't change, but, they wrote, of course, it would.

Clausing wrote that Trump floated the idea of replacing the income tax with tariffs while meeting with Republicans in Congress in June. "To be sure, when Trump vents before friendly audiences, one has to take it with a large grain of salt," she wrote. If it happened, "it would cost jobs, ignite inflation, increase federal deficits, and cause a recession.

"If pursued, this policy would antagonize US allies and partners, provoking worldwide trade wars, damaging global economic welfare, and undermining national security. It would also likely destabilize the global financial system."

She said a 70% tariff on imports would move resources away from airplane manufacturing, where the U.S. has a comparative advantage, toward sectors where it is less efficient, such as furniture manufacturing.

Sky-high tariffs would lead to companies lobbying the government for exemptions, smuggling, and shopping abroad, Clausing argued.

The White House economists estimated that just a 10% across-the-board tariff would impose a tariff burden of 2.3% of income for those in the bottom quintile of incomes, and just 1% for the top quintile, since poorer households spend more on goods as a proportion of their income.