Trump’s Tax-by-Tariffs Plan Would Enrich the Wealthy, Cripple the Economy, and Send Inflation Soaring

Trump’s Tax-by-Tariffs Plan Would Enrich the Wealthy, Cripple the Economy, and Send Inflation Soaring. The latest crackpot idea from the presumptive Republican nominee would throw us back to the federal revenue model from the Gilded Age

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Based on Donald Trump’s pledge last week to replace the personal income tax with trade tariffs, there can be no question about the depths of his economic ignorance. Consider the plan’s effects: It would cripple U.S. trade, growth, and employment while triggering the worst inflation since 1980. Tariffs that could replace income tax revenues will have to be very broad and extremely high, damaging the economies in states with major ports or industries that rely on imported parts and materials. In its first year alone, Trump’s scheme for raising revenues would also save the top one-half of one percent of Americans—those with incomes of $1 million or more—a gob-smacking $850 billion.

It’s far from Trump’s only crackpot idea for the U.S. economy. His plan to use the armed forces to round up, detain, and deport 11 million unauthorized immigrants—including 7 million workers—also would end in a serious recession and higher inflation and cost taxpayers $265 billion to carry out. It’s time for businesses, especially C-suite executives flirting with the presumptive Republican nominee, to recognize that he is genuinely clueless about the economy. It’s time for everyone to appreciate how his plans could jeopardize American prosperity and perhaps the future of American capitalism.

The first plank of Trump’s tax-by-tariffs scheme would jettison the personal income tax, taking us back to the Gilded Age when tariffs were the main source of federal revenue. By applying the IRS data for 2021, we can track what that would likely mean. The top 0.03 percent of taxpayers—45,400 households with more than $10 million in taxable income, averaging $29.1 million—would receive an average windfall of $7.8 million. Together, they would pocket 15.6 percent of the plan’s total benefits. (See the table below.) The next 0.5 percent with reported income of $1 million to $10 million, covering 830,100 households, would save an average of $594,000 each. They would be followed by the next 1.0 percent of taxpayers with taxable incomes of $500,000 to $1 million, some 1.6 million households; their savings under Trump’s plan would average $154,400 each. In the first year of Trump’s reconfigured tax system, the top 1.53 percent of U.S. households would save $1.1 trillion or nearly half of the plan’s total tax benefits. It’s an oligarch’s dream.

The next 20.6 percent of U.S. taxpayers have taxable incomes of $100,000 to $500,000, some 33 million households in 2021. They also would fare nicely, pocketing, on average, $25,800 each. The benefits from Trump’s plan fall sharply for those with incomes of under $100,000. For instance, 9.1 percent of households earned $75,000 to $100,000; together, they would receive only 5.4 percent of the benefits. That leaves 110.6 million households with taxable incomes of less than $75,000. They represent 69 percent of households, yet they would get less than 9 percent of the Trump plan’s initial windfalls. And they include the 59 million households with taxable incomes of less than $30,000, who together would receive less than 1 percent of the plan’s savings.

The Allocation of Initial Savings under Trump’s Plan to End Income Taxes in Favor of Tariffs

	Households	Income/Household	Benefit/Household	% Taxpayers	% Benefits
$10 million +	45,404	$29,144,435	$7,824,517	0.03%	15.6%
$1 million-$10 million	830,123	$2,060,600	$594,031	0.5%	21.6%
$500,000-$1 million	1,617,144	$621,841	$154,411	1.0%	10.9%
$100,000-$500,000	33,090,048	$150,626	$25,839	20.6%	37.5%
$75,000-$100,000	14,657,726	$64,335	$8,445	9.1%	5.4%
$50,000-$75,000	22,653,934	$42,274	$5,071	14.1%	5.0%
$30,000-$50,000	28,905,402	$22,103	$2,386	18.0%	3.0%
Under $30,000	59,024,559	$3,320	$337	36.7%	0.9%

The second plank of this mindless plan, using import tariffs to replace income tax revenues, would drive down growth and increase inflation, damaging virtually everyone, but especially the majority, who would benefit little from ending the income tax.

To begin, the plan doesn’t even begin to add up. In 2022, the United States imported $3,270 billion in goods with an average tariff rate of 1.5 percent, generating less than $50 billion in revenues, while income taxes raised $2,362 trillion. If public finance were a matter of simple arithmetic, a 72 percent across-the-board tariff would bring in those revenues. Of course, that’s not how it would work. Treasury Secretary Janet Yellen, inarguably one of the nation’s smartest economists, has estimated that Trump’s tax redesign would require tariff rates “well over 100 percent” that would “make life unaffordable for working-class Americans … and harm American businesses.”

That’s the verdict because skyrocketing prices for everything we import, from automobiles and pharmaceuticals to electronics and food, would depress U.S. consumers’ demand for them. As a result, the needed revenues would dictate even higher tariffs, even as economic growth faltered.

The sobering example of the Smoot-Hawley tariffs also reminds us that the damage would not be limited to consumer goods. In fact, 60 percent of current U.S. imports are used by U.S. companies to produce products here at home, namely capital goods (machinery and other equipment and technologies), intermediate goods (mainly parts), and materials. As a result, Trump’s mindless tax redesign would also raise prices for domestic goods and services, further depressing demand and growth. These effects would depress both employment and investment. It will also change the American diet since 60 percent of the fruit and 38 percent of the vegetables we consume are imported.

These first-order effects would be just the beginning. The initial boost to inflation would be followed by more price increases as the tariffs weaken normal competitive pressures from foreign producers, enabling U.S. producers of similar goods, capital equipment, parts, and materials to raise their prices. The plan would also undercut U.S. exports and the companies and workers that produce them as our trading partners respond with retaliatory tariffs and the dollar appreciates. Both would raise prices abroad for U.S. exports that totaled more than $2 trillion last year, with the result that the jobs and investments tied to producing them here at home will also decline.

The economies in dozens of states that depend on trade would be hit first. The shocks would quickly injure the states with our busiest ports, including Georgia, Texas, Virginia, California, New York, and Maryland. Retaliatory tariffs from our trading partners would especially savage jobs and growth in states with industries that depend on exports. For example, Trump will have to answer to the companies and workers in the major soybean-producing states, including Iowa, Minnesota, Indiana, and Ohio; and to those in South Carolina, Alabama, Michigan, and California that produce cars for export; and to those in Connecticut, Florida, Arizona, and Washington manufacturing aircraft parts for export; and to those in Texas, New Mexico, North Dakota, and Colorado producing U.S. petroleum exports.

A recent study by the Federal Reserve traced many of these second-order effects from the tariffs Trump[ imposed in 2018. Those tariffs covered 12 percent of our imports, affecting 33 percent of all private sector workers. They also triggered retaliatory tariffs, affecting 19 percent of U.S. exports and 23 percent of private sector workers. The Fed analysis also found that the tariffs quickly raised the average price of all U.S. manufactured goods by one percentage point.

We cannot say with absolute assurance how much inflation would follow from Trump’s new and more radical plan. Simple math suggests that 72 to 100 percent tariffs on all imported goods could push up prices for manufactured goods by as much as one-third—and since goods account for 34 percent of personal spending, that could mean overall inflation of more than 10 percent. In any case, the impact would undoubtedly be much greater than in 2018 since, this time, Trump’s tariffs would cover all imports and involve much higher tariff rates.

Ten percent inflation won’t be a problem for wealthy Americans. Their enormous tax windfall would far outweigh the higher prices, and their jobs don’t depend on the larger impact of tariffs on demand and growth. The spike in inflation from the tariffs will be a problem for everyone, starting with 40 percent of U.S. households with no offsetting savings since their incomes are too low to incur income tax liability. When Trump’s plans sink the economy, their jobs and the jobs of many others earning less than $100,000 will be at stake.

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