Donald Trump made various appealing promises during his election campaigns to woo voters. Out of all the proposals, the one promising to eliminate federal income taxes gathered the most attention.
He shared his plans for ending income taxes in two high-profile interviews using all-tariff plans. If you’re a tax-paying citizen residing in the United States, here’s what it could mean for the economy and your wallet.
Replacing Income Taxes with All-Tariff Plans
In one of the talks with barbers in the Bronx, Donald Trump discussed his plans to end income tax by drawing a connection back to the late 19th century. Back in time, the country relied primarily on tariff revenue to fund federal spending. He said America was at its richest when it had tariffs and no income taxes.
Today, the country has income taxes, and people are dying. They don’t have enough money to pay taxes. He plans to use the same policy that existed in the 1890s to fund all federal expenses using tariffs instead of income taxes. However, it isn’t clear whether he will only eliminate individual income taxes or also include federal corporate income and payroll taxes in this policy.
How it May Work
Tariffs are not new to the United States, but none of the previously elected presidents proposed imposing an all-tariff plan to support the federal government’s revenue requirements. Donald Trump has promised to increase tariffs on imported goods by huge margins. He is contemplating imposing tariffs as high as 60% to 100% on Chinese goods.
A universal tax rate of 10% to 20% is also proposed for imports from all countries. In one of his audience interactions at the Economic Club of Chicago, he expressed his intentions of making these tariffs as high as 50%. The aim is to generate higher revenue from tariffs, sufficient enough to replace individual taxes paid by U.S. citizens.
What Experts Say
Alan Auerbach, University of California’s law professor, doesn’t have a very favorable view of this proposed plan. She believes generating an amount equivalent to replace individual income taxes would require a minimum of 70% tariffs on all imports, which isn’t feasible.
Tax Foundation’s senior economist, Erica York, also echoed similar thoughts. Erica said achieving it is mathematically impossible. She even shared her views with a CNN reporter, stating that imports are a much smaller tax base than taxable income. Erica also highlighted how implementing such drastic tariff hikes can attract damaging retaliation against U.S. exports.
Tariff’s Impact on U.S. Consumers
Substituting individual income tax with tariff revenue can have damaging effects on U.S. households. If Donald Trump implements a 60% tariff on Chinese goods and a universal tariff at 20%, the price of items may increase by $3,000 for an average U.S. household. Implementing a 200% tariff on vehicles manufactured in Mexico will increase the average U.S. household costs by approximately $600. It may make Americans lose anywhere between $46 billion to $78 billion every year while buying essentials like furniture, toys, apparel, household appliances, etc.
Worsening Inflation Across the Country
As Donald Trump views tariffs as his go-to economic weapon, experts believe it won’t deliver the same results as expected. In fact, it will worsen inflation in the country by passing the tariff burden down to U.S. consumers. Increased tariffs will naturally increase product prices, pushing people to pay more for the same products. The reduced competition from foreign brands may also make U.S. producers increase their product prices, squeezing U.S. consumer’s wallets.
Shifts in Consumer Behavior
The proposed tariff hikes can drastically increase the imported goods’ prices, bringing noticeable changes in consumer behavior. Wealthy consumers who frequently splurge on imported luxury items may have to shift their focus to domestic products, which may not always meet the same standards and value they’re accustomed to.
Being unable to purchase the same range of luxury items may negatively affect their overall lifestyle, creating significant dissatisfaction among wealthy citizens. Additionally, the reduction in sales may prompt foreign brands to close their stores across countries, leading to substantial job losses and reduced economic activities in certain sectors.
Adverse Impact on Investment Portfolio
If Donald Trump proceeds with his plan of eliminating income tax, the government may later explore other alternatives to cover up for the lost taxes. Some expect that the government’s focus may shift to increasing capital gain or property taxes, especially during the period when tariff revenue isn’t enough to fund all federal government expenses. If higher capital gain or property taxes are implemented, the returns from investment portfolios can witness a massive downward turn.
Potential for Increased State and Local Taxes
State and local governments may increase their taxes to compensate for the losses or lack of revenue due to income tax elimination. While it will impact every individual, wealthy citizens will be the most affected. Since they own multiple properties, even a slight increase in property tax can increase their burden. A higher sales tax will increase the cost of every product and service, reducing every citizen’s purchasing power.
