Replace the income tax with tariffs?

Replace the income tax with tariffs? 

Peter Earle at AIER has written an article commenting on President Trump’s saying that tariffs can replace federal income taxes for those earning under $200,000. https://thedailyeconomy.org/article/tariffs-instead-of-taxes-a-back-of-envelope-estimate/ I have written before that whoever thought this us obviously could not do math. Earle agrees.

Here is the president’s tweet:

“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!!!”

On April 8^th the president crowed that we were already raking in $2 billion a day from the tariffs. Of course the president is notable for his hyperbole. He just misplaced a few zeros. The actual amount was $200 million a day. But hey, what’s a few zeros among friends? Yet, even when all of the tariffs are being collected, will it be sufficient to eliminate the income tax for those earning less that $200,000? 

Actually, it is economically and mathematically impossible.

Earle points out the difficulties that arise from such a suggestion. First, 54% of income taxes are paid by those earning under $200,000. This amounts to $1.19 trillion that would need to be replaced by tariffs. Ceteris paribus (all things equal), on all imported goods in 2023 this would mean a tariff of 39 percent on everything imported. This is a marked increase from the average rate of 2.5% in 2023. The question is whether a universal tariff of 39 percent would collect $1.19 trillion? The answer is no. Trump is assuming that Americans will purchase the same amount of goods when the tariffs are imposed. Where did he learn his economics?

Tariffs translate to higher consumer prices. Higher prices translate to lower quantities demanded and lower quantities demanded translate to lower revenues. So $1.19 trillion will not be collected. How much less depends on the elasticity of demand for the imported goods. We do know that higher prices mean lower real incomes. We also know that higher prices on imported goods will cause increased demand for domestic substitutes further decreasing the amount raised from tariffs. That means for each decrease in revenues from the tariffs, the tariffs would have to increase even more in order to try to reach the $1.19 trillion needed. Earle states that if the amount of imported goods purchased shrank by 50 percent then the tariffs would have to rise to 77 percent. But if those tariffs increase prices even more – which they will – then the tariffs would have to go up even more. It would be a never ending cycle. 

The bottom line being that trying to replace the income tax with tariffs will result in a net economic loss accompanied by price inflation. It will also mean fewer imports leading to less tariff revenue. There will be less choice for the American consumer, inefficient industires, fewers goods and higher prices. This is the rebirth of mercantilism and will result in Trump’s Fortress America. The president says that we don’t need their cars, we don’t need their energy, we don’t need their lumber. I guess we also do not need their toys, clothes, hats, belts, textiles, electronics and agriculture products either. But I am in trouble. My jeans are from Mexico. My shoes from Cambodia. My pants from Bangladesh. My belt and socks from China. My shirt from India. My underwear from Kenya. Kenya? Yes Kenya. My Georgia bulldog cap is from China – Go Dawgs! ! (包括 的例句)!

Trump may not need foreign made stuff but apparently I do.

I presume this idea emanated from Trump’s two advisors who have PhDs from Harvard. Further evidence that Harvard is not “elite”. These guys obviously can’t do math and need to go back and take Harvard’s remedial math course. Earle calls the notion of tariff substitution for income taxes untenable. I call it foolish.