Nov 3, 2024
Imagine a financially liberated America where citizens kept every dollar they earned, while foreign companies took on the nation’s tax burden. That was the vision Donald Trump shared with Joe Rogan in an episode of The Joe Rogan Experience podcast.
About 40 minutes into the near-three hour episode, Trump comments that the country could become rich through the use of tariffs and Rogan asked the former president directly: “Did you just float out the idea of getting rid of income taxes and replacing it with tariffs? Are we serious about that?”
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Trump’s response was emphatic.
“Yeah, sure, why not?” he replied.
Trump then dove into a bit of American economic history, recounting how tariffs once funded the federal government before being replaced by income taxes.
“Our country was the richest in the, relatively, in the 1880s and 1890s. A president who was assassinated named McKinley — he was the tariff king. He spoke beautifully of tariffs,” he told Rogan.
Trump went on, attributing the shift to income taxes to external pressure from foreign governments: “And then around in the early 1900s, they switched over stupidly to, frankly, an income tax. And you know why? Because countries were putting a lot of pressure on America. ‘We don’t want to pay tariffs. Please don’t.’ Believe me, they control our politicians.”
The funding sources for the U.S. government have indeed evolved over time. The Sixteenth Amendment, ratified on Feb. 3, 1913, gave Congress the power to collect income taxes, marking a major shift in how the government funded itself. Prior to this, the federal budget relied primarily on tariffs. But with this amendment, the U.S. introduced an income tax system that has since become a cornerstone of federal revenue.
Tariffs: 10%, 20% or 2,000%?
On the campaign trail ahead of Tuesday’s Presidential election, Trump has floated plans for a broad-based tariff of 10% to 20% on all imports to the U.S., along with targeted tariffs upwards of 60% on all Chinese imports.
Trump has also pointed to specific industries as targets for even steeper tariffs.
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In a recent farming roundtable in Smithton, Pennsylvania, he issued a stark warning to agricultural and construction equipment giant John Deere, threatening a 200% tariff on any products the company manufactures in Mexico.
“I love the company, but as you know, they announced a few days ago that they're going to move a lot of their manufacturing business to Mexico. I'm just notifying John Deere right now: if you do that, we’re putting a 200% tariff on everything that you want to sell into the United States,” he declared.
At the Economic Club of Chicago, Trump expanded on his plans, citing the auto industry as an area of concern. He expressed alarm over Chinese investment in auto plants in Mexico, warning that without action, these cars would flood the U.S. market, putting the American auto industry at risk. “That’s going to be the end of Michigan, it’s going to be the end of, frankly, South Carolina, going to be the end of everything,” he stated, suggesting that entire regions of the country could be devastated if these imports aren’t stopped.
To counter this, Trump proposed using heavy tariffs. “If I'm going to be president of this country, I'm going to put a 100, 200, 2,000% tariff,” he declared. “They're not going to sell one car into the United States, because we're not going to destroy our country.”
Trump outlined two key purposes for tariffs. The first is to generate government revenue, noting that even a 10% tariff could help reduce the budget deficit. The second is to force companies to relocate production to the U.S. However, Trump emphasized that a low tariff, like 10%, wouldn’t be enough to drive such a move.
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“They're not going to do it for 10[%], but [if] you make a 50% tariff, they're going to come in,” he explained.
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‘Absurd idea’
Trump’s enthusiasm for tariffs, which he calls “the most beautiful word in the dictionary,” hasn’t found much support among economists, particularly when it comes to the idea of replacing income taxes with tariffs.
Erica York, a senior economist at the Tax Foundation, called the notion “absurd.”
“It’s an absurd idea for many reasons, the biggest being that it is mathematically impossible to replace the income tax with tariffs,” York told CNN.
York explained that tariffs apply only to imports — a much smaller tax base than taxable income — and therefore couldn’t generate the same level of revenue as income taxes.
Economists Kimberly Clausing and Maurice Obstfeld of the Peterson Institute for International Economics have further explored the numbers. They noted that in 2023, imported goods, which are subject to tariffs, amounted to $3.1 trillion, whereas taxable income in the U.S. exceeded $20 trillion — allowing the government to raise about $2 trillion in individual and corporate income tax revenue.
Clausing and Obstfeld argue that to replace income tax revenue, tariffs would need to be “implausibly high.” Moreover, raising tariffs to these extreme levels would likely reduce imports, shrinking the tax base even further. They conclude that “it is literally impossible for tariffs to fully replace income taxes.”
Additional research from the Budget Lab at Yale University highlights the potential impact on consumers. Their analysis found that Trump’s tariff proposal could increase prices by 1.4% to 5.1%, depending on the specific proposal. For an average household, that would mean a reduced purchasing power of $1,900 to $7,600 annually.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
