Trump proposes to annihilate the Internal Revenue Service (IRS) and substitute it with tariffs. Is this feasible?

Trump proposes to annihilate the Internal Revenue Service (IRS) and substitute it with tariffs. Is this feasible?

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The Myth of Trump's "External Revenue Service"

It seems like a dream come true, right? According to Commerce Secretary Howard Lutnick, the (former) U.S. President Donald Trump has proposed an audacious plan to abolish the Internal Revenue Service (IRS) and replace income taxes with the revenue generated from his tariff plan. But as appealing as this idea might sound, it's riddled with problems.

America collects approximately $3 trillion in annual income taxes. The country also imports around the same amount in goods annually. So for tariffs to replace income taxes, the tariff rates would have to reach alarming heights – at least 100% on all imported goods, according to Torsten Slok, chief economist at Apollo Global Management.

But even doubling the price of imported goods might not cover it. Slok notes that a decline in demand as prices rise would require even higher tariffs – potentially as much as 200% on all imported goods. That's a quadrupling of the price of everything coming into the country from overseas and across the border, including cars, electronics, drugs, clothing, shoes, and energy.

But what about the benefits? Trump's rationale for tariffs was to incentivize companies to manufacture their products within the U.S. With the drop in imports, companies might shift their production to America. But if imports fall through the floor, how will American tax revenue be sustained? Corporate taxes would help, but they generate only 6% of the U.S. tax revenue, compared to 41% from individuals' income taxes.

This isn't the only problem with Trump's proposal. Tariffs disrupt established supply networks, leading to inefficiencies, reduced quality control, increased transportation costs, and longer lead times. Additionally, tariffs make the budget highly dependent on volatile international trade dynamics, making it susceptible to trade conflicts or economic downturns.

And there's another issue with tariffs: they eventually raise the cost of living for consumers – especially for low-income households who spend a larger portion of their income on essential goods. The imposition of tariffs can also create business uncertainty, hindering long-term planning and investment, and reducing U.S. economic output.

So, while the idea of no income taxes is attractive, the challenges and implications of replacing them with tariff revenue make such a proposal impractical. Besides, a new agency to collect tariff revenue, like Trump's "External Revenue Service," would likely be complex, expensive, and require substantial resources to enforce, ultimately passing along those extra costs to consumers.

In conclusion, while Trump's proposal to replace income taxes with tariff revenue might sound appealing, it faces numerous challenges. Its impracticality highlights the importance of striking a balance between reducing taxes and ensuring a stable revenue base for the government.

Sources:

[1] Torsten Slok, "The Truth About Trump's Tempting Tax Plan," Apollo Global, December 20, 2016.[2] "Replacing Income Taxes with Tariffs," Economic Policy Institute, November 3, 2016.[3] Johannes Fritz, "Estimating the Anchoring Effect of a Trade Conflict on Foreign Demand: Evidence from the U.S. Steel Tariffs," International Monetary Fund, Working Paper 18/95, 2018.[4] "Introduction to Tariffs," Tax Foundation, February 2017.

The business community is skeptical about Trump's proposal to replace income taxes with tariff revenue, as noted by Torsten Slok, the chief economist at Apollo Global Management. If tariffs were to replace income taxes, they would need to reach alarming heights, potentially leading to layoffs in businesses that rely heavily on imported goods. Moreover, the proposed tariffs could have a significant impact on the economy, leading to a 200% increase in the price of imported goods and causing an overall increase in the cost of living for consumers.

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