No, Tariffs Can't Replace Income Taxes
They are among the worst taxes imaginable—narrow, arbitrary, unstable, and regressive.
After more deadlines and deals, another round of President Donald Trump's tariffs has arrived. With higher prices again needing to be justified—and on the heels of the "Big Beautiful Bill," which didn't exactly balance the budget—protectionists are positioned to once again play the revenue hawk's card. There are multiple problems with this story.
The idea is that tariffs—which some believe function like the consumption taxes that economists generally view favorably—can raise money more efficiently than income taxes.
First, how can tariffs both protect American producers and reliably raise tax revenue? Think about it: Any tariff high enough to keep out lots of foreign products will not be levied on very many. Conversely, any tariff low enough to generate steady revenue would need to let trade continue by skimming off just a small portion in duties, offering only token protectionism.
History shows this tradeoff clearly. For much of the 19th century, when tariffs were the federal government's main source of revenue, rates were set to maximize collections, not to wall off our economy. When tariffs turn protective, revenue falls.
Tariffs also fail the tax efficiency test. It's true that taxes distort behavior, and that America's income-based taxes—especially the corporate tax—are among the most damaging varieties. Economists prefer consumption taxes, which leave income alone until it's spent, sparing savings and investment from double (or triple) taxation.
Leaving aside their protectionist nature, if tariffs did that, it might make sense to think about substituting them for other, worse forms of taxation. But they don't.
Take an actual consumption tax—the value-added-tax—which is applied uniformly to domestic and imported goods, rebated at the border for exports, and structured to avoid double-taxing investment. Tariffs, on the other hand, single out imports, which account for only about 15 percent of U.S. consumption. Different goods from different countries also face different rates. Thus, they are neither broad-based, nor neutral or transparent. They're just an additional tax that tries to push buyers toward less-preferred products.
Worse, tariffs fall heavily on capital inputs like machines and other equipment. More than half of U.S. imports are raw materials, intermediate goods, or capital equipment—things we need to build other things. As the American Enterprise Institute's Kyle Pomerleau notes, this makes tariffs more, not less, distortive than our current capital income taxes.
The latter allow firms to deduct investments in machinery and equipment, lowering the effective tax rate from what's on paper. Tariffs provide no such deduction. That makes investing in U.S. capabilities—precisely what spurs productivity and wages—more expensive. Far from being a relatively tolerable consumption tax, tariffs are an inefficient, arbitrary surcharge on growth.
Tariffs fail another principle of good taxation: stability. A serious tax system is predictable, allowing businesses and households to plan ahead. Tariffs are imposed unilaterally under statutes like Section 301 or even emergency powers. As recent experience shows, they can be, and often are, reversed overnight without any assurance they won't soon reappear. That's not a reliable revenue source or incentive for businesses to proceed with confidence.
Finally, tariffs invite carveouts and favoritism. Politically connected firms routinely secure exemptions, exclusions, or special treatment, drastically narrowing the tax base. Since April's "Liberation Day," exclusions have sheltered goods worth more than $1 trillion while other goods got hammered. A tax code riddled with loopholes secured through Congress is bad enough; a tariff regime where lobbyists compete for carveouts so quickly and effectively is worse.
Let's pretend tariffs could avoid all these problems. Could they cover the cost of income taxes, even just for those making less than $150,000 or $200,000, as suggested by Trump and Commerce Secretary Howard Lutnick?
In the most recent fiscal year, the federal government collected about $2.4 trillion from the individual income tax. That's 49 percent of federal tax revenue. The Tax Foundation's calculation for 2021 shows that collections from those earning less than $200,000 amount to $737.5 billion annually. There's also $430 billion brought in from the corporate income tax in fiscal year 2024.
Extrapolating from the Treasury Department's duty collection for July, Trump's sweeping new tariffs might bring in as much as $360 billion this year—significantly higher that the pre-Trump era collection of $80 billion. Grandiose plans to do away with most people's income taxes would mean raising tariff rates far higher than even Trump wants, and without all the carveouts. Then, we'd need to hope for the impossible—namely, that the tariffs don't kill off a ton of economic activity.
Tariffs are not a realistic tax base. They're among the worst taxes imaginable—narrow, arbitrary, unstable, and regressive. They tax investment more than consumption. They reward lobbying over efficiency. And the revenue they raise is but a fraction of annual government spending.
Pretending they deliver both protection and revenue is not only dishonest; it risks undermining the very foundations of American prosperity.
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