Trump and Biden are each their own worst enemy. This post is about Trump’s latest tariff gaffe. But he has made similar nonsensical claims before.
The Math Doesn’t Add Up
Trump proposed 10 percent tariffs across the board with 60 percent on China.
The Tax Foundation thoroughly trashes Trump’s latest proposal in its report, Five Things to Know about Trump’s Tariff and Income Tax Proposals
Last week, former President Trump took his affinity for tariffs much further, floating the possibility of entirely replacing the federal income tax with new tariffs. He also raised other ideas like eliminating taxes on tipped income and lowering the corporate tax rate by one percentage point. Rather than constituting a fiscally responsible and coherent tax reform plan to boost growth and competitiveness, the latest ideas lack seriousness and merit. If pursued, they would fall well short of fundamental tax reform while hurting American workers and businesses.
1: The Math Doesn’t Add Up
The individual income tax raises more than 27 times as much revenue as tariffs currently do, but it’s not the gap in revenue levels that makes replacement impossible.
An across-the-board tariff hike of 69.9 percent [not just China] on the level of goods imports from 2023 ($3.1 trillion) seems like it could fully replace individual income tax revenues. But that calculation is a significant understatement. It fails to account for several factors that would reduce how much revenue the tariff would raise, including noncompliance and the behavioral response of people reducing how much they import.
- Assuming 15 percent noncompliance, revenue from a 69.9 percent tariff falls to $1.8 trillion
- Assuming an elasticity of -0.997 percent, revenue drops to about $560 billion (imports drop by slightly less than 1 percent for a 1 percent price increase)
Replacing the individual income tax with tariffs is thus completely unrealistic—and the above illustration doesn’t even account for additional factors that would further reduce the revenue raised, like holding the price level constant (which requires the calculation to use the inclusive tax rate), tax offsets, and the negative economic effect of higher tariffs.
2: Tariffs Were a Main Source of Revenue for a Drastically Smaller Government
Former President Trump has pointed to the tariff in American history as a motivation for his idea, but the federal government of a century ago is much different from the federal government of today—as is the American economy. Economists Chad Bown and Douglas Irwin have previously explained that tariffs have not been a main source of federal revenue since 1914, and it would be impossible to rely on tariffs for current spending levels.
3: Higher Tariffs Would Raise Costs for Americans
When the U.S. imposes a tariff, the person or business that imports the good is responsible for paying the tariff—not a foreign country or a foreign business. Depending on different factors, different people in the economy could bear the ultimate economic burden of a tariff. For example, suppose the U.S. places a tariff on dinnerware. If a U.S. retailer imports dinnerware, it must physically make the payment for the 25 percent import tariff on the plates it purchases. But the burden could fall elsewhere. If the foreign seller lowers its own prices to offset some of the tariff cost, it bears part of the burden. If the U.S. retailer raises its own prices, the people who buy plates and bowls from the store bear the tariff burden.
Recent studies on U.S. tariffs have found near 100 percent pass-through of the 2018-2019 trade war tariffs to U.S. importers. That means foreigners have not, directly or indirectly, paid U.S. tariffs—instead, the billions in import taxes raised by the U.S. government have been paid by U.S. businesses and consumers. The economic evidence leaves no dispute that even higher tariffs would further increase costs for American consumers and businesses.
4: Higher Tariffs Would Harm American Workers and Businesses
Even though tariffs cause higher prices for businesses and retail consumers, policymakers might argue that tariffs are worth it because they benefit some sectors of the economy enough to outweigh the harm of higher prices. That sentiment is mistaken. Tariffs have a net negative impact on the economy, which can happen through different channels.
For example, Federal Reserve economists Aaron Flaaen and Justin Pierce estimated the effects of the 2018-2019 tariffs on the U.S. manufacturing sector accounting for both the benefits of tariffs to protected companies and the costs of tariffs to companies that faced higher input prices or other distortions. On net, they found a decrease in manufacturing employment due to the tariffs.
5: Tariffs and Income Tax Exclusions Are Not Tax Reforms
Tax policy changes should aim to boost growth and competitiveness. Fundamental reform efforts to transform the U.S. income tax system to a flatter consumption tax system in that vein should be applauded. Unfortunately, Trump’s tariff and tax proposals are a far cry from that.
Policymakers drawn to Trump’s tariff and tax ideas should go back to the drawing board. Otherwise, they might squelch the opportunity for fundamental tax reform by pursuing unprincipled, economically harmful, and nonsensical ideas.
End Tax Foundation, Begin Mish
Everything above is from the Tax Foundation. Thanks! There is much more in the report but I clipped the essential pieces.
I am glad the foundation used the phrase “nonsensical ideas” because that is exactly what I knew to be true even before reading their report.
Mother of All Stagflations
“This is a prescription for the mother of all stagflations,” Summers said on Bloomberg Television’s Wall Street Week with David Westin in regard to replacing a major amount of income-tax revenue with tariffs. It would also create “worldwide economic warfare.”
I don’t often agree with Larry Summers, but that is my take as well.
It’s not the first time Trump has spouted tariff nonsense.
Trump Tweets “Trade Wars are Good and Easy to Win”
Flashback March 2, 2018: Trump Tweets “Trade Wars are Good and Easy to Win”
OK, If trade wars are good and easy to win, someone please ask Trump “Why didn’t you win them then?”
Flashback September 19, 2012
Since Trump raised tariffs massively, and Biden increased them, would someone please ask Trump “Why didn’t that reduce our deficit fast?”
Trump on Mexico, January 2017
Trump renegotiated NAFTA to his liking, calling it USMCA. Let’s discuss Trump’s success.
The US trade deficit with Mexico went from 78 billion to 152 billion since 2017.
In 2020, Trump’s USMCA went into effect. Since then the trade deficit went from 111 billion to 152 billion.
Is this winning easy or what?
For discussion of the above chart please see The Futility of the US Trade War With China in Two Pictures
OK, the US trade deficit with China is down a bit. But the deficit with just three countries (Mexico, Taiwan, and Vietnam) went from 132 billion to 305 billion.
Clearly, this is still more winning. And shades of Smoot-Hawley, Trump is willing to wreck the entire global economy to the tune of 10 percent across the board an 60 percent tariffs on China.
Nonsense Like This Could Cost Trump the Election
I have posted many times that renters (blacks and young voters hammered most by inflation) will decide the election.
That is still my base case provided Trump does not go overboard with nonsense.
Two Issues
Trump is clobbering Biden on two key issues, inflation and illegal immigration.
However, Trump’s tax proposal would be highly inflationary. Anyone with a bit of common sense, and even many dunces should be able to see that.
The average fence sitter or independent voter that Trump needs to win won’t buy into this scheme.
Trump needs to walk this issue back saying it’s just part of his plan or make some other excuse.
I Repeat, Two Issues
Trump desperately needs to keep the political debate as focused as possible on inflation and illegal immigration.
Instead, he made a tariff proposal even loonier and more inflationary than Biden’s. This isn’t good.
Why Angry Renters Will Decide the Election, Take II
On June 19, I repeated my base case Why Angry Renters Will Decide the Election, Take II
Unfortunately, my thesis may require Trump to stick to a reasonable message or for Biden to flat out keel over.
The way this is headed, we may need the latter.
Clearly China just shifted manufacturing from Mainland China to Mexico & Vietnam & Taiwan. There are large consulting companies here (I’m in China) that advertise their services in helping firms do that very thing.
Trump/Biden tariffs have done wonders for Mexican repackagers and inbound logistics firms. They couldn’t be happier.
I always love Mish’s articles, but this is one where he discusses tariffs vs income taxes with current government spending levels: is not one of them:s
“. . . as is the American economy. Economists Chad Bown and Douglas Irwin have previously explained that tariffs have not been a main source of federal revenue since 1914, and it would be impossible to rely on tariffs for current spending levels.”
The income tax was introduced shortly before 1914. So naturally the burden of tax collection shifted from tariffs to income (Politicians couldn’t resist spending other people’s money to buy votes and control). Moreover, I think most people with a brain want the government to become drastically smaller and the consequent spending levels to be reduced. Compliance enforcement takes a huge amount of the revenue collected:
https://www.ntu.org/foundation/detail/65-billion-hours-260-billion-what-tax-complexity-costs-for-americans
One aspect which was not discussed in the article is the morality of the income tax. To enforce the income tax, Americans’ privacy must be invaded (all the reporting requirements). It is none of the government’s business how one spends their money and on what, unless the person is involved in criminal activity, and in that case, the government should apply to a court for a warrant (The presumption of innocence has been destroyed under the income tax). It has taken away everyone’s freedom of choice. Privacy should not be illegal. Things about your life which you wouldn’t tell a close friend are required to be reported to the government (health records among other things). Mish is essentially arguing for the continuation of this Orwellian system. I agree that there would be economic disruptions for the first few years, but in the long run, America would be more self-sufficient and independent of corrupt, hostile countries around the world, and people would get some of their civil rights back.
Well the first mistake is taking the Tax Foundation’s numbers as gospel. They make their living on people clicking and investing in them for their advice regarding income tax. Take income tax away and they don’t have an income from providing income tax advice. The first question is how much the US imports and buys as percentage of the total GDP. 2024 GDP is ~ $30 Trillion. The US has ~17% imports, so $5 Trillion spent on imports. The total income tax revenues for 2023 were $4.44 Trillion. So a 10% average tariff would cover all US income tax revenues. So seems very feasible to me. I would argue it does pencil out. The next thing that happens over time is because of the tariffs jobs start flowing back to the US over time. Adjustments can be made in sales or a VAT tax that would compensate any loss in tariff revenues. Income tax is slavery the 16th amendment should be repealed.
The article was very thorough and you failed to read or understand it
There’s a positive correlation, across innumerable research studies, that people who can’t read have difficulty with understanding.
“Jobs start flowing back to the US over time..”. Citation please. Any industry. Any period.
Public onanism is always to be deplored.
Let’s look at the situation from another view. It takes the threat of a strong military and active government to enforce trade agreements. The less one purchases imports, the more the tax on one’s earned income subsidizes consumption of other people’s imports.
I would certainly pay fewer taxes under Trump’s proposed plan since I’m not a big consumer of electronics or trinkets.
Exactly.
Tariffs didn’t work to build colonial America. /s
And they produced a war between States.
Its more of a response to what we are doing now clearly isn’t working. Why not try something new? Its just an idea. Would take massive house and senate lifting to get anything close to this to become law…and we know that wont happen. Let’s pump the breaks on the sensationalism that we are all doomed and Trump can snap his fingers if elected and enact these ideas.
Excellent.
Trump uses the tariff rhetoric to get concessions from other countries, for Mexico it had to do with getting them in line on immigration controls. The middle class and lower income workers spend most of their income, so they would end up paying the extremely regressive tariffs. Democrats would create yet another refundable tax credit to make sure the poor aren’t affected by tariffs, so only the middle class would end up funding the entire government. That is the Paul Ryan dream scenario.
what concessions did Trump get?
Tariffs backfired.
Just referring to Mexico, he threatened tariffs if they didn’t throttle the flow of illegal invaders. That brought them around to a certain extent, with the “remain in Mexico” policy. Steve Bannon did a segment on how Trump was able to use the threat of tariffs to get some of the worst actors to stop manipulating their currencies.
It’s clear that Lighthouser, Navarro and Bolton are advising Trump.
Next month, this time, Trump might be in upstate NY Clinton jail with thieves, murderers and rapist.
And many other politicians.
Don’t forget the many, many other politicians.
Trump has to attack the sham democrat DA, judges and courts, to talk about his tax plan, but let Biden stand, not to knock him down in the first round, bc in Aug the DMC in Chicago might elect Michelle. That will be a game changer.
Tariffs instead of income tax or not, this is not even a serious policy debate. The worst impact of Trump on US politics is that it’s no longer possible to have informed debates. Even Banana republics do better. It will take a decade or so to undo the damage Trump has done to the quality of public discourse on US policies.
Next week on CNN : a scared and impaired Trump or a feisty attack on sham DA, judges and courts. A blue collar worker, who moves packages from point A to B, between 2AM and 9AM, will get an automatic raise by not paying income taxes. Since the cost of doing business will fall there will be no need to raise prices. Businesses will compete with each other offering large discounts. High tech engineer will earn more, in real terms, without a raise. Small businesses owners will not cheat to avoid paying taxes. The black market will shrink. Carpenters and electricians will compete with new immigrants. The Rent CPI will fall bc inflation is down. A happy labor force is a recipe for higher productivity. The gov size will be smaller. Deflation isn’t so bad. The US will get respect.
Tariffs cannot finance the illegal government we have, but tariffs can finance the much smaller Constitutional government we need. The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.
If the national debt were zeroed-out and gov spending cut by 90% we could eliminate income taxes.
“Zeroed out” strongly suggests someone’s brain here.
Trump is falling behind in the polls and betting markets. The mafia must be done with him. He now seems to be throwing stuff out there to see what sticks and has an effect.
Trump wants to offer Greencards to all college graduates who aren’t citizens. What say ye on this blog ?
I like it a good start. Maybe it ends up 60% Tarifs and a 10% flat tax on business.
Group of business will be much more organized and concentred on the politicians than our public voters who are worried about things that are not important.
Plus then personal saving will really mean something how you choose to live will actually provide a return!
Try something different!
This article is nonsense.
Thanks for your detailed, statement by statement rebuttal.
Btw, rebuttal has nothing to do with your butt.
nonsense or not, challenging the existence of income tax is a net positive for US public discourse!!!
What happen to economic common sense ? At this point I am debating voting against both parties.
Correct Mish. This is equivalent to pandering – such as Biden’s student loan forgiveness. I would advise Trump to stay away from such crap. Better to focus upon downsizing federal government and defunding imperialistic international goals – like a variety of current wars.
I think that’s exactly the opposite of where Trump is going. Kissing the wailing wall is a strong indication that, if elected, he will keep the ptb in place.
Cutting spending to levels that government can be sustained by tariffs is like ending supports for Brawndo in the movie Idiocrasy– everything will collapse. Of course Trump could not cut spending on anything when he was POTUS. He increased everything, not just military. I doubt he will be any different this time. maybe when he is POTUS we can all look forward to Covid-20 checks when the new swine flu lockdowns are implemented.
LOL
Logical and difficult to argue with from a betting standpoint.
2% of existing revenue sounds like a good start to me on the way to ZERO
The tariff proposal makes no sense. But Trump is a TV reality show guy and doesn’t care a bit about economic facts or logic. Only a Banana republic would elect a guy him for president.
Not all banana republics, however, are run by international financiers.
Trump is a clown. And of course I know Biden is worse. We’re screwed.
The government doesn’t tax income because it needs the revenue. It can simply have the Fed print more money to meet its needs. The government taxes income as a way to control people, as a political tool. It also taxes income as a way to help prevent hyperinflation by using a non-asset based fiat currency. Reduce people’s spending power.
Ditching income taxes is ALWAYS beneficial. Even without ANY offset. Aside from possibly some VERY local tithe (meaning, a percent on “income” even non-snooping neighbors simply can’t avoid noticing), NO income tax is even possibly legitimate. Talk about running running obviously afoul of any possibly restriction on search and seizure….
A 5-10% (closer to five…) flat, ZERO POSSIBLE EXCEPTIONs, tariff, Is not, full stop, incompatible with any possibly legitimate government. Which ANY activity tax, no matter what, is.
Of course, any possible “60% China, 48% Botswana unless Mnuchin gets a BJ from the ape who inveeeted Fed loot in the importer, or Netanyahoo says his mom is a hobgoblinist” type arbitrariness, will never be anything other than pure, childish gibberish.
But funding government by charging for the services government provides; done in a non-arbitrary manner; is exactly the only way to Make America; if not great, then at least a tiny bit less flat out illegitimate, Again.
IF we are to have ANY border; government needs to maintain some form of control on goods crossing it inbound. That costs something. Those deciding to engage in this importing, are the only legitimate sources for that revenue. Taking it from anyone else, is just plain theft. And further: If government is to have a monopoly; the price they charge for this border control, WILL be a monopolistic price. 5%, maybe up to closer to 10%, is not up to where the tax itself will massively distort trade; over and above the hassle of the entry procedures themselves. Hence, is not; a priori; “baaaad.” Something all and any income tax always; zero exceptions; is.
The first income tax was proposed by the inflation promoter, the silver coins guy, to tax the ultra rich in NY, NJ, CT and MA : William Jenning Bryan.
It’s obvious you are not considering the following.
1. The issue is spending, not revenue.
2. The Founders never intended for personal income to be taxed w/o apportionment.
3. The 16th amendment is unconstitutional for a variety of reasons, not te least of which is that it was never properly ratified.
Eliminate 1.5 million of the 2 million+ govt jobs, cut the budget by at least 1/2, return to a gold standard, and tariffs would raise enough money they’d send you a rebate check.
How can a Constitutional amendment be unconstitutional? It can be idiotic or conflict with other parts of the constitution.
Incomplete and improper ratification?
vohlbusch was just using a literary device known as the oxymoron /s
Saying that the 16th Amendment was improperly ratified is false and shows a conspiracy-based mode of thought. As for the Founders, they bequeathed us a process for changing the Constitution, which has had to be done on many occasions. Mish is right; this tariff plan would never work in real life.
“..explained that tariffs have not been a main source of federal revenue since 1914, and it would be impossible to rely on tariffs for current spending levels.”
Too bad it’s obviously beyond the backmarkers’ ability to “explain” that the problem is thus “current spending levels.” If our current excuse for a ‘system” is dependent on a Stasi, a population of pliant terror-regime-sycophantic suckups and rats, and crass theft of productive people’s value add: That is the problem. Fix that. Don’t make excuses for it, while pretending any of it is; in any way; some form of requirement for anything other than a totalitarian terror state.
U balance of trade : the brown line (China) is rising to a 10Y high. The yellow line (Mexico+Taiwan+Vietnam) is next. The rest don’t matter. We will sell MBS, Taiwan
and Vietnam more good stuff. Mexico has a target on its back
What is the price one should pay for autarky? It’s not a valueless quality in a world in which we may find ourselves at war with a country that provides most of our consumer goods.
Tariffs highly incentivize autarky.
That said, I agree it’s just never going to cover the hole in the budget left by no income tax. At most it could cover corporate income taxes if we abolished those.
And that’s where the Fairtax should come in. A 25% national sales tax with prebates for necessities WOULD cover income and payroll taxes.
It’s the most studied tax proposal, ever.
When did tariffs result in autarky?
Those on gov support pay no income taxes. Highly skilled workers will benefit
from tariffs and no income taxes. Progressive states will raise taxes. Gov size and the swamp will shrink to hit DC. The country will be divided : blue states will have a raging inflation. Red states will deflate. Blue collar workers and highly skilled workers will earn more in real terms. New immigrants will cannibalize each other and deflate low end jobs. Wealthier savers and foreign entities will park their money in the gov roach motel. Interest rates will fall. The most important issue in Nov election is preserving our freedom and strengthening industries that are important to our freedom and national interest. Those industries have to be protected by tariffs.
The supreme court will rule the country.
“Strengthening industries that are important to our freedom and national interests….well, that would be guns, porn and artificial sweeteners.
Trump is on brand, fighting for the common man. Who do Biden and the dems fight for? The elite, the out of touch and the woke and broke college grads.
Let’s see – the budgets that we have had for the last 20-40 years have not been balanced (yes, I know, Clinton had some years when everyone behaved) and we run terrible budget deficits and accumulate a huge national debt. Not good.
So we propose a revived old method of funding, using tariffs, but this will lead to terrible deficits and huge national debt. Sorry, I just don’t see a difference.
The problem is uncontrolled spending by Congress and the president – Americans desire everything for free, without putting any effort into it. And our government satisfies those desires. Only when Americans start to hurt, will there be any hope of balancing our budget. And by hurt, I mean not having ANY food delivered to your favorite grocery store. You’ll have to grow your own food – you will pay with your time. No Ubers, no Doordashes, no 40 different breakfast cereals to choose from. We’ll become like China, or Russia, or Zimbabwe, except we voted for that.
“We’ll become like China, or Russia, or Zimbabwe, except we voted for that.”
Zimbabwe,sure. The other two: Good luck with that.
And as if the specific rain dancing or chad dimpling ritual resulting in life in a dystopia, makes any difference.
Already happening if you shop regularly in the non-processed food aisles.
All administrations throw out ridiculous over the top trial balloons. It’s just the in-power administration uses media “puppets” to do the bidding for them. Trump does it himself to keep himself in the limelight.
You’d think that by now Trump would understand the media is going to broadcast every stupid thing he says and keep quiet about the occasional astute things he says. They handle Biden completely differently because they are really a state media. I agree with Mish that Trumps tariff comment was stupid but people aren’t voting for Trump because of taxes. The election is going to be about were you better off 4 years ago, illegal immigration, crime, LGBTQ excess in schools and in corporations, and the DEI (anti-white) policy. Everything else is a side show that the media and Democrats will want to discuss over and over like abortion & Trumps trial. That said, I believe the mail ballot fraud in the next election will be far beyond anything we’ve seen in the past.
I don’t think it moves the needle as far as the election goes. Some will see it as a ridiculous policy. Others’s will see it as Trump fighting against evil countries who are out to screw hard working Americans.
He needs to keep focusing on the idea of not taxing tips.
It’s a brilliant easy campaign item because it affects Joe Sixpack of both Republican and Democratic nature and it’s an easy way for him to show he’s helping out the little guy.
It also makes tax time a LOT easier for everyone who derives significant income from tips because you no longer have to track it or worry about being audited for not reporting tips accurately etc.
Many workers who receive tips have a base wage at or sometimes even below the legal minimum wage. Not taxing tips is a great way to increase the effective “minimum wage” without increasing the cost to employers, who usually pass the cost right on through to the end consumer or customer.
REAGAN was the one who began taxing tips. Thanks, Ron. U saved America.
If voters wanted economic policy that made sense, Paul Tsongas or Warren Rudman would have become president. The best way to become president is to promise free shit and no taxes. The only mystery is why that isn’t done to an even greater degree than it is now – although running $2 T deficits is pretty close.
What is a Tariff if it is not a consumption Tax under a different name?
Should America consume less and produce more? Seems that ever present Trade Deficit with everyone else would point in that direction.
Would Trump ever get a full blown Tariff regime thru Congress to become policy? I mean really, with the amount of our political class in bed with China and other Globalist entities the answer to that question would be Nyet.
However getting American consumer to save more and spend less while keeping more money in America at the expense of Globalists is desirable.
Would Tariffs signal to working people that Trump administration priority would be to reduce Income Tax burden? Um, why yes it would.
What does Biden propose? Hire more IRS agents to go after everyone.
Trump is not the simpleton he always gets painted as being. It is highly doubtful that his position on Tariffs is as one dimensional as it gets portrayed.
There is an upcoming debate, why not pose that question to expound on his thoughts regarding Tariff imposition get asked.
I agree
Fine. Reduce federal spending to the level that it can be financed with tariffs, and a few other sources of revenue. (Yes, I know that would be a Libertarian unicorn utopia, but hey, it worked for the first 150 years of this republic.)
The DC Swamp has a spending problem, not a revenue problem. Politicians of BOTH major parties are addicted to spending.
Reduce federal spending, now that’s a funny joke. Who on either side will be able to get that done? You know the answer. None of them.
US government is funded largely by borrowings. Trump’s talk on tariffs is just glib piffle. Similar to the piffle of Biden but unctuous.
if I recall when this UNION/REPUBLIC began
it was entirely funded on tariff income
and the idea that IRS is anything but bully thief
and the FED – well they need to be strung up along with spendthrift CONgress
I’ll go along with you MISH – if and only if we can send 434 members CONgress to Ukraine as Zelenski’s new recruits for front line
they already funded it
And slap a Tariff on all spending by those 434 nincompoops. If they spend $100,000, then TARIFF THEIR ASSES with $60,000 more. THERE YOU GO!
I’ll say again. Trump is financially Illiterate!
Pretty obvious. Guy is a male Chatty Cathy who is operated by a string pull jerked by the financiers.
Will the IRS grant extensions to file in the event of a nuclear war?
File that under: questions that don’t matter
tax = theft
People should just build their own roads, don’t you think?
Two-thirds of roads in Sweden are privately operated and managed by local Private Road Associations (PRAs). These road associations are composed of homeowners who live along private roads. An estimated 140,000 kilometers (about 87,000 miles) of roads are the responsibility of 60,000 PRAs.
Thanks! I always encourage dumb comments from dumb people.
Income taxes, as well as sales taxes, undoubtedly are.
Property taxes, as well as tariffs, strictly are not; assuming ANY monopolistic government is legitimate.
property tax = renting the land from the government
This is conflicted with the Theory of “property Rights” which include the fruits of my labor