[co-author: Robert Hawes]
President Trump has suggested using tariffs to lower the Federal Government’s reliance on income taxes. [1] The goal is shifting the burden of funding the federal government to foreign countries and away from American taxpayers. In a recent Politico interview, Trade Adviser Peter Navarro claimed that:
“If President Trump succeeds like he wants to succeed, we are going to structurally shift the American economy from one over-reliant on income taxes and the Internal Revenue Service, to one which is also reliant on tariff revenue and the External Revenue Service,”[2]
Aside from the political ramifications and potential economic consequences is a fundamental question of whether replacing tax revenue with tariff revenue is feasible. Kimberly Clausing and Maurice Obstfeld of the Peterson Institute recently published a report analyzing this question.[3] Clausing and Obstfeld concluded that it would be impossible for tariffs to fully replace income tax revenue.
Clausing and Obstfeld noted that the federal government raised roughly $2 trillion in income taxes in 2023, but this income tax revenue comes from a much larger tax base than tariffs do. U.S. income exceeded $20 trillion in 2023. Imported goods totaled only $3.1 trillion. To solve the imbalance, the United States would have to (1) increase tariffs astronomically and/or (2) increase the volume of imported goods.
Clausing and Obstfeld point out that raising tariffs would decrease the volume of imports. This creates a perpetual cycle that decreases the import tax base and requires higher tariffs to maintain revenue levels. The research indicated that, at any tariff rate beyond 50%, tariffs could not offset the decrease in imported goods volume. At 50%, tariffs would raise $780 billion, which is significantly less than the $2 trillion raised via income taxes in 2023.
[1] https://www.cnbc.com/2024/06/13/trump-all-tariff-policy-to-replace-income-tax.html, https://www.cnn.com/2024/10/26/politics/trump-joe-rogan-podcast-income-tax-tariffs/index.html
[2] https://www.politico.com/news/2025/02/04/navarro-trump-will-structurally-shift-american-economy-with-tariff-revenue-00202344
[3] https://www.piie.com/blogs/realtime-economics/2024/can-trump-replace-income-taxes-tariffs
[View source.]
