During his State of the Union Address, President Donald Trump restated his desire to replace income taxes with tariffs. “As time goes by, I believe the tariffs paid for by foreign countries will, like in the past, substantially replace the modern-day system of income tax.” While tariffs could replace a portion of the income tax, replacing it entirely would be impossible. The income tax raises too much revenue, and the tariff base is too narrow and elastic to make it work.
The individual and corporate income tax raises a significant amount of revenue. Under current law, the Congressional Budget Office (CBO) projects that the individual income tax will raise $2.8 trillion in 2026 and the corporate income tax will raise another $400 billion for a total of $3.2 trillion. This accounts for a little more than 50 percent of total federal revenue.
The problem with using tariffs is that they apply to a narrow base. The CBO projects that total imports of goods and services will reach $4.2 trillion in 2026. However, tariffs generally apply only to goods, which make up about 78 percent of total imports, or roughly $3.3 trillion. This is small compared to the $21.7 trillion in personal consumption expenditures.
Given such a narrow base, the effective tariff rate would need to be extremely high to raise enough revenue. Assuming no behavioral responses whatsoever, it would take an effective tariff rate of 220.1 percent to replace both individual and corporate income taxes while leaving the federal deficit unchanged. (Note: you cannot simply multiply the statutory tariff rate by imports to get the net budgetary effect of tariffs).
Once behavioral responses are considered, it becomes clear why this is impossible. Taxable imports are relatively responsive to changes in tariffs. Individuals and businesses respond to higher import prices by shifting their spending in ways that shrink taxable imports. Using an elasticity of taxable imports with respect to after-tax import prices of -2.5, an effective tariff rate of 220.1 percent would reduce taxable imports by 95 percent, leaving little for tariffs to tax.
Even a tariff calibrated to maximize revenue would still fall short. At an elasticity of -2.5, the revenue-maximizing effective tariff rate is roughly 66 percent. Tariffs at that rate could only replace around 33 percent of income tax revenue.
Regardless, such tariff rates are politically and legally infeasible. Prior to the Supreme Court ruling that IEEPA tariffs are illegal, the effective tariff rate stood at 16.9 percent. It is now set to fall to 9.1 percent. The Liberation Day tariffs peaked at an effective rate of 24.9 percent. It will be difficult for the President to recover even the lost IEEPA tariff revenue, let alone achieve an effective tariff rate of 66 percent. Congress, meanwhile, has shown little interest in voting on tariffs.
Such a high tariff would also be economically unwise. Like the income tax, tariffs reduce the supply of labor and capital, leading to lower economic output and household income. But tariffs impose additional costs: they reduce the quality and variety of goods available to consumers and redirect domestic resources toward the production of expensive alternatives that could otherwise be imported. Finally, tariffs at such high rates would almost certainly invite retaliation by trading partners, magnifying the economic damage.
The observation that tariffs cannot replace the income tax is not new. Several experts have made the same point.
The math is straightforward: We cannot replace the income tax with tariffs.
