President Trump describes his administration’s sweeping new tariffs on other countries as a tool for accomplishing a range of key economic goals, including reviving U.S. manufacturing. Recently, he’s been highlighting another aim: lowering, or even eliminating, individual income taxes for most Americans.
“When Tariffs cut in, many people’s Income Taxes will be substantially reduced, maybe even completely eliminated. Focus will be on people making less than $200,000 a year,” he wrote Sunday on Truth Social, his social media app.
Tariffs are already kicking in, with businesses around the country facing import duties of 145% or more on imports from China and tariffs of 10% on goods shipped from almost every other nation. Many Americans say they disapprove of these import duties, which are typically passed onto consumers through higher prices, and are bracing for higher inflation as the costs trickle through the economy.
Mr. Trump’s comments also point to his earlier assertions that higher tariffs could raise more than $1 trillion in federal revenue in the next year or so. On Sunday, before boarding Air Force One to return from Pope Francis’ funeral, Mr. Trump asserted that the revenue raised by his tariffs “will be enough to cut all of the income tax” in the U.S.
The White House didn’t respond to a request for comment on whether the Trump administration is developing a proposal to cut taxes for most Americans.
What’s the link between tariffs and taxes?
Currently, there is no tax bill in Congress — the arm of government with the authority to change the tax code — that would eliminate federal income taxes for people earning $200,000 or less. Even so, the House is working on a reconciliation bill that would extend Mr. Trump’s 2017 tax cuts, as well as add a few new reductions promised by the president on the campaign trail, such as eliminating taxes on employee tips.
If passed, that bill would mean individuals would continue to pay the same tax rates they’ve paid since Mr. Trump’s Tax Cuts and Jobs Act took effect beginning for the 2018 tax year, with individual tax brackets ranging from 10% to 37%, depending on a person’s income. And if the legislation is enacted, notably, most Americans would see no difference in their federal income tax rate.
“There is no real connection” between Mr. Trump’s tariffs and lower taxes, said Erica York, vice president of federal tax policy at the Tax Foundation, a think tank focused on tax issues. “He has the authority to impose higher tariffs, and he’s done that. But he doesn’t have the authority to unilaterally cut income taxes — that’s done by Congress.”
There is “zero chance” that Congress would eliminate income taxes for a large swath of the U.S. population because the new tariffs won’t generate enough revenue to replace the $2.4 trillion in income taxes paid by American households each year, she added.
Even if a president imposed 50% tariffs on all goods imported into the U.S. — or twice the current rate under Mr. Trump — the income generated would represent less than 40% of what income taxes bring in, according to the Peterson Institute for International Economics, a nonpartisan research firm.
Why tariffs can’t replace income taxes
Even the notion of eliminating income taxes for people earning less than $200,000 doesn’t add up, York said. Here’s why: Mr. Trump’s tariffs could raise about $170 billion in revenue this year, while wiping out individual taxes for people earning less than $200,000 would forego $700 billion in tax revenue this year, she estimated.
“You would need tariffs multiple times higher than what we have now” to generate the revenue to make up for the gap in lost taxes, York said. Making the math work is “an impossibility,” she added.
Yet hiking taxes even more aggressively would heighten the risks of a U.S. recession, which would cause job losses, inhibit consumer spending, suppress business investment and further roil financial markets — all developments that reduce the government’s tax receipts.
Mr. Trump’s claim about tariffs lowering taxes amounts to “an argument that says, ‘If Americans pay more out of their left pocket, the government will be able to put more in their right pocket,'” said Joe Rosenberg, senior fellow at the Urban-Brookings Tax Policy Center, another think tank focused on taxes.
“Even if you make the math work, it’s really replacing one form of tax with another — and the other important point here is these taxes have very different distributional effects across income types,” he added.
Translation: Tariffs take a bigger bite out of low- and middle-income Americans’ budgets because they spend a larger share of their incomes on basics like food and household goods than compared with high-income Americans. A typical low-income household is likely to see their disposable income fall by 5.5% under Mr. Trump’s tariffs, compared with 1.9% for the highest-earning families, according to a March 31 estimate from the Yale Budget Lab.
But faced with higher prices for consumer goods, many households would cut back on spending, adding to the challenges of relying on tariffs to raise enough revenue to replace income taxes, experts say.
Dueling goals
Mr. Trump’s move lifting the effective U.S. tariff rate to its highest since 1943 reflects conflicting aims, experts told CBS MoneyWatch. For instance, the president has said he wants to use tariffs to secure better trade deals with other nations. Yet reaching new trade pacts with lower tariff rates would undercut the president’s goal of relying on import duties to replace the federal income tax.
Mr. Trump’s back-and-forth on his tariffs, including temporarily rolling back some import fees and creating exclusions for certain products, also undermines the administration’s ability to generate a new source of federal revenue, Scott Lincicome, a trade expert with the Cato Institute, told CBS News.
“If you are tariffs on, tariffs off, because of these negotiations that are supposedly going on, you’re not raising much revenue, or protecting industry or getting new investment the United States because of all the uncertainty,” Lincicome said.
By dangling the prospect of a tax cut, Mr. Trump may be seeking to convince Americans to bear the brunt of the tariffs’ impact, which economists say could slow U.S. economic growth and reignite inflation.
“Americans are about to find out really fast that this is a tax on us,” York noted. “It will hurt our trading partners, too, but it is a tax that in large part falls on American businesses and American workers.”
