I admire his approach so much that I did my own version of a Venn Diagram back in 2019.
And I’m doing it again today by exposing the nonsensical claims that massive trade taxes can simultaneously reduce imports while also generating massive amounts of money.
I’m addressing this issue because the President hints that he’s going to get rid of the income tax and replace it with tariffs.
And his Commerce Secretary recently said this was the goal.
Since I despise the income tax, I’m halfway happy with these sentiments. But since I know math, economics, and the budget, the other half of me knows his plan is absurd.
I explained why in a column for the U.K.-based Telegraph. Here are the key excerpts.
Donald Trump proudly portrays himself as “Tariff Man”. The vast majority of economists disagree with him… But what if Trump decides that there is another levy – the income tax – that does even more damage to prosperity and proposes to do a revenue swap? …To some degree, the president and his team have history on their side. Prior to 1913, there was no income tax and trade taxes were one of the main sources of revenue for Washington. …However, there’s something the Trump people are overlooking. The federal government could finance its budget with trade taxes…in large part because the federal government was small. Or perhaps tiny would be a better word to use. Total federal outlays averaged about 3 per cent of Gross Domestic Product in the decades before 1913. …Unfortunately, the public sector in the United States is now a much bigger burden for the private sector to finance…with federal spending in Washington consuming close to 24 per cent of GDP. …financing Washington’s…spending would require a 220 per cent tax on all imports… In reality, however, that kind of import tax would not generate much if any revenue for the simple reason that consumers can and would shift to domestically-produced products. That’s an outcome that would please protectionists, but it also blows up the argument that the federal government can be funded with tariffs.
I also explain that trade taxes would have to be about 90 percent if the goal was solely to eliminate the personal income tax. Needless to say, that punitive tariff also would wipe out almost all imports.
So even that more limited plan is utterly impractical (not to mention that I fear future politicians would modify the payroll tax and corporate income tax in ways that would resuscitate the income tax).
However, I do explain in the column that there is a way for Trump to achieve his goal of getting rid of the income tax.
…push an agenda to dramatically downside the federal government. Get rid of bureaucracies like the Department of Education, Department of Energy, Department of Agriculture, Department of Labour, and Department of Housing and Urban Development. Rejuvenate federalism and copy Bill Clinton’s successful welfare reform by shifting all redistribution programmes – including Medicaid and food stamps – down to the state and local level. Replace Social Security with personal retirement accounts, like those found in various forms in Denmark, Australia, Switzerland, Chile, Iceland, and the Netherlands. And copy Singapore by requiring private saving for health expenses. This ultra-libertarian agenda would warm my heart. And, over time, it could bring the burden of federal spending considerably below 10 per cent of GDP. And if interest payments dramatically fell, it might even be possible to get Washington’s spending burden down to 5 per cent of GDP. Once we had an 1800s-sized federal government, it would be plausible to have an 1800s-style revenue system.
Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.
