Back in the glory days of the 1800s, tariffs on imported products generated 50% to 90% of federal revenue. There was no income tax. The federal bureaucracy was tiny.
President Trump thinks we can get there again. While campaigning last year, he suggested replacing income taxes with tariffs, as if one can simply substitute for the other. Budget analysts laughed off the idea as a campaign fever dream.
Trump is already pushing America back to the past. He has imposed a slew of new import taxes that raised the average tariff rate from 2.5% when he took office to around 25% now. That’s the highest since the early 1900s. If those tariffs stay in effect, they will amount to a tax hike on American businesses and consumers of more than $500 billion per year.
Part 2, for Trump, is an offsetting cut in income taxes. In an April 27 social media post, Trump said, “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.”
It’s not as easy as Trump wishes it were. While the US president does have the authority to levy tariffs, he cannot cut income taxes on his own. Congress would have to do that. And while Congress may trim taxes here or there by the end of 2025, the idea of lopping off a major portion of the income tax at a time of soaring federal debt is economically and politically ludicrous.
Simplistic arithmetic makes it seem like the government could repeal the income tax if it just pushed tariffs high enough. In 2024, at an average tariff rate of about 2.5%, the government collected about $80 billion in tariff revenue on about $3.2 trillion worth of imports. Individual income taxes generated $2.4 trillion in revenue. So if you wanted $2.4 trillion in tariff revenue, you could just raise the average tariff to around 75%, which is the rate you’d need on $3.2 trillion worth of imports to match the revenue from income taxes.
Except it wouldn’t work like that, as any prudent shopper knows. When prices soar, people don’t just keep buying the same amount as before. They buy a lot less. So tariffs that nearly doubled the cost of imports would send the sale of imported goods plunging. The tariff rate would have to go higher and higher on a shrinking pool of imports, and for most products, there’s a point where the price can get so high that nobody will buy it.
Two new analyses capture the folly of trying to substitute tariffs for income taxes. The Tax Foundation simulated the loss of federal revenue by eliminating the income tax on everybody earning $200,000 or less, and found it would be “impossible” to make up for it with higher tariffs. The basic problem is that the income tax covers a much larger taxable base than tariffs do, making it relatively easy to raise large amounts of money with reasonable tax rates. In 2021, for instance, individual income totaled $15 trillion, while the value of imports was only $2.8 trillion.
President Donald Trump walks from the Oval Office to depart on Marine One from the South Lawn of the White House, Thursday, May 1, 2025, in Washington. (AP Photo/Alex Brandon) ·ASSOCIATED PRESS
Replacing income tax revenue with tariff revenue “would require astronomically high tariff rates,” the Tax Foundation found. “And raising tariff rates astronomically high would significantly depress imports, making it impossible to generate enough revenue to fully replace the income tax.”
The Peterson Foundation for International Economics recently estimated the effect of Trump’s tariffs on the broader economy and found that any gain in tariff revenue would be offset by a slower-growing economy with lower output, employment, wage growth, and tax payments. In a scenario with an average increase in the tariff rate of 20% —around where we are now — higher tariffs would generate $270 billion in new revenue, while revenue from individual income taxes would fall by $121 billion and corporate tax revenue would drop by $70 billion. That assumes there’s no change in tax rates and that trading partners would retaliate with higher tariffs on US exports, which is what happened during the trade war during Trump’s first presidential term.
Trump’s math falls apart because the federal government of 1870 or 1912 was nothing like the bureaucracy we have today. As a percentage of the economy, federal spending is now about 10 times larger than it was and the end of the 19th century. Some Americans may think that’s just unnecessary bloat. But a lot of that spending goes toward safety net programs such as Social Security, Medicare, Medicaid, veteran benefits, and food aid, which didn’t even exist back then. Another big chunk of federal spending funds the most potent military in the history of the world. The so-called “DOGE” commission is trying to prune government spending, but it has run smack into the reality that most federal spending has a purpose that isn’t as dumb as critics think.
Trump also makes the Great Tariff Era sound rosier than it was. There was a five-year depression that started in 1873, followed by seven recessions between 1882 and 1902. Bank runs in which unlucky depositors lost all their money were common, as there was no federal bank insurance. The Panic of 1907 was so severe that it led to the creation of the Federal Reserve and the modern system for regulating banks.
When Trump thinks of the glorious 1800s, he may have in mind the “robber barons” who were the billionaires of their day, making vast fortunes as industrialists, investors, and speculators unfettered by regulation or tax burdens. But the wealth didn’t always filter down and voters demanded, and eventually got, the social welfare programs and government protections that arrived in the 1900s. That was a pretty successful time for America too.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
