Key Takeaways:
- President Trump has proposed using tariff revenue to reduce or eliminate federal individual income tax, but tax experts are skeptical about the feasibility of this plan.
- Tariff revenue is unlikely to replace individual income taxes, as it would require import taxes so high that Americans would stop buying most imported goods, causing tariff revenue to collapse.
- A reduction in income taxes would largely benefit the nation’s top earners, with the top 10% of earners paying about 72% of the nation’s income taxes.
- The idea of sending Americans a $2,000 "tariff dividend" check also faces a troublesome math problem, as it would cost between $300 billion and $600 billion, far more than the U.S. is currently collecting in tariffs.
- Tariffs are structured differently from income taxes, with tariffs being a flat rate and income taxes being progressive, meaning lower-income Americans pay a smaller tax rate than higher-earning households.
Introduction to the Proposal
President Trump has recently floated an idea that could appeal to millions of budget-strained households: using tariff revenue to reduce, or even eliminate, the federal individual income tax. This proposal comes as the Supreme Court is weighing the constitutionality of his tariffs, which are import taxes paid by U.S. companies that are typically passed partly on to American consumers in the form of higher prices. The Treasury Department has significantly boosted the country’s collection of tariffs this year, thanks to Mr. Trump’s policies. However, tax experts are skeptical that import taxes could completely replace income tax, and they say a reduction in income taxes would largely benefit the nation’s top earners.
The Feasibility of the Plan
According to Erica York, vice president of federal tax policy at the Tax Foundation, a nonpartisan think tank, it is mechanically impossible to fully replace income tax revenues with tariffs. York estimated that the Trump administration’s current tariff policy, assuming it remains in place, would generate about $2.1 trillion in revenue over the next decade. By comparison, federal individual income taxes would provide more than 10 times that amount, at $32 trillion over the same period. Personal taxes provide about $2.7 trillion annually in federal revenue, according to IRS data. For fiscal year 2025, the U.S. generated $195 billion in tariff revenue, Treasury data shows. York noted that tariffs, even applied maximally, simply could not generate that level of revenue, as imports are not a large enough tax base.
The Impact on Low-Income Households
To be sure, tariff revenue could be used to provide a tax cut, said Scott Lincicome, vice president of general economics at the nonpartisan Cato Institute. However, because low-income households already pay little to no income tax, it’s unlikely to help the families most in need of a financial boost. Lincicome noted that if they did a flat 3% reduction in income tax, the only people who would really benefit are the top 10% of income earners. The top 10% of earners pay about 72% of the nation’s income taxes, according to Tax Foundation data. This means that a reduction in income taxes would largely benefit the nation’s top earners, rather than low-income households.
The Tariff Dividend Proposal
Mr. Trump has also discussed the possibility of sending Americans a $2,000 "tariff dividend" check, an idea he reiterated during the Dec. 2 Cabinet meeting. However, this proposal also faces a troublesome math problem, Lincicome said. Sending a one-time $2,000 payment to U.S. households would cost between $300 billion and $600 billion, far more than the U.S. is currently collecting in tariffs. Issuing a tariff payment or reducing income taxes would also require Congress to change the tax code, a tall legislative task given the ongoing partisanship in Congress. Some Republican lawmakers have already rebuffed the idea of a $2,000 payment, with Sen. Ron Johnson of Wisconsin recently saying the U.S. "can’t afford" it.
The Difference Between Tariffs and Income Taxes
Tariffs are structured differently from income taxes, with tariffs being a flat rate and income taxes being progressive. U.S. companies that import products, parts, and other goods from abroad pay a fee based on the country of origin. For instance, American firms pay a 15% tariff on imports from the European Union. This means that an American company importing a $5 Italian chocolate bar would pay the U.S. government an additional 75 cents, and then decide whether to pass that extra cost on to consumers or absorb it. By contrast, individual income taxes are progressive, meaning lower-income Americans pay a smaller tax rate than higher-earning households. The lowest bracket is 10%, while the top rate is 37%. Replacing the graduated income tax with a flat tariff rate would likely leave low- and middle-income households shouldering a bigger share of the burden than higher-income earners.
The Potential Consequences
The idea of replacing income taxes with tariffs has been met with skepticism by tax experts, who argue that it would harm working-class Americans, damage the U.S. economy, and significantly increase the federal budget deficit. York noted that tariffs are relatively flat, and even slightly regressive, placing a larger burden on working-class households than on the rich. The income tax, on the other hand, is highly progressive and even provides negative income tax rates for the lowest-income households. Swapping a highly progressive income tax for a slightly regressive tariff scheme would harm the very households the president claims to be helping. Furthermore, the U.S. is unlikely to raise enough tariff revenue to fund dividend checks or replace the individual income tax, as that would require import taxes so high that Americans would stop buying most imported goods, causing tariff revenue to collapse.
