Trump says 'there is a chance' tariff revenue could replace the income tax. Economists are skeptical Here's what economists say
President Donald Trump said "there is a chance" that tariff revenue could replace the federal income tax
As investors face tariff uncertainty, President Donald Trump remains committed to the strategy — even suggesting tariff revenue could offset the federal income tax.
"There is a chance that the money from tariffs could be so great that it would replace" the income tax, Trump said in an interview with Fox earlier this month.
It's an idea that Trump floated during his presidential campaign last year in a meeting with Republican lawmakers. (Changes to the income tax would require Congressional legislation.)
But economists are skeptical.
"It's not a realistic proposal," Alex Durante, senior economist at the Tax Foundation, told CNBC.
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Tariff negotiations are ongoing. There's currently a 90-day pause on the sweeping tariffs enacted by the Trump administration in early April, and most countries face a universal tariff rate of 10%. Meanwhile, tariffs on Chinese goods imported to the United States are as high as 145%.
Tariff tax base is 'a lot smaller' than income tax
Some policy experts have questioned how much revenue the duties could bring in, compared to the federal income tax.
"The tariff tax base is a lot smaller than the income tax base," Kimberly Clausing, a senior fellow at the Peterson Institute for International Economics, told CNBC.
In 2023, the U.S. imported $3.1 trillion of goods. By comparison, the government levied tax on more than $20 trillion in incomes, according to a report she co-authored last summer.
White House trade adviser Peter Navarro in late March estimated tariffs could raise roughly $600 billion a year.
But that figure "is not even in the realm of possibility," Mark Zandi, chief economist at Moody's, told CNBC earlier this month. "If you get to $100 billion to $200 billion, you'll be pretty lucky."
To compare, the IRS has collected $1.14 trillion in individual income taxes for fiscal year 2025 through March 31, according to Treasury data.
"Tariff rates would have to be implausibly high on such a small base of imports to replace the income tax," Clausing co-wrote in the Peterson Institute for International Economics report.
Plus, at higher tariff rates, people will buy fewer imported goods, which reduces revenue, Clausing told CNBC: "That's part of the point of the policy."
The Trump administration did not respond to CNBC's request for comment.
Consumer behavior influences tariff income
As tariff rates increase, other factors can decrease how much revenue the U.S. ultimately collects, experts say.
"The administration seems to think that every time it raises the tariff rate that it can collect more revenue," Tax Foundation's Durante said. "And that's not always the case."
Direct tariff revenue is lowered by behavioral and other economic factors, Durante detailed in a report earlier this month.
The Tax Foundation estimates that a 10% universal tariff would raise $2.2 trillion through 2034. However, the same tariff would reduce U.S. gross domestic product by 0.4%, which impacts revenue.
The International Monetary Fund on Tuesday reduced 2025 U.S. growth projections to 1.8% from 2.7% based on trade tensions.
This story originally appeared on: CNBC - Author:Kate Dore, CFP®, EA
