In the final days of his presidential run, Donald Trump floated the idea of eliminating the income tax and replacing it with tariffs as the means to fund federal spending.  He cited the era of U.S. history when the country had no income tax:

When we were a smart country, in the 1890s . .

this is when the country was relatively the

richest it ever was.  It had all tariffs.  It didn’t

have an income tax.*

While Trump was correct about the prosperity at the time, it is wrong to suggest that tariffs were the reason.  While there was no income tax, there was little if any burdensome regulation or government subsidy, and, most importantly, the nation was on a gold standard, which kept increasing the purchasing power of wages, all of which raised living standards to unprecedented heights.

On the surface, the idea of replacing the income tax with tariffs seems equitable. This is why many conservatives, populists, and libertarians have supported the idea. 

Under the present political order, the United States is a constitutional republic that is based on the social contract theory.  Government is established, in part, to protect the persons and property from external threats and internal unrest.  All citizens, in theory at least, are protected by the state.  It follows, therefore, that they are obliged to contribute to their defense.

Tariffs, on the other hand, are borne directly by two groups: consumers who buy imported goods, and businesses who sell imported goods and are impacted by a loss of income. 

Consumers pay the tax levied on foreign goods.  Therefore, those consumers who buy more expensive goods, such as a Mercedes Benz, pay a higher percentage of tax than those who buy trinkets such as Christmas tree ornaments and plastic cutlery from China.

Businesses, too, suffer from tariffs.  While it is often said that the tax is “passed on to consumers,” companies will see a reduction in income, since tariffs raise the price of goods.  Higher prices will cause a fall in demand, resulting in loss revenue.  Moreover, businesses who deal in foreign products have to bear the bureaucratic cost of complying with the government’s ever-changing trade policies while serving as tax collector for the state. 

While the income tax under social contract theory is more “equitable” than tariffs, one of its most egregious features cannot be justified.  Under current law, American citizens that are living abroad or have relocated permanently are still subjected to the income tax.  However, expats are no longer being defended by the U.S. government.  Renouncing citizenship (which is quite costly) is the only way to avoid being taxed.

Why should Americans, who are no longer being defended by their government, still be required to pay for it?  This would be a clear violation of the “social contract” that citizens have supposedly agreed to. 

There are other dangers that have come with government financing through tariffs, or, as some have called for, a national sales tax. Originally, when the income tax was proposed, it was to replace tariffs.  Tariffs, like all sales taxes, burden the poor and middle class disproportionately.  The income tax, which at first only affected the affluent, was accepted by the public since tariffs were to be eliminated.  Unfortunately, the tariffs remained after the two world wars and the income tax was levied on almost everyone. 

A similar situation could occur with the expansion of tariffs or the implementation of a national sales tax.  Governments rarely relinquish their taxing power.  

What is being ignored in the talk about tariffs and the income tax are the exploding government deficits.  Fiddling with what source of revenue the government collects is not addressing an impending financial crisis that could bring down the entire U.S. economy.

Of course, runaway debts and deficits are inherent in democratic republics as politicians are not personally responsible for the debt, unlike a monarch or king.  This is another flaw in the social contract theory. 

Before policy makers change the nation’s tax system, they should carefully consider the ramifications and seek to find the most equitable solution that will not burden only part of the citizenry. Cutting runaway federal spending is a first step.       

*https://www.cnn.com/2024/10/26/politics/trump-income-taxes-tariffs/index.html