U.S. President Donald’s Trump’s global trade war is sowing economic chaos around the world. But his ultimate rationale for the tariff fight — considered by most economists to be wealth destroying — has been something of a head scratcher. Recently, his commerce secretary, Howard Lutnick, suggested a potential answer, telling an interviewer that one of Trump’s ultimate ambitions is to eliminate income tax for Americans earning less than US$150,000 and to replace it with tariff revenue and other measures. Lutnick has likened the idea of forcing other countries to pay to access American markets to getting a Costco store membership: “It’s like joining Costco — he’s got to pay to come in,” he said in an earlier interview. But could the U.S. really raise enough to eliminate income tax? The Financial Post explores the question.

What does the Trump administration want to do?

According to Lutnick, Trump wants to waive taxes for people earning under US$150,000 once the government balances the budget. “That’s aspirational,” he said in an interview with Fox News this month. “Our objective is during President Trump’s term, over the next four years, we are going to try to balance the budget. That’s why you have got Elon Musk and DOGE (Department of Government Efficiency). You take a trillion out of the waste, fraud and abuse of our systems, and then you have the tariffs … and then you produce: drill, baby, drill.”

Lutnick also said the government is ready to start selling a new US$5-million “Gold Card” on a pilot basis within weeks. The cards would allow foreigners to become U.S. residents and then citizens. He said he expects to sell tens of thousands of such cards and raise somewhere between US$500 billion and US$1 trillion a year, but some immigration analysts believe those projections are far too rosy.

How much revenue does the U.S. raise from income taxes?

Personal income taxes in the U.S. raised more than 27 times as much revenue as tariffs in 2021, according to a report published by Washington-based non-profit Tax Foundation in June 2024.

American taxpayers reported almost US$15 trillion in personal income in 2021, which resulted in US$2.2 trillion in income tax. In the same year, total imports were US$3.4 trillion, which includes services that aren’t subject to tariffs. Looking at goods separately, imports totalled US$2.8 trillion, which resulted in tariff revenues of US$80 billion — a figure that works out to a little under three per cent of the value of goods imported.

Theoretically, Trump would have to place high across-the-board tariffs on goods to make up the difference, economist Erica York said in a the June report. “An across-the-board tariff hike of 69.9 per cent on the level of goods imports from 2023 (US$3.1 trillion) seems like it could fully replace individual income tax revenues (US$2.2 trillion),” she wrote. But even that is too simple, she warned.

How much could the U.S. really raise from tariffs?

A 70 per cent tariff would not be that effective in reality because tariffs also have drawbacks, such as the reduction in revenue that inevitably comes when importing companies switch to alternatives, York said. In a bid to consider the different realities linked to high tariffs, the report assumed a 15 per cent non-compliance deduction and a negative elasticity of 0.997 per cent to take the gradual decline in imports into consideration.

Those assumptions would drop tariff revenue — even from a 70 per cent across the board levy on all goods imported into the United States — to about US$560 billion.

“You’re constantly incentivizing people to not import while also trying to make money from imports. The two are incompatible,” Jamie Tronnes, an executive director at Ottawa-based Macdonald-Laurier Institute, said. “You get a fat revenue cake in the first year, but next year it’s a slice, then, before you know it, you’re running on crumbs.”

What about replacing taxes for those earning under $150,000?

While figures for the precise threshold cited by Lutnick were not readily available, American taxpayers who earned less than US$200,000 reported almost US$8 trillion of individual income in 2022, which is about half of the overall reported income, according to Alex Durante, a senior economist at the Tax Foundation.

Durante said that this group pays about US$674 billion in taxes in a year, for an average tax rate of about eight per cent. This is still more than the estimated US$560 billion that York calculated the U.S. could potentially earn after imposing a tariff rate of about 70 per cent.

Based on Trump’s plan of imposing a 20 per cent tariff on goods from China and 25 per cent on goods from Canada and Mexico, the U.S. would earn about US$100 to US$130 billion per year, according to various estimates — a significant shortfall. To put things into context, the U.S. would need to sell 108,000 of Trump’s proposed Gold Cards to close the gap every year, a figure that immigration consultants say is unlikely.

“This is kind of a very unrealistic plan, and the math sort of just doesn’t work,” Durante said. “Most countries that rely on tariffs for revenue are developing nations and that’s because most of them don’t have an efficient system to levy some kind of income tax. There’s a very good reason why we just don’t see a lot of developed countries using this kind of policy.”

• Email: nkarim@postmedia.com

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