Donald Trump, the U.S. president who saw his approval ratings plunge due to the 'tariff war,' has pulled out the income tax exemption card. This idea suggests that high tariffs can replace income tax revenue, but major foreign media evaluations indicate that the president's plan to eliminate income tax lacks feasibility.
According to CNN on the 28th (local time), President Trump told reporters before boarding Air Force One after attending the funeral of Pope Francis, "We will make a lot of money (from tariffs), and we will reduce taxes for the people," adding, "It will take time, but we will lower taxes. I think it's possible to eliminate income tax because I believe that tariff revenue can fully replace all income taxes."
However, CNN pointed out that to abolish income tax, tariffs would need to be much higher than the current level. The U.S. federal government currently earns about $3 trillion (approximately 4,312 trillion won) in revenue from income tax each year. The value of goods imported by the U.S. in a year is also around $3 trillion. To replace income tax with tariffs, a minimum tariff rate of over 100% would need to be imposed on all imported goods, but according to the international credit rating agency Fitch, the current effective tariff rate in the U.S. is only 22.8%. This figure has increased more than tenfold from the 2% level earlier this year.
CNN noted, "To replace income tax with tariffs, the tariff rates would need to be raised more than fourfold," adding that "the current U.S. tariff rates are already among the highest among developed countries, posing a risk of driving both the U.S. and global economies into a recession." Raising tariffs high enough to abolish income tax is deemed practically impossible.
In addition, the rise in tariffs is likely to lead to increased prices for imported goods and sluggish consumer spending. U.S. corporations have already claimed that Trump's trade policies are increasing corporate expenses and reducing consumer expenditures. In fact, PepsiCo, a representative consumer goods company, has adjusted its annual performance forecast downward, considering the repercussions of the tariff war. Reuters reported on the 24th that about 30 companies have withdrawn or lowered their performance forecasts in the past two weeks.
Torsten Slok, chief economist at Apollo Global Management, said, "It’s unclear how the sales volume would change if the price of all imported products were to double," adding that, "If prices rise due to tariff increases, sales will decrease, so it may be necessary to impose tariffs of up to 200% on all imported goods to fully replace income tax." This implies that to abolish income tax, tariffs would need to be raised to a level that would make the prices of imported goods more than four times higher than they are currently.
Even if U.S. consumers accept significantly higher prices to abolish income tax, another issue complicating the repeal of income tax exists. President Trump aims to incentivize many corporations to produce goods within the U.S. through tariff increases. If a significant number of companies build factories in the U.S. to avoid tariffs, revenue from tariffs will decline. This means that the U.S. will not be able to secure revenue from tariffs to replace income tax.
Some argue that corporate income tax can fill the revenue gap; however, current corporate income tax accounts for only 6% of total U.S. revenue. In contrast, individual income tax makes up about seven times more at 41%. Furthermore, President Trump wants to further reduce the corporate income tax rate.
Meanwhile, this is not the first time President Trump’s plan for 'income tax abolition' has been discussed. U.S. Secretary of Commerce Howard Lutnick stated in a February interview with Fox News, "Trump established the External Revenue Service. His goal is very simple. Abolish the IRS and make foreigners pay taxes," adding that the abolition of income tax had been one of the administration's objectives even before the tariff war. President Trump acknowledged that while he aims to abolish income tax, it is difficult to realize in the short term.