Trump’s Economic Policies—IRS vs Tariffs: Can it Work?

February 21, 2025

By Evans Momodu
3 minute digest
Updated 14:05 PM UK(GMT), Friday February 21, 2025

Trump introduced US income tax elimination as a substitute for increased tarrifs as part of his economic policies in his second term.

The truth is no one enjoys paying taxes, and the IRS is one of the least popular government agencies in America. But could it really be abolished?

According to Commerce Secretary Howard Lutnick, that’s exactly what President Donald Trump wants to do. Lutnick stated that Trump’s goal is to eliminate the Internal Revenue Service (IRS) and replace it with revenue generated entirely from tariffs on foreign goods.

A Bold Idea with Major Challenges

The U.S. government collects about $3 trillion annually from income taxes. At the same time, the U.S. imports around $3 trillion worth of goods each year. If tariffs were to fully replace income taxes, they would need to be set at 100% on all imports, according to Torsten Slok, chief economist at Apollo Global Management.

But the issue is more complicated than simply doubling prices. Basic economic principles suggest that as prices rise, demand decreases.

Retailers like Walmart have already warned that higher prices from tariffs could slow sales, meaning the government might need even higher tariffs—potentially 200% or more—to make up for lost revenue.

The Cost for American Consumers

If this system were implemented, American consumers could see imported goods quadruple in price. Everything from cars and electronics to clothing and pharmaceuticals could become drastically more expensive.

Even then, the plan has a major contradiction: Trump’s tariffs are meant to encourage companies to manufacture in America. But if U.S. companies stop importing goods and start producing domestically, the tariff revenue would shrink—raising the question of how the government would fund itself.

Would Corporate Taxes Cover the US income tax elimination?

Corporate taxes could help offset some losses, but they currently only account for 6% of U.S. tax revenue, compared to 41% from individual income taxes, according to the Tax Foundation. Additionally, Trump has promised to lower corporate tax rates, further reducing the potential revenue from businesses.

Trump IRS replacement

Despite the economic hurdles, Trump remains committed to his "External Revenue Service" (ERS) plan. Over the past month, he has introduced new tariffs, including a 25% tariff on lumber, along with existing tariffs on autos, semiconductors, pharmaceuticals, steel, and aluminum.

Next week, a 25% tariff on all goods from Canada and Mexico is set to take effect, and a 10% tariff on all Chinese imports is already in place.

The ERS was first mentioned in a Truth Social post before Trump’s inauguration and was included in one of his first executive orders.

However, even after Commerce Secretary Lutnick’s comments, the exact role of the ERS remains unclear. The executive order instructs Treasury, Commerce, and Homeland Security to explore the feasibility of establishing the ERS to "collect tariffs, duties, and other foreign trade-related revenues."

While Trump’s plan sounds appealing, eliminating income taxes and making foreign countries foot the bill might be disastrous—the numbers suggest it would be economically unsustainable.

High tariffs could lead to skyrocketing prices, reduced consumer spending, and lower overall revenue.
For now, the IRS isn't going anywhere.
Source: CNN