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Why can’t tariffs replace the income tax?

Paul Krugman responds today to Donald Trump's latest idiocy on tariffs, complaining that "almost all attempts to refute Trump’s claims that he can replace income taxes with tariffs aim too high."

True enough! But then he says:

I’m a great admirer of Clausing and Obstfeld’s work on the amount of revenue we could possibly collect from tariffs, showing that it couldn’t possibly replace the income tax. Here’s their chart showing that there really is a tariff-rate Laffer curve.

Silly Nobel Prize winner. That's still infinitely too complex for the average Joe. Try this instead:

I'm not sure that even this would get through to the average MAGAnaut. But it's already so simplified it's wrong.¹ There's not much simpler you can get.

¹The tariff itself will reduce imports, so it won't actually raise the full $310 billion. This is illustrated in, um, Clausing and Obstfeld’s work on import sensitivity to tariff levels.

46 thoughts on “Why can’t tariffs replace the income tax?

  1. Austin

    MAGA: That remaining $1.865T is just waste. Musk will cut it… wait where did my Social Security check go, and why did the hospital send me a “Medicare denied your claim” notice? Those filthy immigrants took my money again!

  2. SwamiRedux

    Silly Kevin. All we have to do is import seven times as much as we do now so the tariffs easily replace the income tax. In fact, let's import 10 times as much and return the extra to people so they can pay for the higher prices of imported goods!

    This economic analysis brought to you by Maurits Cornelis Escher.

      1. Altoid

        Sometimes, but it depends. At first ours were "revenue tariffs" mainly intended to fund the government and not do much else-- the famous graph that's been circulating the past few days shows what a high proportion of the federal budget was covered by tariffs into the late 19C (but of course is being completely misinterpreted, as Krugman's substack piece shows). The original tariffs weren't intended to slow down imports, which would have defeated their purpose. And somebody on this thread points out that Hamilton's early tariffs were on luxury items, which should be relatively inelastic to price changes and weren't things most consumers could buy regardless what they cost.

        Before the Civil War the federal government was orders of magnitude cheaper to run and tariffs were logistically the easiest kind of tax for collecting that kind of money. And the constitution makes them exclusive to the feds. Hamilton tried other kinds of taxes early on, like the famous excise tax on whiskey that was intended to raise a little revenue and mainly to bulk up a federal presence in frontier areas, but it brought on an armed revolt. For decades after that the feds relied on tariffs and land sales for most of the revenue that kept the government running.

        Tariffs' effects on prices were too important to ignore for long, though, and "protective tariffs" were used to shift supply from imports to domestically-produced goods, what we call industrial policy now. In that sense they were meant to reduce imports, but not to reduce overall consumption of whatever we're looking at. One point of textile tariffs, for example, was to get domestic users of cotton textiles to buy them from American manufacturers instead of British ones, and it was done in hopes of encouraging both domestic manufacturing and the domestic market to expand. Other effects resulted too, that touched on the domestic labor market, immigration, urban development, and other things, and the higher price level widened political and cultural differences between producing and consuming areas (North Atlantic states and Old Northwest vs South, most broadly). The consuming areas protested textile tariffs bitterly and surely would have shifted to imports if they could have.

        What trump might have mind with tariffs is beyond me (assuming even he knows, which seems doubtful). In terms of reducing imports, the odd thing is that the McKinley tariff that he and/or his people point to as a model was, I think, the first that was specifically aimed at reducing the *overall* level of imports. But at that point we'd had high protective tariffs since before the Civil War and were running a large federal surplus. Supposedly McKinley's idea was that making imports way more expensive would drastically slow them down and reduce federal revenue to the point where the government wouldn't be piling up a surplus anymore. But I don't know-- if you compare that to the other major option of *reducing* tariffs to bring revenue in line with spending, McKinley's plan seems mighty convenient for domestic manufacturers.

        Regardless, things in McKinley's time were almost completely upside-down compared to now, so talking about using uber-protective tariff levels mainly for revenue looks to me like nonsensical horseshit at best. Somebody is trying to sell somebody a load of goods here.

        1. wvmcl2

          Trump the brilliant economic strategist sees tariffs primarily as revenge and dominance. He has convinced himself that other countries are screwing us somehow, and this is how he gets back at them and bends them to his will.

  3. Liam3851

    Trump hasn't limited himself to a 10% tariff-- he's already proposed 25% on goods from Canada and Mexico, and unlike income taxes there's no reason to cap the rate at even 100%, you could easily have a 200% tariff. Absent Laffer effects, a >=70% tariff would be enough to supplant the income tax, given Kevin's data above. Krugman (citing Clausing and Obstfeld) is making the point that Laffer effects however make this nonetheless impossible, with revenue maximization around the 60% level.

    1. J. Frank Parnell

      Trump is not building a perpetual motion machine. He is building a pyramid scheme. Keep cutting taxes on his billionaire friends while claiming tariffs, growth, oil exports, clean coal or something will make up the difference. Keep the suckers fooled while the debt explodes, then blame the Democrats when they get into power.

  4. Yikes

    If you would have told me at any point prior to this idiot a Republican president would propose a national, federal sales tax, and have the entire conservosphere take it seriously, I would have laughed my ass off.

    Talk about no one failed to get elected underestimating the intelligence of the American people.

    None of this if funny now. Sheesh.

    1. Salamander

      Republicans have been proposing a "national sales tax" (aka "value added tax") for decades now! They love it, because it would be so regressive, falling most heavily on those with the least income and wealth. This is also why they worship the "flat tax":everybody pays the same low rate!!

      Tariffs once financed the US government, back in Alexander Hamilton's day. His rationale was to put them ONLY on luxury goods, so that the well-off would pay a little more for their nice things, but the mass of the population would remain untouched.

      Also, in those pre-computer days, the bookkeeping was simpler.

      1. emjayay

        Bonus: The Customs people had the money to build one lavish facility after another (like the now-misnamed Federal Hall in Manhattan in 1832, then moving into the Merchants' Exchange building and then building the much bigger and more lavish New York Custom House (now used for the Smithsonian National Museum of the American Indian) in 1907.

        And the tax collector employees also did very well.

      2. rick_jones

        Also, in those pre-computer days, the bookkeeping was simpler.

        Was it? I’d think everything from recording to calculating being done by hand would have been more difficult.

        1. Altoid

          Not automated/computerized like now, for sure, but easier because collected at only a few identifiable points of entry where a few clerks could make basically one calculation for each item type and the g-men could impound the goods until the tariff was paid.

          An alternative is to imagine every store clerk and tradesman trying to figure out, collect, and document a modern-style point-of-sale tax in the 18C when a huge proportion of daily business was done on ledger-book credit or even barter and paper was as at least as expensive as vellum is today. Or every employer keeping wage and withholding information on every employee with quill pens or steel nibs and sending copies to tax offices. And people in those offices amassing the data, etc. Basically unthinkable (except for imperial secret police operations in some places, I guess . . .).

          OTOH people who regularly handled money were much better at figuring discounts and percentages on the fly than most of us are now, because they had to be. They were using several different countries' coins and needed to know cross-valuations on the spot, and then in the 19C they had to discount bills from scads of small-town banks that people used because there wasn't enough coinage in circulation and we didn't have greenbacks or other national-issue paper yet.

      3. cephalopod

        I haven't heard of Republicans pushing for a VAT. The GOP stopped Obama's attempt at instituting a VAT.

        Project 2025 talks about several options for consumption, like a national sales tax or a flat tax that excludes investment, but I don't see a VAT listed.

        I'm curious to know who is pushing for a VAT these days, if you have any specific politicians/think tanks.

        1. Altoid

          I don't know about Salamander's, but my own aging memory has vague traces of talk about a VAT from the Nixon era, or whenever it was that the Europeans were seriously considering and/or first adopting them.

          The beauty of a VAT for Nixon would have been that it would be collected at every stage in the chain from manufacture through wholesale to final retail so there was an infinite number of taxable events, and at the same time the taxes would all be hidden from the end buyer.

          But that was before the Flood, when Republicans still believed in balanced budgets, taxation, and other dinosaurs.

        1. wvmcl2

          Not sure I see the difference. A VAT is levied at every stage of the production process, but wouldn't a national sales tax be as well? I mean, if GM buys tires from Goodyear, wouldn't they have to pay the sales tax on those tires?

          1. Altoid

            Not completely certain on this, but I think sales taxes are generally understood to be retail or end-user only. My experience with an industrial supplier in OH is old but I don't remember any intermediate-level sales taxes like the tire example, and I think it's the same in PA now. The line couldn't be 100% impervious because businesses are often end users, like with office supplies, and it could vary from state to state.

            But I think the biggest difference in general usage between a sales tax and a VAT is that a VAT's incidence is just about universal whenever anything changes hands or services are provided. So when people talk about a "national sales tax" I think that's generally understood to exempt supplier-to-producer intermediate sales. And if it's GOP types talking about it, I can't believe they'd even *think* about taxing those intermediate sales!

  5. Jasper_in_Boston

    I had the same exact thought as Kevin when I read Krugman‘s piece yesterday. No need for fancy econo-speak!

    Incidentally, Krugman’s been on fire since leaving the Times. An absolute must read.

  6. KJK

    Even less $ imports after Mango Jesus invades and annexes Canada. Can't collect tariffs for goods coming from our new 51st State.

  7. D_Ohrk_E1

    I think we can shut down the techbro oligarch totalitarian fanboism by encouraging Trump to embrace a 100% tariff on technology imports, and watch the techbros argue against the very thing they claim to support.

  8. golack

    Trump, ok, his puppeteers, want a VAT or national sales tax in place of any income tax (where are their hands???)

    Of course tariffs will kill Apple. at least their iPhones. Not sure about tax avoidance schemes where IP is held in an overseas firm, so no US taxes....Not sure of the current state of that loophole.

  9. Dana Decker

    The so-called $1.8 trillion "shortfall" will be paid for by minting cryptocurrency. It's so easy. Just fire up that old PC you have in the garage, wait a short while (e.g. make a sandwich), out pops a token, put it on the blockchain, generate a QR code, and presto! Instant wealth that can be used to cover debt and operating expenses. Repeat as many times as needed.

    Donald Trump, Elon Musk, and assorted Big Brain Billionaires know it's the smart play. And so should you.
    =-=-=-=-=-=
    Re Kevin's graphic: Adding ".8" to the tariff number makes it *look in a quick glance* as being of the same magnitude of the other numbers, which it is not.

    1. NotCynicalEnough

      In all seriousness, instead of creating the completely idiotic "strategic bitcoin reserve", why not have the Treasury sell its own crypto currency with an explicit guarantee that has no value backed by the full faith and credit of the US government. They can agree to buy them back at any time for at a price of $0. There seem to be plenty of suckers out there, I don't know why the government can't get in on the action.

  10. FrankM

    I think you're missing the whole point of the tariff plan. The idea that it will replace income taxes is just a throwaway to the rubes, like "no taxes on tips" or "Mexico is going to pay for the wall". When Trump says tariffs are "beautiful" he means a beautiful opportunity for graft:

    "Tariffs hurting your business? You'd like an exemption? Let me see...(checks donor list)...looks like you're in luck. Your business is essential to national security. Here's your exemption."

  11. Crissa

    You need your units lined up instead of your significant digits. They won't understand that 311 is smaller than 2176 if you write it 310.8 vs 2,176.

    + 310
    -2176
    =====
    -1865

  12. gVOR08

    Remember Steve Forbes and others pushing a flat tax? They did the same trick, proposing a rate that wouldn’t begin to replace the income tax.

    J. K. Galbraith like the idea of a VAT at least partially replacing the income tax. He had a three part argument: 1. We need the money. 2. Economists always prefer consumption taxes. And 3. reducing resentment toward progressive taxes would deprive the Republican Party of donations.

    1. FrankM

      #3 is a fantasy. Back in the halcyon days of the 1950's the top rate maxed out at 92%. The current top marginal tax rate is quite low by historical standards. Has that reduced resentment toward progressive taxes? Not that I can see.

  13. bbleh

    All these "numbers" really miss the point.

    Foreigners are bad, and tariffs hurt Foreigners; therefore tariffs are okay. But taxes are bad because they hurt ME -- I work hard and play by the rules, and I pay too much in taxes.

    So it's simple: make the Foreigners pay instead of me. Have the bureaucrats work it out. And also cut the bureaucracy -- that'll save a LOT of money. Done.

    1. DButch

      So, what happens when US Customs officers show up in China demanding payment of a huge tariff bill. Are they ever seen again?

      1. Altoid

        Eureka, you have it! He thinks the *shipper* pays the tariff before stuff gets loaded up and sent? What a numbskull. Maybe his new treasury secretary should have some Vince McMahon talent work up a little ringside skit and bout on how tariffs happen.

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