Trump's Tariff Mirage: His Tax Plan to Replace Income Tax With Tariffs Does Not Add Up

President Trump is clearly not happy with the way his legal case for the "Liberation Day" tariffs is going. Yesterday, Trump said that losing this legal battle would "cause the U.S. to suffer greatly" and that "our country has a chance to be unbelievably rich again [with the tariffs]." This pattern of rhetoric glorifying tariffs is nothing new. Earlier this week, he opined that removing tariffs, what should simply be referred to as import taxes because that is what tariffs are, would turn the United States into a third-world country. Let us forget for a moment that the United States has been a developed country for decades without the high tariff rates that Trump is trying to implement. In April, Trump said that tariff revenue could be so great that it could replace the federal income tax. The problem with that assertion is that it does not make economic sense nor would it make America great again. 

Economic Logic Problem

First, as I pointed out in April, the rationales used by Trump for tariffs do not make sense. Trump both wants to protect American workers from "unfair foreign protection" and generate tax revenue. Either tariffs will be high enough to deter imports from coming in, or they will generate enough revenue to make America rich again. These goals are in tension with one another, and maximizing one goal comes at the expense of the other. Trump wants to have his protectionist cake and eat it too, but that is not how tariffs work. 

Revenue Realities

Even setting aside these contradictions, the math to replace the federal income tax with tariffs simply does not add up. With the current tariffs in play, the Congressional Budget Office (CBO) estimated last month that the tariffs would generate $3.3 trillion in revenue over the next decade. Contrast this to the CBO's January 2025 federal income tax estimate (which was made before the tariffs were enacted) over the same period, which is $36.9 trillion (see below). That is a difference of $33.6 trillion, or put differently, the tariff revenue is projected to be less than 10 percent of the income tax revenue. The gap in revenue levels makes replacement impossible. So why is it that tariffs bring in so much less revenue than the federal income tax? 

Historical Perspective

As the Tax Foundation reminds us, the federal government of the late 19th century and early 20th century, which Trump is romanticizing, was different from today's government. Back in the day, federal government spending was about 2 percent of total GDP. Thanks to the implementation of the federal income tax, the government's ability to collect revenue expanded, in no small part to its large tax base. Now, the government spends the equivalent of 22.7 percent of GDP. Tariff revenue could not pay for Medicare, Medicaid, or Social Security, never mind the rest of government spending.  

Why Tariffs Are More Harmful Than the Income Tax

Since the tax base of imports is smaller, the economic harm per unit of trade is higher. This means that raising meaningful revenue means tariffs need to be high. This results in greater economic damage than a broad-based income tax because tariffs tend to distort product and supply chain markets more directly than income taxes, which more often than not influence individual decisions cut as work and savings.

Tariffs affect what to buy, where to buy it from, and how to produce it. They are distortive because they only affect imports, as opposed to all goods. It is more distortive in part because goods from different countries get imposed with different tariff rates. With tariffs, it might cause consumers to buy overpriced domestic goods or force businesses to redesign supply chains inefficiently. As a result of shifting domestic production to less efficient domestic industries, this misallocation harms overall economic efficiency. 

Furthermore, tariffs also hit lower-income households harder because they spend a larger share of their income on goods. To make matters worse, tariffs are systematically higher on lower-end versions of goods (about an average of 4 percent) than their high-end counterparts (Acosta and Cox, 2024), which hits low-income households even harder.  

As I explained last year, free trade is beneficial to the poor because it reduces their cost of living while increasing the price of what they sell. Since tariffs make the economy less free, Trump's tariffs will have the opposite effect on cost of living, as we have seen in the past. Additionally, the Peterson Institute for International Economics (PIIE) showed that a revenue-neutral swap of $780 billion in tariffs for income tax cuts would cause significant losses, including 8.5 percent of after-tax income for the bottom quintile. 

Global Implications

Unlike the income tax, tariffs invite the possibility for other countries to retaliate with their own taxes. Not only does this hurt U.S. exporters, but it disrupts global supply chains and diminishes global trade diminishes, much like it did during the Great Depression. Those higher import costs could very well put upward pressure on prices, thereby risking stagflation. This would likely appreciate the dollar, which would worsen trade deficits and undermine international collaboration. Furthermore, if Trump continues imposing tariffs on the U.S.' allies, he risks alienating allies. This could push allies towards China, which would undermine stated national security goals while diminishing the U.S.' influence in the global economy, as well as in East Asia specifically.

Conclusion

Trump's proposal to have tariffs guide policy on government revenue is not only economically unsound but historically misguided.  When these tariffs were at their heyday in the 19th century, it resulted in lower economic productivity in terms of propping up inefficient enterprises, lower standard of living, and higher consumer prices. If Trump goes ahead with this inane idea, not only will he harm the economy, but he will anger the United States' allies while failing to generate enough revenue to replace the federal income tax. Tariffs are no substitute for a broad-based income tax. Reviving tariffs under the guise of making America great again might make for a catchy slogan on the campaign trail, but in practice, it would cause enough economic decline to send the U.S. economy back to the 19th century, and not in a good way. 

How the Government's War on Single-Room Occupancy Fueled the Housing Crisis

Along with food and clothing, a roof over one's head has been considered one of the three fundamental needs for human survival. This remains true even for those who have next to nothing. There was a time when housing existed for those who had very little: a room, a lockable door, and typically a shared bathroom. It was not glamorous, but it was a roof over one's head. These housing units, called single-room occupancies (or SROs), were a reliable and affordable source of housing for the United States' poorest residents, seniors, and those looking to climb out of poverty. Today, SROs are all but nonexistent in the United States. Rent is higher than ever, homeless shelters are jam-packed, and many are out of luck when it comes to housing. What happened to SROs? In two words: government intervention. 

Last week, a report from Pew Research that was released in July was brought to my attention. With the title "How States and Cities Decimated Americans' Lowest-Cost Housing Option," the researchers at Pew Research detail the various policies that state and local governments used to get rid of SROs. The reason why governments went after SROs was because even as early as the early 1900s, SROs were seen as run-down, neglected, dilapidated. They were stigmatized as a public nuisance and blamed for such outbreaks as pneumonia and tuberculosis. Between the 1950s to 1980s, there were numerous local-level, piecemeal government regulations that severely curtailed SRO usage:

• Los Angeles and San Francisco rewrote zoning codes to prohibit rooming houses and share-living arrangements. 
• Chicago adopted stricter building and housing codes (e.g., imposed requirements for private bathrooms, minimum square footage) that effectively outlawed traditional SRO designs. 
• San Diego used code enforcement and licensing crackdowns to close SROs for safety or sanitation violations. 
• Seattle used redevelopment campaigns in "blighted" areas to clear out residential units where SROs were concentrated in exchange for higher-value development. Other countries similarly subsidizer to demolish these areas courtesy of the Federal Urban Renewal programs, especially Title I of the 1949 Housing Act
• Denver provided housing subsidies for traditional apartment-style housing that effectively sidelined SROs.

There could be better health inspections, rehabilitation incentives, or proper building management to make SROs more habitable, but these regulations that de facto eliminated SROs were overkill. SROs were the lowest-cost housing for individuals in need without requiring government subsidies or intervention. Primarily as a result of this crackdown, the overall SRO housing supply was reduced by 2.5 million units. This especially puts a crunch on the housing supply for those in the lowest-cost tier. This has placed undue demand on government services, subsidized housing, and homeless shelters because they cannot meet the housing demand. Just as one example, about half of the men who entered homeless shelters in 1980 were previously living in SROs. Without SROs, low-income individuals have very few alternatives of places to live, thereby contributing to homelessness, as we will see shortly.

This pushes low-income renters into larger, more expensive units when all they needed was a single room. As the Pew Research pointed out, an SRO in 1924 only cost $230 in today's dollars, which is below the $391 per month that an individual at the federal poverty line can afford in rent. Contrast that to the $1,205 that a median one-bedroom apartment costs. This should not be a mystery. Regulations requiring larger units crowds out the smaller units from the market and forces low-income individuals into more expensive units than necessary. These zoning regulations put additional strain on housing supply.

I first raised the alarm on overregulation in the housing market in 2017, citing a range of studies on how land-use restrictions reduce supply and inflate housing costs. Eight years later, the data has only grown stronger and the consequences more visible. These SRO-related land-use regulations are tantamount to a production quota, which restricts housing supply while jacking up housing costs. In the case of SROs, it is especially problematic because it constricts housing supply for the poorest of Americans, thereby squarely and concretely affecting low-income Americans. 

The Manhattan Institute found that areas with greater housing regulations also had a greater homelessness population (see below). While a compelling pattern, it stops short of showing causation. However, a peer-reviewed study from the University of Maryland fills that gap. The author found that land use regulations are responsible for increasing homelessness by 9 to 12 percent (Dawkins, 2023). In other words, restrictive land-use regulations are not merely correlated with homelessness. They are shown to cause increased homelessness.

There is a way to provide a modern-day equivalent of an SRO that is well-designed, hygienic, clean, and up to code. To do so, the government needs to get out of the way. Modifying current zoning laws to include small, shared-unit formats is a necessary first step. Second, remove the stringent codes in order to allow for smaller units and shared bathrooms and kitchens. Relax permitting regulations to allow for conversion of older building into SROs, especially since it is 25-35 percent cheaper than new construction.

Millions already live in shared housing without stigma, whether it is college dormitories, senior co-housing (aka "Golden Girls" Homes), professional households in which young professionals rent individuals in shared homes to split rent, transitional housing, monasteries, boarding schools, and military barracks. States and cities need to remove regulatory barriers and provide incentives to create low-housing options so that we can reduce homelessness, help financially vulnerable Americans, and help keep America's streets safer and cleaner.