U.S. President Donald Trump has suggested an end to federal income taxes with a tariff-based economic system replacing it. Although he’s pledged to reduce federal bureaucracy, Trump suggests creating a new agency called the External Revenue Service (ERS) that would manage tariffs.
Trump cites the period from 1870 to 1913 as one of the nation’s most wealthy eras, when the U.S. “operated entirely on tariffs” as he claims. Many policymakers are skeptical about this move.
RELATED STORIES
Trump spoke at the conference
The President spoke at the 2025 Republican Issues Conference at Trump National Doral Miami on 27 January, putting forward his proposal in front of GOP leaders.
As a newly-appointed president, the conference aimed to shape his legislative agenda, according to AFP.
An economy relying on tariffs
The new proposal for federal funding is this: instead of taxing American citizens on their income, the U.S. would impose tariffs on foreign goods for the funding of the federal government.
Trump cited the Traffic Commission of 1887, claiming, “You know, from 1870 to 1913, the U.S. operated entirely on tariffs—and that was the richest period in American history, relatively speaking.”
He claimed it made the US incredibly wealthy
“It was so enormous that they had no idea what to do with all of the money. Teddy Roosevelt, as a beneficiary, was able to fund national parks and other projects—all through tariffs. There was no income tax; that only came in 1913,” Trump continued.
Trumps aim to tax other nations
The President suggested that the U.S. would tax foreign nations on their goods rather than taxing the American citizens on their income.
He thinks a tariff-funded economy can happen “very quickly” and that it will make America “very rich again.”
Could tariffs replace taxes?
Mainstream economists are skeptical on whether a tariff-centric economy would be a good idea.
Tariffs, which are collected by the U.S. Customs and Border Protection agents, are typically levied as a percentage of the price of imported goods, and if tariffs are increased so might the prices, ultimately increasing costs on American consumers.
This could cause prices to increase
Essentially, tariffs are taxes on imported goods, so if tariffs increase so will the prices when the items are passed on to the consumers.
Policymakers and critics warn that this could mean a disproportionate effect on the lower and middle income households in the U.S. who might not be able to afford the increase in prices.
It also affects the country’s funding
Not only would a shift to a tariff-based federal system affect the American individual, but it wouldn’t help in bridging the government funding gap that would come from cutting income tax.
Estimates suggest a 10% tariff could generate between $350 to $400 billion annually. This isn’t enough for government funding as the cost of extending tax cuts over ten years is $4 trillion.
Tariffs wouldn’t be enough to cover costs
With the tariffs not covering all the government’s budget costs, this might mean cutting supportive programs like Social Security and Medicare to reduce costs on the government.
A tariff-based federal system could then mean both an increase in consumer prices and inability to cover the government’s federal budget. This could cause the cancellation of important support programs, which is likely to affect lower and middle income households the most.
He’s starting with certain countries
Trump said he would impose 25% tariffs on imports from Canada and Mexico across the board, believing this will stop the flow of undocumented migrants into America, according to CNN.
Additionally, the BBC reports that he has threatened to impose tariffs of up to 60% on Chinese goods.
The External Revenue Service agency
His proposal is to have tariffs and foreign trade revenues be controlled by a new agency called the External Revenue Service agency (ERS).
This raised other concerns of government expansion as Trump has pledged to reduce federal bureaucracy, and tariffs are already being monitored by existing bodies like the Commerce Department and U.S. Customs and Border Protection.
Last Updated on January 31, 2025 by Nour Morsy
