Imagine a United States where April 15th no longer strikes fear into the hearts of taxpayers. No more W-2 forms, no more deductions to calculate, and no more anxiety about an IRS audit. This isn’t just a taxpayer’s daydream—it’s the foundation of former President Donald Trump’s most ambitious economic proposal to date.
In what could be the most significant overhaul of the American tax system since its inception, Trump has proposed eliminating the income tax and shifting the burden of government funding to tariffs on imported goods. This plan would effectively dismantle the Internal Revenue Service (IRS) and replace it with a new entity called the External Revenue Service (ERS), fundamentally changing how America finances its government operations.
The proposal harkens back to America’s economic past while promising a bold new future. But as with any radical reform, questions abound: Is this economically viable? Who bears the cost? And how would such a monumental shift affect everyday Americans, businesses, and our international relationships?
The External Revenue Service Concept
At the heart of Trump’s bold tax reform proposal is creating a new government body: the External Revenue Service, or ERS. Instead of relying on the traditional tax collection system handled by the IRS, Trump suggests that the U.S. could abolish the income tax and replace it with tariffs on imported goods to generate revenue. The concept has its roots in Trump’s larger economic philosophy, which involves making foreign nations pay for American prosperity.
Trump’s pitch for the ERS rests on the belief that America should be less reliant on taxing its citizens and more focused on bringing money into the country through tariffs. The idea is that by taxing foreign nations for the goods they sell to the U.S., the country would generate enough revenue to cover government spending, eliminating the need for Americans to pay income taxes.
While this is undoubtedly an ambitious proposal, the details of how it would work remain vague. The ERS would be tasked with collecting duties and tariffs on foreign trade, shifting the burden of taxation from American citizens to foreign governments and companies. This change would mark a monumental shift in how the U.S. finances its operations, raising several questions about its potential impact.
The Case for Abolishing Income Tax
Trump’s call to abolish the income tax is rooted in his desire to return the U.S. to a system before 1913 when the federal income tax was first introduced. The U.S. largely depended on tariffs to fund the government at that time. The country’s financial system flourished during this period, as it was able to rely on import duties rather than taxing its citizens.
Trump argues that eliminating income taxes would unlock economic prosperity for the nation. He points to the years between 1870 and 1913, a time when tariffs were the primary source of government revenue, as the “richest period in U.S. history.” He believes that by reinstituting this system, the U.S. could see a return to that kind of economic dominance.
However, while this may sound appealing, abolishing the income tax is not without its challenges. The income tax system currently raises trillions of dollars each year, and replacing that revenue would require a significant overhaul of the U.S. economy. According to some estimates, the U.S. raises about $3 trillion annually through income taxes alone. The prospect of losing that much revenue could have serious consequences if there isn’t a reliable alternative.
Tariffs as the New Revenue Model
The cornerstone of Trump’s plan to replace income taxes is his reliance on tariffs. Trump has long been a proponent of using tariffs to improve America’s economic standing, and his proposal to abolish the income tax is no different. He argues that by imposing tariffs on imported goods, the U.S. could raise the money it needs to fund government operations without relying on income taxes.
But how realistic is it to replace income tax revenue with tariffs? For one thing, the U.S. imports around $3 trillion worth of goods annually. For tariffs to replace income taxes entirely, they must be at least 100% on all imported goods. That would effectively double the price of everything from cars to electronics, clothing to pharmaceuticals.
According to Torsten Slok, chief economist at Apollo Global Management, this kind of drastic tariff increase could have serious economic consequences. Tariffs that high could lead to a sharp decline in consumer demand, as higher prices would discourage people from buying imported goods. For example, Walmart recently predicted that sales growth would slow down due to Americans’ concerns about high prices and tariffs.
Even if consumers were willing to accept higher prices in exchange for no income taxes, there are still challenges with how the U.S. would replace the vast revenue from income taxes. With the possibility of decreased imports, the government could face a significant shortfall in revenue. Corporate taxes, comprising just 6% of U.S. tax revenue, may fill some of the gap. However, with Trump advocating for a reduction in corporate taxes, that source of revenue could be less effective than anticipated.
The Potential Impact on Consumers and Businesses
Markets respond strongly to policy certainty; financial commentator Taylor Riggs said, “Markets like certainty. So if you tell me, ‘10% tariff,’ if I’m a company like GM, I can handle that.” However, she noted planning difficulties arise with constantly changing rates: “If you tell me that every month it’s going up by 2.5%, I have a hard time planning around that, because how do I figure out: do I buy goods now? What if tariffs go up? Is it a negotiating tool?”
Some market specialists view potential benefits. Kenny Polcari, Slatestone Wealth chief market strategist, supported changing tax structures: “encourages them to work more, in my opinion, encourages them to spend more, in my opinion.” He concluded confidently, “So then you end up having a stronger and better economy. I think market likes it.”
However, Tax Foundation Vice President Erica York warned against overreliance on tariffs: “Tariffs are not external revenue; they are taxes on U.S. importers that shrink both U.S. economy and U.S. incomes. Higher tariffs will create a drag on U.S. economy and will threaten to offset benefits of tax cuts elsewhere.”
Americans might face significantly higher prices on imported goods—potentially doubling or quadrupling costs for cars, electronics, drugs, clothing, shoes, energy, and countless other products.
The Trade-Offs: Will It Work?
The major question surrounding Trump’s proposal is whether or not it will work. While eliminating income taxes sounds appealing on the surface, the reality is much more complex. Tariffs are not a perfect substitute for income taxes, and using them as the primary source of government revenue could create significant challenges.
Relying on tariffs heavily burdens U.S. consumers and businesses. Higher prices on imported goods would likely lead to lower sales, which could hurt the economy overall. Additionally, as more companies shift production to the U.S., the government would need to find a way to replace the revenue lost from decreased imports. This could mean even higher tariffs or other forms of taxation.
Furthermore, tariffs are a volatile source of revenue. Unlike relatively stable income taxes, tariffs fluctuate based on trade agreements, diplomatic relations, and economic conditions. This creates uncertainty, making it difficult for businesses and consumers to plan for the future.
Trump has already implemented substantial tariff changes:
- 10% tariff on all Chinese goods
- 25% tariffs scheduled for Canada and Mexico
- 25% lumber tariff under consideration
- Additional tariffs are planned for autos, chips, pharmaceuticals
- Dollar-for-dollar reciprocal tariffs proposed
During his campaign, Trump advocated for broader tariff applications, including 10-20% across-the-board rates on all imports and higher 60% rates for Chinese goods.
Most concerning for many economists, Trump threatened 25% tariffs on goods from Canada and Mexico—both parties to the U.S.-Mexico-Canada Agreement (USMCA), a free trade agreement Trump himself negotiated during his first term to replace the North American Free Trade Agreement (NAFTA).
Is It Feasible? Experts Weigh In
