Trump’s Income Tax Replacement Thought Isn’t That Outlandish
Donald Trump has proposed replacing the federal income tax with a revenue system based on tariffs, highlighting the complexities and inefficiencies of the current income-based tax system.
A consumption tax like a VAT (Value Added Tax) would make tax costs transparent to consumers, encourage saving over spending, and could potentially be more stable and easier to administer due to fewer deductions and complexities.
Tariffs could protect and stimulate domestic industries by making imported goods more expensive, encouraging local production and job creation while providing leverage in international trade negotiations.
Potential increases in consumer prices due to tariffs, the risk of retaliatory tariffs leading to trade wars, and the necessity to navigate existing international trade agreements and regulations.
A consumption tax system could be designed to be progressive by exempting necessities, thus not disproportionately affecting lower-income groups, and might incentivize investment and entrepreneurship by removing disincentives for earning income. However, careful policy design is needed to ensure fairness and economic stability.
Donald Trump recently floated the idea of eliminating the federal income tax. He explained that our country could thrive on a revenue stream divined solely from tariffs placed on goods other countries wanted to sell to the US marketplace. While the status quo establishment rolled its eyes at this idea, it’s not as outlandish as it sounds.
Our tax system, primarily based on income, has been criticized for its complexity, disincentives to work, inequities, and propensity to entice the elected class to abuse the system for potential benefactors (crony capitalism). A shift toward a tax system that focuses on consumption rather than income, focusing on our Republic's economic strengths, could offer a transformative approach to fiscal policy that aligns with economic efficiency, simplicity, and fairness.
Immediately, some will screech the warnings of instituting a Value Added Tax (VAT) system. In its purest sense, a VAT has its downsides, as many in the European Union will point out. But there is no reason we, in the United States, cannot create a better hybrid system that plays to our strengths instead of the strengths of the elected and connected classes of the Deep State.
What Is A VAT?
A Value Added Tax (VAT) is a type of consumption tax levied on the value added to goods and services at each stage of production, distribution, or sale. VAT is collected at every point where value is added to a product or service. This means businesses pay VAT on the difference between the cost of inputs they purchase and the price at which they sell their outputs.
When a business purchases inputs (like raw materials or services), it pays VAT. However, when that business sells its product or service, it collects VAT on the sale price. The company then remits the difference between the VAT collected on sales and the VAT paid on purchases to the government. Ultimately, the end consumer bears the full cost of the VAT, as businesses along the supply chain merely collect and pass on the tax.
Depending on how the VAT is instituted into law, it would apply to almost all goods and services, making it a comprehensive tax on consumption. However, the basis for instituting this VAT can exclude certain items deemed essential, such as food, medicine, etc.
On its face, a VAT presents a plethora of advantages:
Consumers know exactly how much tax they're paying because it's included in the price.
Due to the organically intrinsic credit mechanism, businesses have an incentive to report transactions accurately.
It tends to be more stable than income taxes because consumption doesn't fluctuate as dramatically as income during economic cycles.
Once implemented, it can be easier for governments to manage compared to income taxes with their myriad of deductions, exemptions, and crony-capitalist “picking the winners” carve-outs created by the elected class for the connected class.
Of course, implementing and executing VAT has its pitfalls and complications. Setting up the infrastructure for tracking VAT can be initially complex and costly. Without exemptions or rebates, VAT can disproportionately affect lower-income consumers who spend a larger share of their income on consumption.
Additionally, if not properly administered, VAT can lead to a cascade effect where businesses can't fully recover VAT paid on inputs, leading to higher prices. Lastly, small businesses—without a refined automated system—might find the record-keeping requirements burdensome.
The Case For Trump’s ‘Tariffs As Tax’ Argument
Donald Trump’s suggestion of a US tax system based predominantly on tariffs instead of income taxes involves significant economic, political, and social considerations. Still, it is not as radical as it sounds. The truth of the matter is we, the American people, have been conditioned by the elected and connected to believe that an income tax is the only option. It is not. It’s the most politically advantageous for the elected class and the behemoth, insatiable, spendthrift federal government.
Tariffs can make imported goods more expensive, giving nascent or struggling domestic industries an advantage over foreign competition. This protection—as long as it's reasonably applied and unmanipulated by trade union influences—can encourage local production, potentially leading to job creation and economic growth in manufacturing sectors.
By increasing tariffs, domestic consumption would facilitate a shift towards products made within the US (think “buy local”), reducing reliance on susceptible international supply chains. This would be wholly beneficial in times of geopolitical tension or economic sanctions, should any nation or group of nations be so bold as to alienate the world's most lucrative consumer market.
A tax system based primarily on tariffs would replace the income tax as the source of government revenue. This would be particularly beneficial because our current system—based on income—is overly complex, intrusive, and inequitably applied by our government.
And since tariffs are essentially based on the value of imported goods, they inherently adjust with inflation and economic growth without the need for legislative action, providing a more automatic fiscal policy tool.
Further, a tariff-based tax system would simplify and streamline tax collection, eliminating the subjectivity of the IRS tax audits on individual citizens. Since taxes would primarily be collected on imported goods at ports of entry rather than from millions of individual taxpayers, this could reduce the administrative costs associated with tax collection and compliance.
Additionally, the implementation of a tariff-based tax system gives the US leverage in trade negotiations, potentially forcing other countries to lower their trade barriers or comply with US regulations to maintain market access, a hallmark of Trump’s trade and geopolitical strategy during his first term.
But again, there are some challenges and considerations that must be addressed:
Tariffs can increase the cost of imported goods, potentially leading to higher prices for consumers who choose to buy predominantly foreign goods. If not managed carefully, this could fuel inflation.
Other countries might impose retaliatory tariffs, possibly (but not probably) leading to trade wars that could harm US exporters and the broader economy. Again, the US would weather these wars through the consumer purchase of domestically made products (the benefits of a self-sufficient domestic market).
The US would need to navigate World Trade Organization rules and bilateral trade agreements, which might limit the extent and nature of tariffs that can be applied. Then, one can argue the WTO is a corrupt and broken organization that favors nations that ignore the international condemnation of the use of slave labor, like communist China, over the US.
Back To The Argument Validating The Idea Of A VAT
Now that we understand there are good reasons to challenge the status quo's insistence that the only viable tax system needs to be based on income, we can examine the reasons for supporting Trump’s idea of eliminating the income tax as a source of government revenue.
A tax system based on consumption encourages—and facilitates—saving and Investment. It favors saving over spending because only consumed goods are taxed. This leads to higher rates of capital formation, as individuals and businesses are incentivized to invest rather than consume immediately.
Incidentally, countries with consumption or VAT taxes often exhibit higher savings rates. Studies on VAT in the EU show a correlation between VAT adoption and increased savings.
And an examination of the renowned Laffer Curve suggests that a consumer-based tax system increases overall tax revenue by bringing more transactions into the formal economy. This revenue stream is fostered by the replacement of complex income tax codes with their numerous deductions, credits, and loopholes. This would reduce administrative costs for both taxpayers and the government. The IRS could downsize because its purview over the individual would be eliminated, leading to savings in federal expenditure.
Where the consumer is concerned, financial transparency in the marketplace would greatly enhance informed consumer choices. Every purchase would reflect the tax, making the tax burden visible at the point of sale, leading to more informed consumer choices and political accountability.
While voices in the status quo establishment argue that consumption taxes are regressive, this argument can be obliterated by the exemption of necessities, as mentioned previously. Basic goods like food, healthcare, and education could be exempt from a consumption-based tax or taxed at a lower rate. Milton Friedman's Negative Income Tax idea comes into play here, but that exists outside the realm of what we are examining today.
But one of the biggest benefits of a consumption-based tax system is that it is fundamentally equitable in its application. Higher taxes on luxury goods and impulse-buy items would ensure that the wealthy pay more in proportion to their consumption, aligning with the principles of progressive taxation.
If a billionaire wants to buy a new luxury yacht or a new Gulfstream, they would be forced to pay the applicable tax rather than exploit loopholes in the income tax system manufactured for their benefit. Meanwhile, the average Joe would be equitably taxed on his Honda purchase. As Elizabeth Warren—one of the most Marxist of the radical Left—insists, everyone pays their “fair share.”
In the end, taxing consumption rather than income would remove any disincentive to earning, which would lead to a more dynamic labor market and expanding entrepreneurship. It would also lead to a thriving free market and more freedom for us all.
Cautions & Precautions
Transitioning to a consumer-based tax system would require either a constitutional amendment or a coordinated and massive legislative effort, considering the abomination that is the 16th Amendment, which Progressives jammed down our throats, creating the crony-capitalist income tax system, a system that serves a few while fleecing the majority.
Detailed economic modeling would be necessary to predict impacts on different income groups and to design compensatory mechanisms like prebates.
Further, safeguards would need to be unselfishly built into any new consumption-based tax system that would make it a Herculean effort to raise any established taxation parameters. Replacing an income-based system with a consumer-based system would be self-defeating if Congress could raise the tax rate through a simple procedure or simple majority vote. A new affirmative threshold constituting an ultra-super-majority would need to be established, lest we are replacing a cancer with a cancer.
The system would not be unprecedented. The US could look to countries like Japan, Canada, and some European Union nations for lessons learned from their VAT systems, thus benefiting from their weaknesses to create a “better wheel.”
So, Donald Trump has an incredibly valid point, which is not beyond the realm of possibility, given how distraught the American public is with the federal government today. We are at a moment of opportunity where the chaos created by the transformative neo-Marxist Left can actually be co-opted to the advantage of the Republic.
While a consumption tax system offers compelling arguments regarding efficiency, simplicity, and equitably progressive taxation, its implementation is not without its challenges. The transition would need meticulous planning to ensure it does not disproportionately burden the less affluent, maintains government revenue, and smoothly integrates into the overall existing economic framework.
However, if executed with careful policy design, such a system would lead the US towards a tax regime that better aligns with modern economic realities, potentially fostering a more dynamic and equitable economic environment and re-establishing the US economy as the world’s leading economy.
