Trump wants to use tariffs to reduce taxes

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Trump wants to use tariffs to reduce taxes

Yesterday Donald Trump stated that he intends to use the revenue from tariffs to finance a significant cut in federal taxes.

He announced it with a terse post on his social network, Truth, in which he does not explain in detail how he intends to proceed.

The tax cut: the bright side of Trumps tariffs？

It is not difficult to imagine how it intends to proceed.

In fact, if the revenues from the tariffs were to be substantial and continuous, they would produce an excess inflow into the coffers of the federal State. Therefore, if Trump were to opt for a tax cut, the lower revenues would already be covered by the higher revenues from the tariffs.

This would not mean a reduction in costs for taxpayers, as it would in fact only be a replacement of one tax with another, but it would partially shift taxation from income to consumption.

While on one hand it is true that tariffs are paid by companies exporting goods and services to the USA, these costs are obviously then passed on to American consumers who purchase those goods and services, so a large part of the cost of the tariffs is indeed paid by American consumers.

In other words, tariffs are in all respects a tax on the consumption of imported goods, while the federal taxes that Trump intends to cut are mainly those on income.

So in the end, some consumers will find themselves paying more taxes, while others will pay less.

Trumps statement: tariffs as a measure to reduce taxes

The USA president wrote that, with the introduction of tariffs, the income taxes of many people will be substantially reduced.

In fact, he even adds that they could be completely eliminated.

Obviously, his words should always be taken with a grain of salt, given that those who engage in politics often use lies for their own propaganda.

However, these statements appear at least plausible.

However, Trump specifies that the initiative will only concern those who earn less than 200,000 dollars a year, which is still a large part of the population, given that in the USA the average annual work income is just slightly below 70,000$ a year.

In other words, wealthy Americans will continue to pay more or less the same income taxes, but in addition, they will also have to pay the extra cost introduced by tariffs on important products.

The external tax collection

The president called this mechanism “the external revenue service”, that is, a sort of external tax collection.

In other words, it presents it as a tax applied to foreign entities, instead of to U.S. citizens, but in this case, it is clearly lying.

In fact, the cost of the tariffs will ultimately be paid almost entirely by the same U.S. citizens, particularly by the wealthy ones, since in their case it will not be funded by a tax cut and will only be an additional cost to bear.

On the other hand, political propaganda is often made up of lies of this type, that is, difficult to fully understand for those who have a superficial or no knowledge of even slightly complex issues.

It is instead a shift of taxation for the less affluent brackets from income to consumption, in turn financed by an increase in taxation on the consumption of the well-off.

It is true that, in theory, to avoid this increase in consumption taxation, it would be enough to purchase non-imported goods and services, but in fact, it is also true that the USA does not internally produce all the goods they consume, and they never will. It will always be inevitable to import goods from abroad, including raw materials and semi-finished products, so it will be inevitable that for the well-off, taxation will increase and not decrease.

It remains to be seen whether for the less affluent groups it will ultimately not increase, or even decrease, or if the replacement of income taxes with consumption taxes will still lead to an increase in taxation, even if much more limited compared to that of the well-off.

The impact on the economy

Both analysts and the market are more or less convinced that such an initiative will ultimately not be good for the USA economy.

For example, the bettors on Polymarket are still mostly convinced that by the end of 2025, Trump‘s economic and trade policies will send the USA into recession, and it’s no coincidence that these probabilities rose above 50% right after the announcement of the so-called “reciprocal” tariffs by the president (which in reality are not reciprocal).

The hypothesis circulating is that in the end, overall, there will not be a reduction in the average overall tax pressure on the population, and indeed the most affected groups (the well-off) will probably be forced to reduce consumption, thus also reducing the circulation of money.

Furthermore, Trumps idea of bringing in the bulk of industrial production is considered so anachronistic as to be essentially unfeasible, that is, comparable to a foolish fantasy that will not produce substantial advantages.

On the other hand, autarchy over the centuries has already amply demonstrated to produce more damages than advantages, and it is extremely difficult for it to end differently this time.