Can Tariffs Replace the Income Tax? We Did the Math.

It was the dead of night on March 22, 1929 somewhere in the Gulf of Mexico near the port of New Orleans, and the Canadian schooner I’m Alone was waiting to offload its illegal rum.

Prohibition had been in effect in the United States for nearly a decade at that point, which meant that the production, sale, transport, and distribution of any “intoxicating liquors” carried severe criminal penalties.

But prohibition didn’t end alcohol consumption. Americans still imbibed in secret thanks to a vast network of speakeasies, bootleggers, rum-runners, and moonshine distilleries. The black market thrived.

I’m Alone was one of the vessels that would ferry alcohol back-and-forth between the Caribbean and the United States. Ordinarily it would linger in international waters, just beyond the legal jurisdiction of US authorities, while smaller speedboats smuggled its cargo of illegal booze to the shore.

But on that fateful night in the spring of 1929, the US Coast Guard was feeling a little overzealous. Officials pursued I’m Alone into international waters and intercepted it.

I’m Alone’s captain refused to surrender, and a midnight chase ensued. The Coast Guard ended up shelling them with explosives, and the ship sank. One crew member drowned, and the rest were taken into custody.

The problem, of course, was that I’m Alone was a Canadian vessel in international waters. So the fact that it had been shelled and sunk by the United States Coast Guard sparked an international dispute between the US and Canada.

After years of diplomatic wrangling, an international tribunal ultimately ruled in favor of Canada, determining that the US had overstepped its legal authority. The case resulted in a financial settlement, with a sum paid to the Captain, as well as the drowned sailor’s widow.

Prohibition finally ended in 1933… but the damage had been done. Consumer demand for alcoholic beverages never went away, so all Prohibition really managed to do was create an extremely lucrative black market for booze… thus turning small-time bootleggers into powerful, nationwide crime syndicates.

(Many of the most infamous criminals of the early 20th century, like Al Capone, made vast fortunes in bootlegging, or even got their start in it.)

Such unintended consequences are inevitable any time a government imposes nationwide prohibition… or imposes some crazy tax policy or regulatory burden: people always figure out a way around it.

There are places all over the world that have extremely high import duties, and you can see the results.

For example, I lived in Uruguay long ago, and, at least at the time, the country had some of the highest import duties in the world for automobiles. I remember a friend told me that he had paid $100,000 for a generic Ford F150 that should have cost around $20,000 (it was back in 2008).

Yet there was a flourishing industry of guys who figured out how to game the system, and bring in cars from nearby countries like Brazil or Paraguay without having to pay the insane import duties on motor vehicles. People figured out a way to avoid the tax.

Then there is India, which has imposed very high import duties on a variety of goods— including gold. Smugglers there have gone as far as shoving gold into their rectums in order to avoid the tax… proving not only that people will always figure out a way, but they’ll resort to the most ridiculous means necessary.

Or look at Thailand, where drug trafficking can carry the death penalty— yet you can still buy pot and cocaine just about anywhere. The threat of consequences doesn’t matter: people will still skirt the rules.

I say this all because there is obviously a big movement in the US towards tariffs now. Somehow this word has become “beautiful”. And there seems to be an idea that the US is going to generate so much revenue from tariffs that it could even replace the income tax.

Fat chance. Let’s do the math on that…

Individual income tax is the largest source of federal revenue in the United States, bringing in $2.4 trillion in FY 2024 according to Treasury data.

Meanwhile, total imports of goods into the US in 2024 was $3.3 trillion.

This means that, in order for tariffs to generate enough revenue to replace the $2.4 trillion in income tax, the tariff rate would have to be 73% across the board (i.e. 73% x $3.3 trillion in imports = $2.4 trillion in revenue).

Let’s be honest— there’s no way people will accept 73% tariffs. Just like during Prohibition, the black market would once again thrive in the United States as bootleggers smuggle in illegal… you know, toilet paper and other boring household items.

So more likely than replacing the income tax, Americans should be prepared to pay for tariffs in addition to income taxes.

Let’s assume tariffs are only 25%, so the US manages to bring in an extra $825 billion in revenue. Well, that would certainly bring the budget deficit down to a manageable level… which is a good thing.

But it also means that the average American household would be paying an additional $6,000 per year in taxes— and one that would hit the middle class the hardest.

(This assumes full compliance with the tariffs, which is laughable. Again, people will find ways around it, as they always have.)

Of course, part of the stated goal is that the US economy will start manufacturing these products at home, therefore imports will fall and the tariffs will be pointless.

But this is also a terrible idea. There is such a thing as competitive advantage… of ‘best and highest use’. Why would anyone want to bring industries back to the US which can be done cheaper, and more efficiently elsewhere?

Does anyone seriously want Americans pulling levers in a sock factory, or bent over in the fields tending to their turnips?

The US has abundant natural resources and a productive economy, and forcing inefficiencies onto it through protectionist policies is the wrong move. The best and highest use for the US economy is to create the world’s most valuable technological innovations, not produce socks and underwear.

Now, it’s possible that automation, AI, and cheap (nuclear) power could make America a global manufacturing powerhouse again.

But this won’t happen through tariffs. It will happen through investment, innovation, and competitive advantage.

If politicians want to generate more tax revenue, the answer isn’t to slap tariffs on imports and create a labyrinth of regulations.

The solution is economic growth. And that means lower taxes, and more importantly, less regulation.

Tariffs are at best a distraction, and at worst harmful to the economy. And a growing economy is exactly what the US needs to reverse its decline.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com

Source: https://www.schiffsovereign.com/trends/can-tariffs-replace-the-income-tax-we-did-the-math-152190/