In the closing weeks of his campaign, Donald Trump has made bold proposals regarding tax policy that are distinctive and expansive. His plans include extending the lower income tax rates and family tax credits introduced in the 2017 Tax Cuts and Jobs Act, which are set to expire in 2025. Furthermore, Trump has suggested exempting various categories of income from federal taxation, including overtime wages, tips, Social Security benefits, and the paychecks of first responders, military personnel, and veterans. These efforts, while aimed at stimulating the economy and supporting working-class families, would result in an estimated revenue loss of approximately $11.5 trillion over the next decade, equating to about 34% of the projected income tax revenue for that period. This magnitude of tax cuts, reminiscent of the Reagan era, presents significant questions about fiscal responsibility and sustainability within the federal budget.
Moreover, Trump’s potential shift in policy — advocating for a complete elimination of the federal income tax in favor of a systems based on consumption through tariffs — is a radical departure from contemporary fiscal policy. He cites a historical context where the U.S. government managed to fund itself primarily through tariffs rather than income taxes, drawing attention to a time when federal spending was a mere fraction of GDP compared to today. While he proposes implementing a substantial 20% universal tariff on all imports, and a steep 60% tariff on goods from China, this funding model raises concerns about its viability. While revenue tariffs might generate significant income, it is crucial to recognize that such tariffs are burdensome on consumers and can exacerbate inflationary pressures rather than provide a sustainable solution to the nation’s fiscal woes.
Critics of Trump’s proposed tax plan, including the New York Times, express concern over reverting to a reliance on tariffs, given that such strategies are not only simplistic but also fraught with potential complications in a globalized economy. While historical revenue tariffs had effectively balanced federal budgets in the past, contemporary society now faces a vastly more complex economic landscape culminating in a multi-trillion-dollar budget deficit, compounded by the costs associated with the welfare and warfare state. Trump’s initiatives may be well-intentioned, aiming to lessen the burden on the middle and working classes, but adopting an outdated fiscal approach ignores the increased financial demands of the modern state.
The contrast in Trump’s position compared to the current tax system reveals stark disparities in how tax burdens are distributed across different income levels. The top 1% of earners currently contributes a significant portion of total federal income tax revenue. With the bottom half of earners accounting for only a fraction of the income tax burden, Trump’s proposals could potentially deepen income inequality unless balanced with a more equitable system. His revenue tariffs are suggested to cover a substantial part — around $9 trillion — of the projected revenue loss from income tax cuts, but the overall efficacy of this shift in tax strategy remains questionable.
In examining Trump’s broader budget plans, even the implementation of extensive revenue tariffs alongside substantial tax cuts would create an alarming fiscal deficit. Projections indicate that federal revenues would amount to just $60 trillion against projected outlays of $85 trillion, resulting in a staggering $25 trillion in deficits over the decade. His promise to cut waste in government spending, supplemented by a partnership with noted entrepreneurs like Elon Musk, may not sufficiently remedy the existing fiscal imbalance. Although it may be reasonable to expect some reductions, the limitations of cutting non-exempt programs and ongoing fundamental spending commitments—like Social Security and Medicare—highlight the challenge of realigning fiscal policy without compromising essential services.
Finally, Trump’s potential policies pose a significant risk of triggering inflationary impacts on the economy, especially if the Fed aims to accommodate such expansive fiscal measures. This tension could lead to higher interest rates, rising public debt and an overall contraction in economic growth. Adopting a consumption-based tax strategy, especially one as ambitious as Trump’s tariffs, requires careful management to avoid destabilizing effects on both consumer prices and the economy at large. Overall, while Trump’s plans signal a departure from conventional tax norms with aspirations of reforming fiscal structures for enhanced equity, they encompass risks that necessitate thoughtful deliberation and extensive examination to avoid exacerbating the already precarious economic landscape.
