Replacing Taxes With Tariffs

Last week, Donald Trump proposed replacing the income tax with a tariff on imports. Washington DC let out a loud, and collective, scoff. The average American was intrigued. More on this in a few…but to be clear, the idea as it stands won’t work in our current system. The US cannot replace income tax revenues without sky-high tariffs, and sky-high tariffs would shut down world trade. Remember…much lower Smoot-Hawley tariffs in 1930 helped kick off the Great Depression.

But that doesn’t mean we shouldn’t use this as a starting point for discussion. Have you followed Elon Musk and SpaceX? Specifically, the Starship, which just had its fourth launch? Well, what we are witnessing is the process of iterative development. Each launch has gone further and had more success. Henry Ford did the same thing with the automobile and assembly lines.

This process of iterative learning, which is prevalent in the private sector, seems non-existent in government. To use an example that writer Glenn Harlan Reynolds shared in a recent Substack post: Ad Astra, Per Ardua, the Space Shuttle was supposed to be reusable, but it never truly was – it cost over $1 billion per flight. Musk, on the other hand, by figuring out how to re-use boosters has driven the cost per flight down to the range of $3-5 million.

The cost to put a kilogram of payload in space was $55,000 in the Shuttle but is only $2,700 in a SpaceX Falcon 9, a 20-fold reduction. And this cost will keep coming down. It’s an amazing thing to watch, how the private sector can simply crush government in efficiency and progress.

Which takes us back to Donald Trump’s proposal to scrap the income tax and replace it with tariffs on imports. If you look at this proposal like the permanent fixtures of the Beltway do, it’s absolutely ludicrous. Paul Krugman (on X) couldn’t resist running all the numbers, showing how the tariff would have to rise to 133%, or higher, to raise the same revenue.

At least he admitted that in the 1800s the US funded itself with tariffs and excise taxes, but that was when the federal government was significantly smaller. Instead of wondering if we could run the government like SpaceX, and not NASA, he just said anyone who thinks we can shrink government that much is just plain “ignorant.” For the record, calling people ignorant is not proving them wrong. It is rude, though.