For former President Donald Trump, tariffs have long been touted as a “magic pudding”—an endlessly expanding source of revenue capable of funding a wide array of ambitious projects. Last month, he proposed using tariff revenues to provide a $2,000 “tariff dividend” to U.S. households and pay down the nation’s substantial debt. More recently, he suggested that tariffs could also fund the abolition of personal income taxes in the United States.
In a video call with U.S. military members, Trump stated, “Over the next couple of years, I think we’ll substantially be cutting and maybe cutting out completely, but we’ll be cutting income tax. Could be almost completely cutting it because the money we’re taking in is going to be so large.”
The Historical Context of Tariff Revenue
Trump’s vision harks back to the late 19th century when the U.S. government was funded primarily by tariffs, and income taxes were non-existent. However, he overlooks a critical difference: government spending then was less than 2% of U.S. GDP, compared to over 22% today. This historical comparison raises questions about the feasibility of his proposals.
The potential legal challenges also complicate the picture. The U.S. Supreme Court may rule the April 2 tariffs illegal, and emphasizing their revenue potential could undermine the administration’s legal arguments that the tariffs were not primarily intended to raise revenue.
Economic Realities and Expert Analysis
Trump’s Thanksgiving Day comments were met with enthusiasm by his supporters, yet they were not contradicted by senior economic officials, despite the numbers being nonsensical. Depending on how the proposed dividend checks are distributed, costs could range from $300 billion to $600 billion annually. Abolishing income taxes for those earning less than $200,000 could cost around $700 billion, while removing all individual income taxes could reach $2.6 trillion annually.
“So far this year, US Customs and Border Protection has collected about $195 billion of tariff revenue, with $118 billion from Trump’s new tariffs. The Yale Budget Lab estimates that between 2026 and 2035, revenue from these tariffs will be a net $2.3 trillion, or about $230 billion a year.”
These figures fall short of covering Trump’s proposed tariff dividends or replacing lost tax revenue. The tariff revenue would not suffice to reduce U.S. deficits and government debt, which have surged from $36.2 trillion to $38.1 trillion in the 11 months since Trump regained office. The One Big Beautiful Bill Act, including $4.5 trillion in tax cuts over a decade, primarily benefits the wealthy and will further inflate the deficit.
Tariff Rates and Their Impact
Increasing tariff rates could theoretically boost revenue. However, the average effective tariff rate is already about 17%, nearly seven times higher than during Joe Biden’s presidency. Raising rates further could discourage imports and reduce tariff revenue.
To replace all income taxes for those earning below $250,000, tariffs would need to average 25%. To replace all individual taxes, the rate would need to exceed 70%, likely eliminating imports and tariff revenue altogether.
“Tariffs are paid for by U.S. companies and ultimately by U.S. consumers. They are a tax on businesses and consumption, reducing incomes and shrinking the tax base. The US Tax Foundation suggests tariff revenue should be discounted by 23-25%.”
Implications for the U.S. Economy
Trump’s proposals would shift the U.S. tax system from a progressive model to one where lower-income households bear the burden of government funding. This shift would benefit higher-income households, already set to gain from the One Big Beautiful Bill.
Ultimately, Trump’s promises of tariff dividends and income tax abolition are unlikely to materialize. Whether due to a lack of understanding or a deliberate political strategy, these proposals are economically unfeasible. The MAGA base should not expect these promises to come to fruition anytime soon.
As the economic implications of these proposals become clearer, it remains to be seen whether Trump’s cabinet and congressional Republicans will continue to support such initiatives. The Business Briefing newsletter provides major stories, exclusive coverage, and expert opinion. Sign up to receive it every weekday morning.
