Trump wants to 'abolish' the IRS and replace federal income tax revenue with tariffs on imports — how would such a move affect middle-class Americans?

1. Prices are likely to rise

It’s difficult to quantify the effects of Trump’s tariff proposals since they’re continually changing.

But research has shown that during the last Trump trade war in 2018, tariffs resulted in price increases of 10% to 30% for goods subject to tariffs and that much of the tariffs were passed on to U.S. importers and consumers.

The Federal Reserve of Boston looked at an additional 25% tariff on goods from Canada and Mexico with an additional 10% tariff on goods from China, and estimated they would add 0.8 percentage points to core inflation (excluding food and energy).

The policy proposed during Trump’s campaign (an additional 60% tariff on imports from China and an additional 10% tariff on imports from the rest of the world) would add 2.2 percentage points to core inflation.

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2. After-tax income could decline

These price increases will have a greater impact on middle- and lower-income Americans since these demographics tend to have less disposable income.

To test these effects, PIIE studied what would happen if tariffs were maximized in an attempt to replace income taxes. The result? The tax cut for the middle quintile of income earners would not compensate for the tariff increase and they’d see a net after-tax income loss of about 5%.

This loss in income would be 8.5% for the lowest quintile, while the top quintile would come out 2% ahead. The top 1% would see an increase of 11.6%.

Those losing net income to the tariff-income tax trade-off are unlikely to find much help from improved economic and employment conditions.

3. Tariffs could hurt the economy and cost jobs

Oxford Economics estimates that Trump’s 2018 tariffs on Chinese goods and the resulting trade war cost 0.5% of U.S. GDP. “At its peak, the trade war cost the U.S. economy an estimated 245,000 jobs and on a cumulative basis, real household income was $88 billion lower over 2018–2019 (in 2020 prices), or around $675 per household,” it said.

An argument for tariffs is that domestic companies would become more productive and innovative, but one University of California, Davis study of a past era of high tariffs found that they had the opposite effect.

“Less competitive industries are less innovative, and less innovative industries are less productive,” said author Christopher Meissner. “Tariffs probably weakened the incentives to innovate and come up with streamlined processes that keep companies on their toes and productivity high.”

All told, these forces have the potential to be a drag on the economy and employment that may outweigh any jobs created by the tariffs. A study of 151 countries from 1963 to 2014 found that, in the medium term, tariffs have only small effects on the trade balance but lead to lower domestic output and productivity, higher unemployment and greater inequality.