Dear Reader, by now you know I’ve never been wr…, wrr…, wrrrro… damn, my keyboard won’t even type that word! However, although I’ve never been wr _ _ g, I have reevaluated past positions where I was, of course, right under a different set of circumstances—and after deeper thought—have modified my position based on new circumstances. Tariffs are one such area.
As I stated in my April 10th RealClearMarkets article, I am—and have always been—a free-trade absolutist. Read the article. However, I admitted then (and admit now) that Donald Trump could be onto something with his tariff policy if executed properly—and that this could be the biggest boon to our economy and our freedom in more than a century.
The amazing riches of Rome were built on an extended free-trade zone—not to mention a system of law protecting private property and a stable, widely accepted currency that facilitated worldwide commerce.
One of the greatest economic miracles of the millennium came from the mind of Alexander Hamilton. In many ways, his genius created the United States through the financial system he designed—built on tariff revenue. It served the U.S. extremely well. Just ask Andrew Jackson.
However, as I mentioned back in April, tariffs can be abused to pit one section of the country against another, or—as we see so often with today’s tax code—to favor certain special interests to the detriment of others. As a southerner, I am especially attuned to the tragedy that happened between 1861 and 1865—a period of history and economics that very few understand.
The North treated the South as a vassal state. Its economy was primarily agricultural exports. Protectionist policies were of little benefit as it had a much weaker industrial base than the North. Tariff policy favored the North and penalized the South. It only had 30% of the population and paid far more than its pro-rata share in tariffs. Due to other countries reciprocal tariffs to match those of the United States, the South’s export products paid a heavy price in foreign ports. A myriad of punitive trade restrictions—what we would now call crony capitalism—were passed to favor the Northern industrial base at the expense of the South. Lacking the population base to master representation in Congress, the South was abused, ultimately leading to secession.
The South favored free-trade and had all the warm-water ports. If it went its own way, the commercial structure of the North would have sunk like the Titanic. Where I live, the ghosts of the past are acutely alive—Confederate graves are everywhere, along with monuments, foundational ruins, long memories, a million written histories, and much family lore. So, along with being an Adam Smith devotee, tariffs have always scared me for how easily they can be manipulated—and the tragedy that can ensue.
BUT…
As I stated in April—what if we had a massive reduction in wasteful government spending such that tariffs could replace the income tax? My God! How great this would be! Here are some further thoughts:
Under the new trade policy signed with the EU, the U.S. pays 0% tariffs on almost all products and receives a 15% tariff on almost all imported goods. In my view, tariffs are like the Laffer Curve—at a certain rate, they can be magical; at another, they can be highly destructive.
Here’s where “what we don’t see” comes in. There’s no doubt the EU runs a protectionist economy with (and this is a bad word in my book) an industrial policy. What you don’t see is that to compete and sell its products in the U.S., it will have to adjust its policies to cut costs. Allowing more trade with the U.S. will help liberate its economy from a planned industrial policy into a freer, non-protectionist, “let ’er rip” economy. France may have to eliminate the 35-hour work week, reduce government bloat, and cut back its social-welfare structure.
What you don’t see is that dismantling an industrial policy and welfare state actually makes France wealthier. And we want other countries to become rich—they can buy more of our stuff and create more of the things we want to buy.
Another thing you don’t see: a 15% tariff is not automatically a 15% add-on to all products. The producer will have to become more efficient, reduce expenses, and innovate. Many products entering our ports already increase in cost by over 100% due to shipping, distribution, insurance, and markups. Robust free trade and wealth creation worldwide spur fierce competition between domestic and international producers—pushing prices down and quality up. These are the kinds of effects our federal agencies (CBO, BLS, GAO, etc.) can’t calculate, but the invisible hand will be at work—and that’s where most of economics happens.
Trump’s opening up of markets to our products is an enormous economic positive. In many ways, U.S. policy—even with a 15% tariff—is now more “free trade” than it was before. At 15%, the rest of the world won’t retreat; it will get better and more competitive.
That said, high reciprocal tariffs and a long trade war would be disastrous. The Dark Ages earned their name in part because Rome collapsed and global trade and commerce practically vanished. But at 15%, this looks like it might be a pimple on a gnat’s ass.
I would have absolutely no stomach for any tariffs if not for the possibility of replacing the federal income tax with a national tariff/consumption tax. The IRS and OIRA (Office of Information and Regulatory Affairs) estimate that Americans spend $546 billion annually in time and expenses just to comply with the federal tax code! Think of the savings to the private sector if that expense disappeared because federal custom houses collected all taxes instead.
Before COVID, national expenditures were $4.4 trillion in 2019. They ballooned to $6.7 trillion in 2020—a 50%+ increase in just one year. In 2024, they were $6.752 trillion. The 2020 $ 2.3 trillion increase in spending indicates there is an easy $2.3 trillion of annual spending that can be cut!
Tariff income, after only a few months, is already annualizing at $360 billion—and is sure to double by year’s end. Imagine which income taxes could be eliminated with that money. In 2024, corporate tax revenue was $530 billion. Corporate taxes are especially punitive because they amount to double taxation with compliance costs of $200 billion! That means we could eliminate corporate taxes and free up $200 billion in wasted private-sector resources—redeploying this capital to productive purposes.
Plus, there’s the redeployment of human capital. Lawyers, accountants, and bookkeepers are a drain on the economy when their talents are wasted on compliance—with no income tax, this talent pool of smart people will gravitate to a productive use of their labor creating goods and services that people want to buy, as opposed to now, where businesses are coerced to use their labor.
There is no tax more egregious—and more dangerous to liberty—than the income tax. Slavery was outlawed by the 13th Amendment, but when the federal government can own up to 41% of your income (and in some cases more) and force you to pay it at the point of a bayonet, how is that different from slavery?
In 2024, Americans paid $2.4 trillion in personal income taxes, including all forms of capital gains. In 2022, the CBO estimated that 14% of personal tax revenue came from capital gains—about $336 billion. With current tariff revenue projections, we are already close to eliminating not just all corporate income taxes but also all capital gains taxes!
Do you realize how many people hold assets for decades because of the punitive nature of capital gains taxes? All production—everything good—comes from capital. We want capital to move fast and freely to where it is most efficient and earns the greatest return. Eliminating the capital gains tax would do exactly that and create an explosion of productive economic activity.
I’m not sure if tariff revenue can—or should—exceed $800 billion. Like the Laffer Curve, at some point higher rates cause more harm than good. But tariffs, combined with various forms of consumption taxes, could replace the income tax entirely.
Besides the philosophical assault on liberty, the most damaging element of the income tax is its progressivity. We want rich people to be rich—they don’t stuff their money into a mattress. They invest, they innovate, they build. Penalizing the most productive segment of society to achieve “feel-good fairness” is economic lunacy.
Thumb through a history book and look at the private universities, hospitals, charitable foundations, great companies, and great architecture created before the income tax was enacted in 1913. Wealth in the right hands is what drives civilization upwards. That’s the world we could head toward—and it’s exciting.
Yes, I have concerns about tariffs. I worry about restricted trade. I worry about them becoming a sectional tool of crony capitalism. But I also think I understand Donald Trump by now. Let’s not forget: income taxes are built into the cost of every product and service. No income tax and these embedded costs disappear.
Already, tariff revenue is enough to eliminate corporate taxes and capital gains taxes. That is nothing short of amazing. I believe we are witnessing an incremental “show me” approach—where once tariff revenue proves it can replace destructive income taxes like the two discussed, the road will be cleared for broader consumption taxes to eliminate the personal income tax entirely.
I’m keeping my fingers crossed.
