Earlier this summer, former President Donald J. Trump, during a visit with Republican members of Congress, suggested a tax system that would be very different from the one the United States has had for decades.
Rather than taxing Americans on the money they earn from work or on their investments, Trump has proposed broad taxes on goods Americans buy from abroad, and in his view, such tariffs could replace income taxes as a major source of federal revenue.
The idea was briefly floated privately but then seemed to fizzle out, and Trump never repeated it publicly as experts questioned whether such a model was even possible. But in the weeks since, Trump has floated ideas that, taken together, would fundamentally change how Americans are taxed, endorsing expanded tariffs as a way to raise revenue for the federal government while cutting income taxes.
Two of Trump’s proposals — no taxes on tips and no taxes on overtime — would create huge income tax loopholes that could encourage Americans of all stripes to shift their income sources to avoid taxes. Trump also wants to eliminate taxes on Social Security benefits and fully restore large deductions for state and local taxes — all part of his push to extend the tax cuts he signed into law in 2017, many of which are set to expire after next year.
“The joke is that Trump is probably going to get there in the next two weeks and completely eliminate income tax in every proposal,” said Erica York, an analyst at the Tax Foundation who generally supports tax cuts. “All these little policies that we’re seeing are him trying to move one industry, one income type at a time in that direction.”
His ideas are by no means a sure thing in Washington, but if all become law, they would effectively bring the U.S. closer to the tax system adopted by many other countries. Most developed countries, including Canada, Germany and Japan, levy a value-added tax, or domestic sales tax, on goods and services. The U.S. is unique in not having such a tax. Many economists generally support so-called consumption taxes, which they see as an efficient and less evasive way of raising money for the government.
Still, many economists don’t think Trump’s proposal is the right way to reform the nation’s tax system, arguing that it could lead to explosive deficits, intensify trade tensions and disproportionately burden lower-income Americans, who have less money to spend and spend a larger share of their total income on goods that would likely become more expensive under Trump’s tariffs.
“Whether Trump knows it or intends it or not, this is somehow a shift from an income tax to a consumption tax,” said Michael Graetz, a tax scholar at Columbia Law School who has argued the U.S. should have a consumption tax. He still disagrees with Trump’s proposal.
“If you want to have a sales tax, you’d be hard-pressed to find an economist outside of the Trump camp who would say you should start with tariffs,” he said.
Trump’s anti-tax crusade, which unfolded over the summer and fall in social media posts and pithy slogans at political rallies, synthesises several disparate ideas that animate his approach to economic issues, including a belief in the political appeal of his tax-cut pledges and a belief that the costs of tariffs fall on foreigners, not Americans, even though economic studies have repeatedly found that American businesses and consumers ultimately foot the bill.
Another driving force is that some in Trump’s advisors believe the previous round of tax cuts aren’t enough to jump-start an economy battered by years of high inflation, motivating Trump to push for more cuts even though inflation has subsided and the economy remains strong, the people said.
Some advisers have discussed the possibility of suspending the payroll taxes that fund Social Security and Medicare as part of a stimulus package, something Trump tried to do in 2020. Like Trump’s plan to exempt Social Security benefits from income taxes, suspending payroll taxes could further worsen the financial outlook for an already bleak retirement program.
Trump spokeswoman Caroline Leavitt said the former president’s pledge to cut taxes contrasted with Vice President Kamala Harris’ plan to raise taxes on corporations and top earners. “If the American people want lower taxes and more money in their pockets, their only choice is to vote for President Trump,” she said.
A long-standing conservative goal
The United States has been collecting income taxes since the 16th Amendment to the Constitution was ratified in 1913. Currently, these taxes make up the majority of the money flowing into the Treasury.
About 50% of revenue comes from personal income taxes that Americans pay on wages, capital gains, and other income. The remaining 35% of federal revenue comes from payroll taxes paid by workers and employers on wages, and about 9% comes from corporate income taxes. Tariffs currently account for about 2% of federal revenue, according to the White House.
But many conservative economists, including some who have Trump’s ear, have long had an aversion to income taxes. They believe they reduce the amount of money people can save and invest in growing the economy. They think something like a value-added tax, levied at each stage of production, would instead tax spending and give people an incentive to save.
For some economists in Trump’s inner circle, putting tariffs on all imports would push the U.S. toward a consumption tax. Arthur Laffer, a leading conservative thinker on tax for decades, has argued for some form of consumption tax and for the U.S. to institute a flat tax, in which all income is taxed at the same rate. That would be a shift from the current progressive marginal tax system, which taxes higher income earners at higher rates.
“If I have influence in a second term, we could easily move in that direction,” said Laffer, who advises Trump on tax policy. In 2019, Trump awarded Laffer the Presidential Medal of Freedom, the nation’s highest civilian honor.
Project 2025, the conservative policy plan from which Trump is trying to distance himself, calls for creating a sales tax to replace the income tax. That mirrors a parallel effort in Congress, where several Democrats have proposed legislation to repeal all decades of income taxes, including payroll and capital gains taxes, and replace them with a 23% national sales tax. (The legislation would also abolish the Internal Revenue Service.)
Budget experts are wracking their brains over the practical consequences of Trump’s promise not to tax tips and overtime, but many worry the policy could lead millions of Americans to change how they pay their paychecks and earn more in untaxed tips and overtime, setting up a gold rush for tax evasion that could cost the government hundreds of billions of dollars.
Steve Moore, a conservative economist who advises Trump, said the former president doesn’t view his plan as a sales tax because he doesn’t believe the tariffs would be passed on to American consumers and businesses. To be sure, tariffs that tax only imports and risk retaliation don’t work in the same way as a general sales tax that applies to both foreign and domestic products.
Still, Moore added that efforts to impose a sales tax in the U.S. have often met with resistance, and that taking small steps is key. “Taking incremental steps toward a sales tax is the way to do it,” he said.
Harris slammed Trump’s tax proposals, calling his sweeping tariff plans a “national sales tax” that would lead to higher prices for many Americans.
Still, some Democrats, including former House Speaker Nancy Pelosi of California, have signaled support for a sales tax in the past, given how much money it could raise to finance the federal government. Scholars like Graetz have worked on other tax reforms that would keep the tax system overall progressive, preventing low-income Americans from bearing the brunt of the new system — a major concern of liberals.
“It’s possible to design a relatively progressive sales tax by refunding some of the increase to households, but Donald Trump hasn’t proposed that,” said Brendan Duke, senior director of economic policy at the Center for American Progress, a liberal think tank.
The main divide between conservatives and liberals over a sales tax is whether it should replace or exist in addition to an income tax — many countries have both. Trump’s plan would weaken the income tax, effectively forcing the U.S. to rely on tariffs and borrowing to fund the government.
But some conservatives, such as former Trump White House economist Casey Mulligan, oppose a sales tax because of its effectiveness as a fund-raising tool: The Congressional Budget Office estimated in 2022 that a 5% value-added tax on a wide range of goods and services could raise more than $3 trillion over 10 years.
“The reason I’m against it is because sales taxes are such a great way to raise revenue,” Mulligan said. “I’m not sure I want our Treasury to be so well-endowed.”
