to me the most beautiful word and I've said this for the last couple of weeks is the word tariff this country can become rich with the proper use of tariffs you've probably heard over the past few months that a Cornerstone to Donald Trump's economic policies will be tariffs he campaigned heavily around the idea of imposing heavy tariffs on countries like China and since winning the election he's even threatened Canada and Mexico with tariffs to try and force their hand on the topic of border control but probably the most surprising scheme he's disced over the last few months is the idea that if done carefully the revenue raised from tariffs could potentially be enough to replace Americans income taxes did you just float out the idea of getting rid of income taxes and replacing it with tffs well okay were we serious about that yeah sure but why not but while this sounds appealing at face value many have criticized this plan saying it's unrealistic and that at the end of the day tariffs will hurt the American Consumer sir you're previous tariffs during your first Administration cost Americans some $80 billion can you guarantee American families won't pay more I can't guarantee anything so what's the deal with Trump's proposed tariffs could the plan raise revenue and save America or will it just make the American people suffer even more pain than the cost of living crisis has already dealt well to understand this further we first need to understand exactly how tariffs work so tariffs are taxes or duties imposed by a government on imported goods the government sets a tariff rate for example 10% on specific imported goods or All Imports from a particular country then when an importer brings Goods into the country they must pay the Tariff to the government and this is usually calculated as a percentage of the value of the imported goods so if there's a 10% tariff on imported goods from China then an importer buying $100,000 worth of Chinese stock will pay $10,000 in import taxes to the US government but that then eats into the profitability of this whole exercise right the Importer is now paying a lot more in tax so what will happen is the Importer will typically pass on the Tariff cost to consumers in the form of higher prices for those imported goods for example Brandon's beverages might choose to import some wine from The brussa Valley in Australia now let's say the US wants to apply 20% tariff on Australian wine well if Brandon's beverages purchases a million dollar worth of stock from Australia and imports it into America it'll pay the US government $200,000 in import taxes to then be able to sell the product in America but that makes the whole business venture much less profitable for Brandon's bevs so in reality they raise the price of each bottle by 20% from $50 to $60 to cover that extra cost so ultimately it means imported goods are more expensive for the end consumer you are now proposing tariffs against the United States three biggest trading partners economists of all Stripes say that ultimately consumers pay the price and now you have major companies from Walmart black and& Decker AutoZone saying that any tariffs are going to force them to drive up prices for their consumers but if tariffs make imported goods more expensive for American consumers why would a government Implement them well there's really two answers both of which perfectly fit into the Trump narrative number one they rais revenue for the government it's a tax and that's how the government makes their money by imposing taxes so the more they can enforce tariffs on Goods or countries the more Revenue they can raise that they can then spend on health care or infrastructure or Social Security Etc this is why Donald Trump is talking about tariffs as a way to reduce or eliminate income taxes raise more money in import taxes so you have to raise less money in income taxes so that's the first reason then the second reason why a government would impose tariffs is to attempt to protect domestic Industries if we go back to our example before and know this obviously isn't the case it's just an example but imagine us wine makers could only get their operations profitable by selling their bottles of wine at $55 per bottle when before the tariffs were imposed Brandon's bevs could sell the Australian wine at $50 a bottle and make a profit well by imposing that 20% tariff on Australian wine and forcing Brandon's bevs to sell the Australian wine at $60 per bottle the government has now forced the imported goods to be more expensive than the locally made wine and you'd expect this to increase the sales for the local wine producer thus supporting the American Business this fits the other part of Trump's rhetoric that he wants to put America first he wants to use the tools at his disposal to bias American businesses so that is the groundwork on how tariffs work but the next thing I wanted to talk about is what Trump is planning on doing both on the Tariff side and also this crazy idea that tariff could eventually replace income taxes but before I do I want to give a big shout out to an app that has been helping me quite a bit with understanding the context I need for this video and that is blinkist blinkist is a fantastic app for the time Port because what it does is it summarizes thousands upon thousands of non-fiction books and podcasts into Quick 15 20 minute blinks so I can literally understand the major points of say a book about economics in the 20 minutes or so that it will take me to do my daily chores for example I recently listened to the blink of Schiller's narrative economics which is all about how the statistical world of Economics is influenced by narratives and people with biases and emotions it was a really interesting listen it gave me great insight into how populous leaders like Donald Trump get elected and how assets like Bitcoin can rise so quickly honestly I really like the app it makes learning quick and enjoyable so much so that now blink has poast over 31 million users so I'd encourage you try it out today you can start your 7-Day free trial by clicking my link in the description box or scanning the QR code on screen and if you like what you see you can also get 40% off blinkist annual premium with that link so thanks always to blinkers for sponsoring these videos and now back to Trump's big tariff plan and the next question to answer is well what is he actually proposing well I do want to say firstly this is Donald Trump we're talking about so it's very much a concepts of a plan type situation and he has said a lot of stuff to a lot of people who knows what's actually going to happen but some of the things he has reiterated are a possible 10 to 20% tariff on all imported goods to America so just a blanket tariff on everything that comes into the country and then more specifically he has also floated the idea of between a 60 to 100% tariff on Chinese Goods to address trade imbalances and alleged unfair Trade Practices uh he's threatened Canada and Mexico with 25% tariffs starting on inauguration day if they don't address his concerns about how they're handling immigration into the us at their borders and then you might have also seen my recent video around the brics Nations banding together to try and circumvent the US dollar and thus circumvent us sanctions well in the last few weeks Trump has also threatened to slap a 100% tariff on the group of now nine brics Nations if they try to replace the US dollar with another currency through their bricks pay bricks Bridge system so he is very much looking to use tariffs as a negotiating tool because at the end of the day if these Imports are much more expensive they'll probably sell less and that ultimately means less orders from the massive US market for foreign made Goods hurting International manufacturers and thus exports from these other countries so that's the plan so far but beyond making this a geopolitical weapon Trump is also obviously interested in his tariffs becoming a big money maker and he said that he'd even attempt to use the revenue raised from tariffs to eliminate income taxes for Americans that sounds pretty good right but for the next part of the video I want to discuss how realistic this plan is really and to talk about that we need to look at a few numbers so fiscal year to date since October 2024 the US has brought in $629 billion of Revenue they've also spent 1. 25 trillion in that same time which is a bit of a worrying stat but that's a topic for a different video now out of that Revenue they produce just about half of it has come from individual income taxes 40% has then come from social security and Medicare taxes and 32% has come from corporate taxes but the bit we're interested in is this customs duties they're the tariffs and they've made up just 2. 23% of the government's income fiscal year-to date but to get this bubble to be the size of this bubble you'd need to increase tariff revenues 22 fold now that's a tall order but interestingly it's not actually the Gap in Revenue levels that makes this idea basically impossible as the tax Foundation notes the bigger issue is simply the relative size of those tax bases what's the amount of income available to be taxed in both scenarios now as this chart shows the most recent Internal Revenue Service data for tax year 2021 shows American taxpayers reporting almost $15 trillion of individual income while paying 2.
2 trillion of taxes an average tax rate of 14. 9% now total Imports in 2021 on the other hand were just 3. 4 trillion but that includes services that are not subject to tariff so looking at Goods alone Imports total 2.
8 trillion in 2021 while tariff revenues were 80 billion for an average tax rate of 2. 9% so in this example you'd need a tariff of 78. 5% on All Imports to raise the same amount as individual income taxes yeah I mean if we looked to 2023 the US made 2.
2 trillion in individual income tax revenue and goods Imports total 3. 1 trillion So based on last year's number the US would need a blanket Tariff of 71% to replace income taxes with tariff Revenue but believe it or not that's not actually the main reason why this plan wouldn't work the main problem is that if you imposed massive 70% tariffs on All Imports what do you think is going to happen to America's Imports they're going to go way down which reduces the overall tax base even further meaning you might tax more per dollar of imports but the amount of dollars you can tax is going to drop way down and will raise less money in fact Studies have shown that import demand is highly elastic meaning people and businesses are very responsive to price changes in fact there's so sensitive that for every 1% increase in the price of imports due to tariffs the quantity of some imports can even decrease by more than 1% so in reality what this means is that while Trump might tout tariffs as a brand new way to make big money in reality imposing higher tariffs will likely drop Imports lowering the tax base and not having much of an impact at all on government revenue generation and this isn't even factoring in the idea of non-compliance where in the face of increased tariffs individuals and businesses will try to actively evade the tariffs through tactics like misclassification of goods Under reporting values rerouting Imports through untaxed Pathways or at the extreme end smug and this also leads us to the other problem with Trump's tariff plan and that's that tariffs aren't actually very fun for Americans well Trump might message it to the American people as though he's putting America First and we're making sure America doesn't get taken advantage of anymore what tariffs actually end up doing is they make Goods more expensive for consumers we can go back to the Australian wine example I was talking about before now in that example the Australian wine was being sold at $50 a bottle versus the American wine that could only be sold sold profitably at $55 per bottle but in reality if a 20% Tariff was placed on the Australian wine making it $60 per bottle American wine manufacturers don't sit there and enjoy their increased sales at $55 per bottle no in reality they raise their prices to $59 a bottle and now no matter which product you buy you the consumer are paying more for any bottle of wine that you buy this is another big reason that Trump's plan to replace income taxes with tariffs has been heavily criticized because it's going to particularly hurt Americans who are already doing it tough because when you break down the data actually 98% of America's federal income taxes are paid by the top 50% of earners yes the bottom 50% make up just 2% of income tax payments but what tariffs tend to do is they raise the prices of consumer goods which all Americans need to buy so in effect even if you were able to replace income taxes with tariffs the ultimate effec that would just be increased cost of living for everyone which we know disproportionately affects those who earn less if Essentials go from 350 to 400 a week that hurts someone making $500 a week much more than someone making $11,000 per week and that's the thing about economics as Warren Buffett says in economics you can't just do one thing you have to ask and then what and I think this really highlights the fundamental problem with the idea around potentially increasing tariffs to lower income taxes ultimately where Revenue comes from tariffs or income taxes it is the American people who bear the financial burden and for a lot of Americans that rubs them the wrong way especially considering when we look at these bubbles there's a pretty obvious one that could be a lot higher that the Trump Administration is so against raising this bubble to be exact the 3.
