By Issues & Insights Editorial Board | January 27, 2025
While speaking Saturday in Las Vegas, President Donald Trump suggested, as he had during the 2024 campaign, replacing the federal income tax with tariffs on foreign imports. We don’t need to see an economic analysis to believe this is debate worth having. Of all the good Trump could do as president in the next four years, eliminating the federal income tax would be one of his greatest achievements.
“If the tariffs work out like I think, a thing like that could happen, if you want to know the truth,” he said.
Trump also reminded the fussbudgets and change-fearing conventionalists who will predict that without a federal income tax the country will fall into a decline that until the 16th Amendment was ratified in 1913, there was no federal income tax. That’s right, establishing a federal income tax required a change to the Constitution. The Supreme Court in 1895 struck down an effort in the year before to establish a national income tax. It was, said five justices, unconstitutional.
An income tax at any level is insidious. Internal taxes, Thomas Jefferson said, were an assault on liberty, which “covered our land with officers and opened our doors to their intrusions.”
“Jefferson would be horrified by the power of today’s IRS to break down our doors and seize our property, and he surely would have led a revolt on seeing the powers added to the IRS under Obamacare,” the Cato Institute’s Chris Edwards wrote nearly a full decade before the Biden administration and the Democrat Congress weaponized the IRS with a plan to add 87,000 new agents.
The federal income is an economic assassin. According to the White House Office of Information and Regulatory Affairs, Americans burned more than 7.9 billion of their hours last year complying with IRS filing and reporting requirements.
“This is equal to 3.8 million full-time workers doing nothing but tax return paperwork — roughly equal to the population of Los Angeles — and nearly 46 times the workforce at the IRS,” says Scott Hodge of the Tax Foundation.
“If we assume a reasonable hourly wage, the 7.9 billion hours Americans spend complying with the tax code costs the economy roughly $413 billion in lost productivity,” Hodge continues. “In addition, the IRS estimates that Americans spend roughly $133 billion annually in out-of-pocket costs to comply with the tax code. This brings the total compliance costs to $546 billion, or nearly 2% of GDP.”
There are also social costs and opportunity costs imposed by the federal income tax. Hodge again:
“Every hour spent complying with tax forms and returns is an hour that parents cannot spend with their families or business owners cannot spend growing their firm.”
It’s not just the small businesses that take a hit. Large corporations, says Hodge, need “830 hours, more than 20 weeks,” each year to prepare their taxes. Instead of performing productive activities, there is an army of employees and consultants and contractors who are a deadweight economic loss.
While not every employee is a ruthless cutthroat eager to mete out punishment, the Internal Revenue Service has a reputation for abusive behavior toward the people who are paying for its existence. Allow us to repeat what we said last fall:
Americans rightly fear the IRS. They’re terrified of audits, scared that they will have their property seized, lose sleep over the possibility they made an honest mistake that will land them in deep trouble, outraged by the invasion of their privacy, and frightened by the abuse that the agency has been known to dish out to taxpayers.
Take the experience of Daniel J. Pilla, whose family was targeted by the IRS:
In 1974, the IRS seized my father’s business for back tax debts. They padlocked the doors and auctioned the equipment off for a few cents on the dollar. Then in 1977, they turned their attention to our family’s home. I came home one day and my mother handed me a letter from the IRS. She said, ‘What do you make of this?’ I read it and said, ‘It looks like they’re going to take the house.’ She wanted to know what we could do about it. My mom was in tears.
Though I had no answer, I went to a law library near our home in St. Paul. I starting fumbling around in the tax code and literally stumbled onto an area of the law deals with taxpayers’ rights and limits the IRS’s power. I didn’t get six pages into that part of the code and found that the IRS was proceeding illegally to seize our home. So I did what any 18-year old would do — I sued the IRS!
I soon found myself in a federal courtroom in Minneapolis in front of a judge and opposed by an IRS attorney from Washington, D.C. After hearing arguments from both the IRS’s attorney and me, the judge declared that I was right and slammed his gavel. I won the case!
Most Americans will go through their lives without enduring such a nightmare. But the fact that even one family did – and Pilla’s story is not at all an isolated event – and that most of us live in dread that one day we will go through a similarly cruel tribulation, makes the IRS an agency not in most need of reform but of outright elimination.
The IRS must go but the federal government will still need a revenue stream for funding (though it could do with far less than it rakes in). We have supported a national sales or consumption tax to replace the federal income tax, but we are wide open to the possibility of trading the income tax for tariffs. Yes, the latter will have their own negative impacts on the economy and personal finances. But they can’t be worse than the damage caused by income taxes.
Since tariffs provide only a small slice of federal revenue now, probably less than 2%, rates would have to be raised – but just enough to fund the state that is far leaner than today’s leviathan, in line with the smaller pre-income tax government, and not so high as to negatively affect economic behavior. Slashing Washington has to be part of any discussion about changes in our tax system.
Issues & Insights was founded by seasoned journalists of the IBD Editorials page. Our mission is to provide timely, fact-based reporting and deeply informed analysis on the news of the day – without fear or favor.
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