Workplace Disagreement

The president says tariffs will replace income taxes. His Treasury Secretary says they'll fade away. Both can't be right.

We all have workplace challenges. Ever had your boss undermine you in a meeting? Imagine if the meeting was the Supreme Court where you had insisted something to be so, or you lectured a t.v. anchor about economics and then your boss, with the largest microphone in the world, immediately said the opposite of what you were insisting. The behavior might come up at the HR 360-degree review.

Treasury Secretary Scott Bessent says tariffs are not a permanent solution to America’s budget deficit. His boss says the opposite. On Thanksgiving, Donald Trump said tariff revenue will essentially replace the income tax:

“Over the next couple of years, I think we’ll substantially be cutting and maybe cutting out completely, but we’ll be cutting income tax. Could be almost completely cutting it because the money we’re taking in is going to be so large.”

Footnote [^1]

When George Stephanopoulos recently pressed the Treasury Secretary on this idea, Secretary Bessent corrected him:

“No, no, no, George. Stop right—no...it’s not about taking in the [tariff] revenue, it’s about re-balancing. And the revenue occurs early on. And then as we rebalance and the jobs come home, then it becomes domestic tax revenue.”

But if taxes are going to disappear, as the president says, how can tax revenue flood the treasury as Secretary Bessent has said repeatedly? Here he is in April to Tucker Carlson:

What will happen over time is: we’ll have substantial tariff income in the beginning. Manufacturers will build their factories here. The tariffs will drop. But the revenue from the factories—from income taxes, from all the new jobs—will go up.

Either tariffs generate enough revenue to replace income taxes (Trump’s claim), or tariffs fade as factories return and taxes make up the difference and more (Bessent’s claim). Both cannot be true.

According to the Pew Research Center, 81% of registered voters say the economy will be very important to their vote. On that issue, the president and his top economic spokesperson are telling the world two different things on the signature economic policy of the administration. Is this a purposeful mischaracterization to the American people, or does the president misunderstand how his policies work?

Politically, there is evidence that voters don’t like being misled about the economy. Joe Biden experienced this when he tried to downplay inflation and then explain it away.

There’s also a legal angle. The government has argued to the Supreme Court that tariffs imposed under the International Emergency Economic Powers Act are “regulatory rather than revenue-raising in nature”. To avoid its interpretation of IEEPA being declared an unconstitutional delegation of power, the government needs to show the tariffs are not primarily about raising revenue.

But the president keeps claiming they’re raising massive revenue—indeed, enough revenue to replace the entire income tax. Chief Justice John Roberts seemed doubtful of the government’s interpretation that the tariffs are regulatory rather than revenue-raising. When the president says tariffs will replace income taxes, he’s undermining his own legal team’s argument.

The plan may also not be working as a matter of economics. Recent manufacturing data shows the sector contracted for the ninth consecutive month in November, with the ISM Manufacturing PMI at 48.2—following two months of expansion preceded by 26 straight months of contraction. A reading below 50 indicates contraction. Business executives surveyed reported: “Orders are down across most divisions, and we’ve lowered our financial expectations for 2025” and “Wonder has turned to concern regarding how the tariff threats are affecting our business”.

The math doesn’t work. The legal argument doesn’t work. And nine months of manufacturing contraction suggests the economic strategy isn’t working either.

[^1] Tariff revenue has been huge: $195 billion in fiscal year 2025, up 150 percent from $77 billion in 2024. But individual income tax revenue in the first eleven months of FY 2025 was $2.36 trillion. To replace income taxes with tariffs, tariff revenue would need to increase more than tenfold. It’s not going to do that—tariff revenue tends to go down as countries negotiate deals and companies find avoidance strategies. And when we say “tariffs,” what we’re really saying is import taxes paid by American companies and consumers, despite what the president claims.