External Revenue Service

Trump’s Proposed External Revenue Service: A Return to 1913

Former President Donald Trump has recently floated the idea of replacing the Internal Revenue Service (IRS) with an “External Revenue Service” that would eliminate income taxes and instead rely on tariffs and fees imposed on foreign governments. In essence, replace Income Taxes with fees on Foreign trade shifting the burden of taxes on foreign entities instead of inwardly on US citizens. While this proposal is still in its early stages, lacks concrete details, and may never come to fruition it has sparked discussions about potential benefits and drawbacks of such a dramatic shift in U.S. tax policy.

Historical Context

While many will hear about this proposal and think this is a major, if not radical change it’s important to note that Income taxes are a relatively recent development in U.S. history. The Federal Income tax as we know it today was only established in 1913 with the ratification of the 16th Amendment. Prior to this, the U.S. government primarily relied on tariffs and excise taxes for revenue.

Potential Benefits

Proponents of this proposed system argue that it could offer several advantages:

1. Simplification: Eliminating income taxes could greatly simplify the tax code, potentially reducing compliance costs for individuals and businesses.
2. Increased competitiveness: By shifting the tax burden to foreign entities, U.S. businesses might become more competitive in the global market.
3. Strategic leverage: Tariffs and fees on foreign governments could be used as tools in international negotiations and to address trade imbalances.
4. Encouraging domestic production: Higher costs on imported goods could incentivize domestic manufacturing and reduce reliance on foreign supply chains.
5. Domestic Job growth: Tariffs can create barriers protecting domestic industries and promoting job growth and potential repatriation of foreign jobs, companies, and manufacturing.
6. Strategic positioning: As the US has entered a new cold war with China as a near peer competitor, strategic tariffs could serve as an effective check limiting their Economic growth and ability to build military and economic power against the US.

Trade-offs and Challenges

However, this proposed system also presents significant challenges and potential drawbacks:

1. Revenue stability: Relying primarily on tariffs and foreign fees could make government revenue more volatile and dependent on international trade dynamics.
2. Consumer costs: Tariffs are ultimately paid by consumers through higher prices on imported goods. This could lead to increased living costs for many Americans.
3. International relations: Imposing significant tariffs and fees on foreign governments could strain diplomatic relationships and potentially lead to retaliatory measures.
4. Economic distortions: Tariffs can create market inefficiencies and lead to suboptimal resource allocation. It could potentially cause massive shifts in supply chains and have major ripples in economies throughout the world with a wide range of impacts, and potentially negative consequences for all participants.
5. Constitutionality: The legality of completely eliminating income taxes and replacing them with an external revenue system would likely face legal challenges.
6. Potentially Regressive: US Federal Income taxes are highly Progressive with 89% of taxes being paid by the Top 25% of tax payers. Shifting to tariffs for revenue maybe inflationary to goods. While it is likely the higher income individuals consume more, it may be that staples required by all consumers may disproportionately impact those most in need.
7. Feasibility: While this may sound good on paper, the IRS collects roughly $5 trillion in income tax revenue annually – it may not be economically feasible or possible to collect this from external entities

Tariffs as a Form of Taxation

It’s crucial to understand that tariffs are indeed a form of taxation. While they are imposed on foreign goods and not seen as a direct cost to the consumer, the cost is typically passed on to domestic consumers through higher costs. This means that under the proposed system, Americans would still be paying taxes, albeit indirectly through higher prices on imported goods.

Strategic Considerations

Despite the economic drawbacks, some argue that tariffs can serve strategic purposes beyond revenue generation. In particular, tariffs on goods from near-peer competitors like China could be used as leverage in geopolitical negotiations or to protect sensitive industries as well as check a rising global power who we are currently in a cold conflict with and may potentially be in a hot conflict in the future. However, this approach carries risks of escalating trade tensions and potential economic retaliation.

Conclusion

Trump’s proposed External Revenue Service represents a old, but radical departure from the current U.S. tax system. While it offers potential benefits in terms of simplification and strategic leverage, it also presents significant challenges and economic risks. As with any major policy shift, careful consideration of both short-term and long-term consequences is essential.

It’s important to emphasize that this proposal is still in its early stages and lacks specific details. The feasibility, implementation, and potential impacts of such a system would require extensive study and debate. Furthermore, any major overhaul of the U.S. tax system would likely face significant political and legal hurdles.

As discussions around this proposal continue, it will be crucial to consider not only the economic implications but also the broader impacts on international relations, domestic policy, and the overall well-being of American citizens. Ultimately, any changes to the tax system should aim to balance revenue needs, economic growth, fairness, and strategic interests in an increasingly complex global landscape.

Reference:
[1] https://www.reuters.com/world/us/trump-says-will-create-external-revenue-service-collect-revenue-foreign-sources-2025-01-14/