Earlier this year, Commerce Secretary Howard Lutnick announced that President Donald Trump had a new strategy for funding the federal government: an External Revenue Service. “[The President’s] plan is very simple: to abolish the Internal Revenue Service and let all the outsiders pay,” he told Fox News in February.
The “outsiders,” according to Lutnick, were foreign nations, which he claimed would effectively fund the government through the tariffs they paid. This, went the tale, would make the Internal Revenue Service irrelevant.
Lutnick’s words were not mere idle talk. His announcement came as the White House announced its first wave of IRS cuts, which consisted of laying off 6,700 probationary employees. Buyouts for thousands more IRS employees followed, and by April, the New York Times reported that the IRS was “on track to lose about a third of its work force.”
Meanwhile, Trump was rolling out his “Liberation Day” tariffs, a sweeping set of import duties aimed at shifting the federal tax burden to foreign nations. While critics warned the tariffs would result in higher consumer prices and damage trade relations, defenders of the policy argued that the import duties would generate trillions in new revenues.
“There is a chance that the money from tariffs could be so great that it would replace [the income tax],” Trump told Fox News on Tax Day.
Tax revenues from tariffs have indeed been flowing into federal coffers — the government had collected more than $100 billion as of July, according to the Treasury Department — but the White House is already having second thoughts about IRS cuts.
According to reports, the IRS is working to rebuild its depleted workforce. The Treasury has since confirmed the development, which the IRS union is now celebrating. “We are pleased that the administration now realizes it cannot afford to lose more of these trained, nonpartisan professionals,” said Doreen Greenwald, national president of the union representing IRS workers.
The White House’s pendulum swing from abolishing the IRS to beefing up the tax agency is not a good look. The IRS is notoriously unpopular with voters, which is no doubt why the White House peddled its abolition as a pro-tariff talking point.
But replacing income taxes with tariff revenues was always a pipe dream, something economists have been saying for months. In 2023, the United States imported goods worth about $3.1 trillion, establishing the maximum pool from which tariffs could be collected. By comparison, income taxes brought in some $2 trillion. To replace that sum, tariffs would have to be astronomically high. But if they were, soaring prices would drive down imports, shrinking the taxable base.
In other words, Trump’s $2 trillion target was always unattainable. Running the federal government on tariff revenues might have been possible in the 19th century, when federal revenues accounted for 2% or 3% of GDP. When federal spending accounts for 25% of the economy, tariffs aren’t going to cut it. The White House’s quiet move to rebuild the IRS tacitly admits that its plan to replace income tax revenue with tariffs was a fantasy.
No matter how hard you squint, tariff revenues can’t replace income taxes. And since much-ballyhooed spending cuts never materialized, Americans are just left paying more to Washington.
Free-market advocates are understandably bewildered. Trump’s tariffs could rank as the largest tax increase in U.S. history, yet they are being championed by the very party that only recently rallied behind the anti-tax Tea Party. Because, despite whatever Lutnick might claim, other countries do not pay for tariffs. American consumers and American businesses do.
All of this might explain why the president gets such low marks for his handling of the economy. Time will tell whether the weight of tariffs will strangle an already weakening labor market and pull the U.S. into recession, or cause the Federal Reserve to slash interest rates prematurely and reignite the historic inflation that helped put Trump back in office.
WHERE THE REMAINING LEGAL CASES AGAINST TRUMP STAND
But one thing is undebatable: the man who just months ago was talking about ditching the IRS and replacing it with an “External Revenue Service” has now signaled the service is once again open for business.
For Americans who see the agency as intrusive, inefficient, or even illegitimate, the reversal is a striking reminder that Washington’s insatiable thirst for revenue will always trump rhetoric.