Trump Proposes Tariffs to Replace Income Taxes, Sparking Market Volatility

President Donald Trump has suggested that his new tariff policies on imported goods could lead to a significant reduction in federal income taxes, particularly for those earning less than $200,000 annually. In a recent post on Truth Social, Trump hinted at a potential shift in government funding, proposing that tariffs could replace income taxes as the primary source of revenue. This concept, dubbed the “External Revenue Service,” aims to return to a model similar to the 19th-century Gilded Age when the U.S. operated without an income tax.

Trump’s proposal has sparked discussions about the potential economic implications. Lower income taxes could increase Americans' disposable income, potentially driving higher consumer spending and investments in stocks, real estate, and cryptocurrencies. However, analysts caution that the broader economic impact, especially in the context of potential Fed rate cuts and market fluctuations, will determine the effectiveness of this plan.

Critics have expressed skepticism about the feasibility of Trump’s tariff strategy. They argue that the plan lacks a clear roadmap and that relying solely on tariffs may not generate enough revenue to support current federal spending levels. Research suggests that eliminating income taxes could save the average American over $134,000 over a lifetime, but experts warn that significant changes to federal spending would be necessary to make this viable.

U.S. Commerce Secretary Howard Lutnick has voiced support for Trump’s tariff strategy, citing historical examples where tariffs contributed to national wealth. Financial strategist Bert Dohmen has also proposed additional tax ideas, including exempting seniors over 76 who operate small businesses from income taxes and offering tax incentives for families to encourage higher birth rates.

The introduction of Trump’s tariff policies has added volatility to the markets, with frequent revisions and policy shifts causing sharp reactions in stocks and bond yields. This instability comes at a critical time as markets prepare for potential Fed rate cuts later this year. Investors will closely monitor how Trump’s tariff-driven vision and the Fed’s monetary policy interact to shape the economic landscape ahead of the 2026 election season.