Days after the Supreme Court struck down President Donald Trump’s tariffs, the president defended the policy and reiterated during his State of the Union address that he wants tariffs to replace income taxes.
“As time goes by, I believe the tariffs paid by foreign countries will, like in the past, substantially replace the modern-day system of income tax, taking a great burden off the people that I love,” he said.
Not paying income taxes sounds like a dream, but you’d pay in other ways. Here’s what would actually happen to your finances, according to experts.
How Tariffs Show Up in Your Budget
You won’t see a tariff on an itemized receipt, but it’s there. Tariffs directly raise the price of imported goods. For instance, a tariff on a smartphone component gets built into the price you pay at checkout.
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“Tariffs function like a consumption tax,” said James Comblo, partner at Prosperity Capital Advisors. “Your tax return might look better, but your grocery bill, your car payment, and your utility costs quietly climb.”
Would Your Income Tax Bill Really Go Down?
If Trump did eliminate income tax in favor of tariffs, you might see a difference if “Congress passed reductions,” said Divakar Vijayasarathy, CEO of DVS Advisory Group.
However, that doesn’t mean you’re saving money.
“If income taxes are cut, tariffs are not paid by ‘foreign countries,” explained Vijayasarathy. “They are paid by U.S. importers, who often pass costs to consumers through higher prices.”
Winners and Losers: Who Actually Comes Out Ahead
Middle- and lower-income households would likely feel the biggest hit, but “it’s not about winners or losers,” said Christian A. Morales Reyes, CPA with Numbers Consulting. “It’s about who absorbs the shift in tax structure from income taxes to consumption taxes.”
If the economy were to shift to a tariff-driven tax system, higher earners and some domestic industries could benefit. “But consumers and import-heavy businesses could have a negative effect,” said Reyes. With the middle-class and lower-income households spending more on goods than high earners, they “could be the losers in the equation,” he explained.
What This Means for Your Long-Term Plans
Long-term goals like buying a house, saving for college and building retirement savings could be affected in “ways that a short-term tax adjustment doesn’t offset,” Comblo said.
But according to Reyes, tariffs wouldn’t be the biggest issue; uncertainty would.
“If tariffs raise costs and income taxes fall, families and small businesses need to reassess cash flow, inflation risk and investment assumptions,” he said.
Here’s How to Take Action
Uncertainty may be unavoidable — but being unprepared doesn’t have to be. Stay calm, build an emergency fund, avoid big purchases and “shift where it’s practical” are things Vijayasarathy advised.
Another course of action is to build a financial plan that accounts for a range of outcomes rather than trying to predict which policy will actually pass, Comblo explained. Also, the best thing is to be “flexible.”
Bottom line: Preparing for change — rather than assuming stability — is the best way to protect your finances, no matter what happens next.
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: Would Trump’s Tariff-Only Tax System Make You Richer or Poorer? Middle-Class Math, Explained
