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No. You can’t compare tariff rates and income tax rates

Brian Albrecht dismantles a seductive but dangerous economic fallacy that has recently resurfaced in public discourse: the idea that swapping high income taxes for low tariff rates is a net win for the economy. While the math looks clean on a spreadsheet, Albrecht argues that this comparison ignores the fundamental mechanics of how different taxes distort human behavior. For busy leaders trying to parse the real cost of trade policy, this piece cuts through the noise to reveal why a 2.5% tariff can be far more damaging than a 40% income tax.

The Trap of Nominal Rates

The piece begins by addressing a claim made by John Lott, who suggested that because average tariff rates are tiny compared to income tax rates, shifting the burden to imports would reduce the overall economic burden. Albrecht immediately identifies the flaw in this logic, noting that "No one corrected him on this. Even economists who pushed back on Lott missed it or ignored it." The danger here is that the argument sounds plausible to non-specialists because it relies on a single, true principle applied to the wrong context.

No. You can’t compare tariff rates and income tax rates

Albrecht explains that while it is true that deadweight loss—the economic value destroyed by a tax—increases with the square of the tax rate, this rule only holds within a single market. He writes, "This principle compares a fixed market with a fixed demand and supply curve. This relationship only holds within a given tax base." The error in Lott's logic is treating all tax bases as identical, when in reality, the responsiveness of buyers and sellers varies wildly between markets.

"Elasticities destroy any attempt to compare tax rates across different bases and make Lott's whole construction nonsense."

This is the crux of the argument. A tax on land, where supply is fixed, creates zero distortion regardless of the rate. A tax on imports, where supply and demand are highly responsive, creates massive inefficiencies even at low rates. Albrecht points out that imports are "very elastic," citing estimates that put the long-run elasticity at 14, implying that "a huge deadweight loss" is generated even by small tariffs. The nominal rate is a red herring; the behavioral response is what matters.

The Compound Effect of Layered Taxes

The analysis deepens as Albrecht moves beyond isolated markets to show how taxes interact. He argues that income taxes and tariffs do not operate in a vacuum; they stack on top of one another, compounding the distortion on workers and consumers. He illustrates this with a simple budget constraint: if you earn a wage, pay income tax, and then face higher prices due to tariffs, the total "wedge" between your labor and your consumption is the sum of both distortions.

He demonstrates that a 10% income tax is economically identical to an 11.1% consumption tax, proving that "you can't look at the nominal rates and conclude that one tax is lower than the other." When a tariff is added to an existing income tax, it doesn't just add a small cost; it creates a specific, targeted wedge that distorts choices between domestic and imported goods. Albrecht writes, "The tariff creates a much bigger wedge specifically on imported goods, which distorts your choice between domestic and imported goods even when both are equally efficient in production."

Critics might argue that tariffs can serve strategic goals beyond revenue, such as protecting nascent industries or national security. While valid, Albrecht's point remains that as a revenue-raising mechanism, they are mathematically inefficient compared to broad-based taxes. The narrow base of tariffs means that to raise meaningful revenue, the rates must be astronomically high, leading to "astronomical rates that create massive distortions in consumption patterns."

"The narrow base means you need a much higher rate to raise equivalent revenue."

This logic exposes why replacing income tax with tariffs is a false economy. Because imports make up only a small fraction of total consumption—roughly 10% in the US—a tariff must be applied at a rate ten times higher than a general consumption tax to generate the same revenue. Albrecht notes that this is the same logic that would apply to a sugar tax: "To raise meaningful revenue, you need astronomical rates that create massive distortions... It may even be impossible for reasons related to the Laffer curve."

The Mathematical Reality

Albrecht concludes by grounding these intuitions in explicit math, showing how the total tax wedge depends on the interaction of income and consumption taxes. He derives a formula where the total distortion is not simply the sum of the rates, but a function of how they compound. "The consumption tax and income taxes aren't unique things that we can isolate," he writes. "They compound."

The result is a clear verdict on the proposed policy shift. Replacing a broad income tax with a narrow tariff base would not lower the economic burden; it would concentrate the distortion on a small slice of the economy, forcing consumers to make inefficient choices. Albrecht's model shows that a 100% income tax is equivalent to an infinite consumption tax, highlighting the absurdity of comparing rates across different bases without accounting for the underlying economic structure.

"You can't compare tax rates across different bases without accounting for how responsive behavior is to each tax."

Bottom Line

Albrecht's strongest contribution is exposing the fallacy of comparing nominal tax rates across different economic bases, a mistake that has confused even seasoned observers. The argument's vulnerability lies in its strict focus on efficiency; it does not address the political or strategic motivations that often drive tariff policy, such as geopolitical leverage or domestic manufacturing goals. However, for anyone evaluating the economic cost of trade policy, the takeaway is unambiguous: low nominal rates on narrow bases can create far higher economic costs than high rates on broad bases.

Sources

No. You can’t compare tariff rates and income tax rates

by Brian Albrecht · Economic Forces · Read full article

A little while back, John Lott had a very confused piece in the New York Post. In it, he made the following claim:

Distortions increase as tax rates do.

Before Trump’s policies, the average US tariff rate stood at just 2.5% — tiny compared to the 43.4% average top personal income tax rate (including federal and state taxes) or the 27.5% average total corporate tax rate.

If we understand a tariff as a tax like any other, higher tariffs could in fact reduce the overall economic burden on American individuals and companies — an outcome that Trump has often touted as his ultimate goal.

This sounds plausible. It sounds like something an economist would say.

But it’s absolutely wrong.

No one corrected him on this. Even economists who pushed back on Lott missed it or ignored it. Don Boudreaux granted “tariffs might well have a role to play as part of the mix of taxes to raise revenue.” David Henderson wrote:

We do know that the deadweight loss, which is the overall loss from the tax minus the gain to the government, is proportional to the square of the tax rate. For example, doubling a tax rate quadruples the deadweight loss. So, it could be true that reducing the top marginal tax rate on income from its current 37 percent to, say, 35 percent, and replacing it with a 5 percent tax on imports could reduce overall deadweight loss.

No. This isn’t possible.

So someone needs to refute this logic outright.

Today’s newsletter has two parts. The first part covers the basic intuition and the second will be the actual math. Putting it in an explicit model will show us the errors and why it’s helpful to be comfortable writing down some math here and there. That’s today’s newsletter. Let’s roll.

The Tax Rate/Deadweight Loss Connection (And Why It Doesn’t Mean What Lott Thinks).

Lott’s claim contains a grain of truth: deadweight loss from taxation increases with the square of the tax rate. Double a tax rate, and you quadruple the deadweight loss. This is a standard result in public finance, and it suggests we should spread our tax burden across many bases rather than concentrate it in one place.

Here’s the intuition. When you impose a small tax, you only kill off marginal transactions—deals that barely made sense in the first place. The buyer was almost indifferent about purchasing, ...