One of President Trump's proposals for his new term is to abolish the federal income tax and replace it with tariffs as the primary revenue source for the US federal government. In a brilliant rhetorical move, he suggests implementing this through abolishing the Internal Revenue Service and replacing it with the "External Revenue Service," claiming that the tariffs collected by this new agency would be financed by foreigners rather than Americans. This sure sounds like a good deal.

Trump has claimed that "tariff" is the most beautiful word in the English language, even more so than "love." Perhaps it would be if it were a device by which one could costlessly extract funds from foreigners. But is a tariff capable of doing such a thing?

Standard microeconomic analysis tells us that the economic "incidence" of a tax (that is, who really pays what portion of it) is not necessarily who statutorily collects it. In other words, just because sales tax is collected by the seller who then pays it to the tax man, this doesn't mean that it is the seller paying the whole tax. Rather, the incidence of the tax depends on the relative elasticities of the buyer's demand and the seller's supply. A greater portion of the tax will be borne by the party whose demand (or supply) is relatively inelastic, as shown in the figure below.