Yahoo Finance Trump Wants To Eliminate Income Taxes: Here’s How That Might Impact the Price of Foreign Cars
In June, CNBC reported that Donald Trump called for eliminating the income tax and making up for the lost revenue with increased tariffs. In a country that imports $1 trillion more than it exports annually and the highest-earning taxpayers are 37% partners with Uncle Sam every time they go to work, that would be quite a transition.
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According to Cars.com, America imports roughly half the cars it buys — 47%, to be exact. The end of the income tax and the imposition of tariffs hefty enough to replace it would upend the relationship between America’s car culture and the imported vehicles that support it.
GOBankingRates talked to professionals who earn their living in the international shipping and automotive industries to find out how.
Also see what eliminated income taxes might do for the economy in general.
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If Trump or anyone else succeeded in eliminating the income tax, the most immediate effect would be that Americans would have up to 37% more of their income to spend on expensive things like cars.
“If the U.S. were to eliminate the income tax, several economic shifts could occur,” said Shawn Miller, senior writer at Modified Rides. “Firstly, consumers would have more disposable income, potentially increasing demand for domestic and foreign cars. With higher demand, prices could rise due to increased purchasing power.”
Albert Brenner is co-owner of a contract manufacturing, design and importing firm called Altraco, which serves businesses ranging from start-ups to Fortune 500 companies in the automotive industry and others.
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“Without income taxes, Americans would have more disposable income to spend on big-ticket items like vehicles,” he said. “This increased demand would drive up the cost of all cars, especially foreign models that are already more expensive due to import duties and transportation costs.”
Brenner said many of the companies he works with manufacture components for German luxury vehicles.
“These automakers could raise their prices in the U.S. due to higher demand and still sell as many cars,” he said. “They may use these extra profits to further improve design and performance to stay ahead of competitors.”
Foreign Producers Probably Would Raise Prices — Unless Their Competitors Didn’t
Brenner thinks most overseas carmakers with significant interests in the U.S. market would be forced into one of two choices.
“Higher prices often mean lower sales volumes, so automakers would need to strike a careful balance,” he said. “They may opt to absorb some of the increased costs to remain competitively priced, sacrificing a degree of profitability to gain long-term market share in a tax-free America.
“But no matter what they chose, their costs would certainly increase due to building and transporting more vehicles to meet demand. Without income taxes, foreign automakers would likely raise prices, but Americans’ additional buying power could make the impact negligible or even drive greater overall sales.”
The Overseas Market Would Split Into the High-End and Low-End Import Segments
Brenner expanded on his position, imagining an income tax-free future where the rest of the world’s auto markets would be divided by the net worths of the American buyers they serve.
The American Action Forum (AAF) says Trump plans to impose a 10% tariff on imported goods from all countries except China, which he would hit with a 60% tariff — but 10% means different things to different people.
For the typical Toyota Camry owner, for example, a $2,840 price increase on a Japanese commuter sedan with a $28,400 starting MSRP could be a deal breaker — but the typical Porsche Tycan owner might not flinch at dropping $10,000 more for their favorite $100,000 German prestige luxury sports car.
“In the end, eliminating income taxes could be a boon for high-end foreign automakers, who cater to buyers less sensitive to price changes, and a challenge for companies focused on budget-friendly vehicles,” Brenner said. “For the U.S. auto market, the net impact would depend on how demand, supply and strategic pricing decisions interact.”
The Economic Ripple Effects Would Spread Far Beyond the Price of a Camry
The transition from an income tax to a tariff-only revenue framework would cause economic reverberations far beyond a 10% price increase on the Honda or Toyota you have your eye on.
“If tariffs on foreign cars are raised to offset the revenue lost from eliminating the income tax, cars produced domestically or imported from countries with favorable trade agreements could become more competitively priced compared to foreign imports,” said Ross Kernez of Mavis Tire, the largest tire retailer in the United States. “This scenario has the potential to bolster domestic car manufacturers and bolster employment in the United States automotive industry.”
The problem there is that countries that felt unfairly targeted likely would impose retaliatory tariffs to make U.S. exports more expensive and, therefore, less competitive. That’s the opposite effect Trump’s trade policies strive to attain — and tariffs are just one thing that can make it cheaper to import and more expensive to export.
A devalued dollar is another.
“If demand for foreign cars in the U.S. increases significantly, this could affect the exchange rate of the U.S. dollar,” said Ray Lauzums, who engages in international shipping as the CEO of the Wisconsin-based toy seller Poggers. “Higher import demand could lead to a widening of the trade deficit as more foreign cars are imported.”
Countless Variables Breed Many Unknowns
Even in the current, familiar framework, global auto industry pricing dynamics are complex and fluid.
“Foreign car prices in the United States are affected by many factors, including import tariffs, if any, transportation costs, import duties and competition in the market,” Lauzums saud. “The elimination of the income tax [would] not directly affect these factors, but increased demand [likely would] lead to price adjustments.”
Many variables would impact those price adjustments, but one thing is sure: Not all imports would be treated equally.
For example, President Biden imposed a bruising 100% tariff on Chinese EVs, which — along with Trump’s existing tariffs — is why you’ve never met anyone with a Chinese EV.
Conversely, the AAF says Trump would reduce his universal 10% tariff to just 3% for some preferred trade partners.
Also, the modern global economy blurs the line between foreign and domestic — particularly when it comes to making cars. Even before the pandemic, CNN reported, “There are no purely American vehicles” because “every car sold in America is at least partly imported.”
Not only do U.S. automakers source parts from all over the world, but many foreign automakers — Toyota, Mercedes, VW, Subaru, etc. — assemble at least some of their vehicles in the United States.
Such a scenario could breed only one certainty: Eliminating the income tax in favor of tariffs in a consumer economy that depends heavily on imports is radical enough to guarantee unpredictable results.
“Foreign car manufacturers may adjust their pricing strategies based on increased demand in the U.S. market,” Lauzums said. “If they see an opportunity to earn higher margins due to increased demand, they may maintain prices or adjust them downward if they want to attract more customers.
“In summary, while the elimination of income tax in the United States may increase consumer spending and potentially increase demand for foreign cars, the actual impact on foreign car prices [would] depend on market dynamics, exchange rates, car prices and the interplay of strategies from manufacturers and importers.”
Editor’s note on election 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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