Old habits are difficult to break. Case in point: I habitually refer to posts on the social media platform X as “tweets” despite knowing the term is outdated.
I intend no offense by the verbal miscue, mindful that referring to the online blurbs as tweets is less pejorative than other descriptors that might be apt. It’s more polite than calling them rants, screeds, harangues, diatribes, bloviations, huffs, or tirades.
This week’s column was inspired by a single tweet. It was a retweet (another anachronism) of something President Trump recently posted on his preferred social media platform. The relevant excerpt reads as follows:
“For far too long, we have relied on taxing our Great People using the Internal Revenue Service (IRS). Through soft and pathetically weak Trade agreements, the American Economy has delivered growth and prosperity to the world, while taxing ourselves. It is time for that to change. I am today announcing that I will create the EXTERNAL REVENUE SERVICE to collect our Tariffs, Duties, and all Revenue that come from Foreign sources. We will begin charging those that make money off of us with Trade, and they will start paying, FINALLY, their fair share. January 20, 2025, will be the birth date of the External Revenue Service. MAKE AMERICA GREAT AGAIN!”
Donald J. Trump / @realDonaldTrump
[Truth Social, Jan. 14, 2025, 11:28 AM. Later reposted on X.]
By the time this essay is published, the inauguration will be behind us. The proposed federal agency may already have been born — possibly by an executive order signed on Trump’s first day in office. Notwithstanding the possibility, I refer to the agency in the future tense. Apologies for the temporal incongruity.
What follows are my initial responses to Trump’s creation of the External Revenue Service, or ERS, future rival of the IRS.
Can Trump Do That?
The short answer is no, not without congressional cooperation. Like other presidents, Trump lacks the constitutional authority to create a whole new federal agency such as the ERS.
Historians speak of the so-called presidential reorganization authority when referring to the ability of the chief executive to divide or consolidate federal agencies. That authority may extend to the abolition or creation of entirely new agencies. However — and this is the salient point — the authority must be delegated through an act of Congress.
Over the course of U.S. history, there have been 16 instances of grants of reorganization authority. The first occurred during the Great Depression, through The Economy Act of 1932. The statute gave President Herbert Hoover a fixed period (eight months) in which to reorganize executive branch agencies subject to legislative approval.
Hoover attempted to exercise the power through a series of executive orders, only for a defiant Congress to nullify each of them. President Franklin Roosevelt would eventually use the power, under a reauthorization, to advance his New Deal agenda.
Additional statutory authorizations followed, including the Reorganization Acts of 1939, 1945, and 1949. The latter statute was reauthorized on nine occasions, not being superseded for almost 30 years. President Eisenhower relied on it in 1953 to create the Department of Health, Education, and Welfare — as it was then known; President Nixon relied on it in 1969 to establish the Environmental Protection Agency.
The last statutory authorization was the Reorganization Act of 1977, which President Jimmy Carter relied on to create the Office of Personnel Management and the Federal Labor Relations Authority. In 1984 Congress reauthorized the statute for a two-month period, but President Ronald Reagan failed to exercise the power.
In 2002 President George W. Bush asked Congress to extend the president’s permanent reorganization authority, but lawmakers denied his request. A few years later, President Barack Obama sought reorganization authority to revamp the Department of Commerce. Again, lawmakers denied the request.
The emerging picture is one of an authority that is seldom granted and infrequently invoked.
In summation, Trump cannot just create the ERS out of thin air. That said, he could easily request the authority from Congress, knowing that his party holds the majority in each chamber and might be eager to cooperate.
We Already Have the CBP
The next thing that occurs to me is that the ERS is not necessary. It’s not as though the federal government now lacks the operational capacity to successfully enforce all the tariffs currently on the books.
Imported goods are duly inspected when they arrive at our shores, and the appropriate duties are collected. These tasks are performed by the U.S. Customs and Border Protection Agency, known in beltway lingo as the CBP. Trump could increase tariffs as much as he desires; the CBP is equipped to handle it.
Since its founding in 2003, the CBP has been housed under the Department of Homeland Security, the result of reorganizations that occurred in the aftermath of the terrorist attacks of September 11, 2001. The connection to Homeland Security surprises some people, who assume that an agency tasked with responsibility over a major federal revenue source would naturally be contained within the Treasury Department. Not so.
Thus, the pre-Trump framework has the IRS commissioner reporting to the Treasury secretary, while the head of the CBP reports to the secretary of Homeland Security. This model has worked just fine for the last 22 years. In 2023 the CBP hauled in $80 billion in tariff revenues from 328 designated ports of entry, representing around 2 percent of the $4.4 trillion collected that year in combined federal revenues.
The CBP claims a workforce of 65,000 employees and an annual budget of $19.7 billion. Most of its staff, however, are not involved with the administration of tariffs. Rather, they’re involved in policing the nation’s borders for both contraband (such as fentanyl) and monitoring the attempted entry of foreign individuals into the United States. Those duties are assigned to the U.S. Border Patrol, a law enforcement subagency of the CBP.
The Immigration and Naturalization Act authorizes the CBP, and its subagencies, to question under oath any person seeking entry into the country to determine admissibility. Such tasks were previously assigned to the Justice Department’s Immigration and Naturalization Service, before the CBP’s establishment. The Border Patrol now accounts for most of CBP’s human resources. A small portion of its staff, around 2,500 employees, conduct customs inspections and administer tariffs.
There’s no evidence to suggest the CBP is underperforming as to its revenue function. For instance, there is no discernible “tariff gap” to speak of, as there is in the income tax context — denoting the differential between revenue due and revenue collected. As best one can tell, the enforcement of tariffs transpires efficiently and without controversy — apart from the generalized policy debate about whether tariffs should be increased to bolster domestic manufacturing. To be clear, taking sides in that debate is not CBP’s mandate. It does not set tariffs; it merely enforces them.
True, importers complain about wait times and backlogs, such as when a major bridge near the Port of Baltimore collapsed into the Patapsco River in March 2024. That’s hardly the CBP’s fault. Moreover, delays in processing imports are because of the high volume of shipping vessels arriving at our ports and the sheer quantity of cargo that requires off-loading.
If everything is running smoothly, why the abrupt change from Trump? We know that once the ERS is up and running, there will be structural redundancy with the CBP. The implication is that the latter’s activities will be phased out. That is, those frontline CBP employees handling imports and tariffs may soon be reassigned to the ERS, where they’ll constitute the new agency’s initial workforce.
This provides a glimpse of the organizational dynamic at play. Trump wants to place the federal government’s two revenue-generating agencies — the IRS and the ERS — on parallel footing. This is to project a constructive equivalence in their revenue missions.
There’s been no indication yet as to whether the ERS would be housed under Treasury, but that’s the expectation. Once the tariff function is fobbed off from the rest of the CBP, there’s little purpose in keeping it under Homeland Security.
Especially since Trump is keen to portray tariffs and income taxes as interchangeable revenue tools. Before 2003, the U.S. Customs Office was under Treasury, so Trump can rationalize the reorganization by saying that he’s restoring the status quo ante. But I suspect there’s more to it than that.
Is This Why the U.K. Had the Inland Revenue?
Not exactly. For almost 100 years (1909-2005) the U.K. government had separate agencies supervising the administration of direct taxes (Inland Revenue) and indirect taxes (Customs & Excise).
Twenty years ago, the functions were consolidated into HM Revenue & Customs. There’s a loose parallel between Trump’s vision for the ERS and the now defunct Customs & Excise. In the same manner, there’s a parallel between the IRS and the now defunct Inland Revenue. The terms “inland” and “internal” are basically synonymous.
Strictly speaking, the Customs and Excise office is not an ideal analog for the ERS. That’s because the former agency did not exclusively deal with foreign (external) revenue sources — it also dealt with excise taxes, which are the domestic (internal) counterpart to tariffs. The relevant commonality between tariffs and excise taxes is that both are indirect taxes, then considered outside of Inland Revenue’s administrative competence.
Thus far, there’s been no discussion of how U.S. federal excise taxes would be affected by Trump’s creation of the ERS. Presumably these taxes will not be administered by the ERS, given that excises are not derived from external sources.
Note that Trump refrained from calling his new creation the “Federal Consumption Tax Agency” or some title to that effect. It doesn’t serve his purpose to remind people that tariffs are a domestic consumption tax. There’s scant difference between a tariff and a national sales tax, other than the latter has a broader base. Republican presidential candidate Nikki Haley repeatedly raised the point while campaigning last year.
ERS, You’re Gonna Be Popular!
The ERS doesn’t exist yet, but I’d bet the farm it already polls better than the IRS ever has. There’s no doubt about it — Trump wants the ERS to be widely popular.
Note how his language, above, links the agency’s arrival with a new era of U.S. economic growth and prosperity. No longer, he writes, will the nation be burdened by “soft” and “pathetically weak” trade agreements of the past. The insinuation is that the ERS will play some vital role in liberating the United States from its purported softness.
Mind you, it’s not clear which trade deals he’s talking about. The United States already ditched the North American Free Trade Agreement during his first term. He’s not referring to the United States-Mexico-Canada Agreement, NAFTA’s successor, which was negotiated during his first term. If there’s a deficiency in the United States-Mexico-Canada Agreement, he’d own it. Nor is he referring to the Trans-Pacific Partnership, which the United States withdrew from in 2017.
Also, the United States has already defanged the WTO by crippling that institution’s dispute settlement function — also Trump’s doing. The WTO isn’t dead, technically, but it’s futile for any trade partner to launch a WTO dispute against the United States. The findings of a WTO dispute settlement panel are unenforceable unless confirmed on appeal, and the appellate body has been rendered nonoperational.
Looking beyond the insults hurled at free trade agreements, we see something else — effusive praise for soon-to-be empowered ERS. Public statements meant to glorify tariffs will soon become inseparable from those that glorify the ERS.
With each passing month, we can expect the ERS to be lionized while the IRS will be scorned — unfairly so, in my opinion. It may follow that morale within the ERS will be sky-high, while morale within the IRS will be stuck in the gutter. That would be an unfortunate development for the federal tax system, and you can’t help but question whether the degradation is purposeful.
You can see where the narrative is headed. ERS will be portrayed as the good guys who levy taxes on wicked foreigners who seek to do nasty things to the U.S. economy — like sell their wares in consensual commercial transactions. Meanwhile, the IRS will be portrayed as the bad guys who levy harmful taxes that inflict pain on U.S. households. In crass terms, the plot is for the ERS to be blessed with a perpetual halo while the IRS is condemned to wear devil horns.
Once we understand this trajectory, it’s only a matter of time before the ERS begins to siphon off critical talent and budgetary resources that once supported the IRS. Isn’t it inevitable that the professed good guys will be better funded than the bad guys?
If your ulterior motive was to lay a cultural predicate for the future transition away from income taxation toward a consumption tax base, all the above would be a clever way to go about it.
At the risk of sounding like an alarmist, I am compelled to sound the nearest alarm: The popularization of the ERS is primarily about diminishing the IRS and the fiscal relevance of income taxation generally. I genuinely hope that I’m wrong.
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