Why the U.S. once relied on tariffs to raise revenue — and what it would mean to go back
Why the U.S. once relied on tariffs to raise revenue — and what it would mean to go back
The Monthly Treasury Statement is scheduled to be released Wednesday afternoon, and it will provide information on how much money flowed into and out of the federal government in October. The biggest source of revenue for the federal government these days? Income taxes, which President-elect Donald Trump has suggested he would cut or even eliminate, ramping up the role tariffs play instead.
One of the first laws Congress passed, in 1789, imposed tariffs on imports, and it was because the U.S. needed the money.
“The federal government literally had no sources of income to pay the federal debt, to pay for national defense,” said Douglas Irwin, a trade historian at Dartmouth. “And the very few agencies we had at that time.”
Irwin says tariffs made sense as a revenue raiser. The U.S. was mostly an agrarian society, and tracking what everyone made — and then taxing that income — would have been difficult to do. Also, people did not like paying excise taxes on things like whiskey.
Meanwhile, ships importing goods had to go through a port and it was easy to show up and collect what was due.
“So every port had a Customs House. And so the tax collectors were right there, you know, you couldn’t get around them,” said Irwin.
Irwin says 90% of the federal government’s revenue came from tariffs. From the country’s inception until the 1860s.
Then, “the Civil War was very expensive, and the tariff alone couldn’t pay for that.”
Irwin says the government briefly introduced an income tax, but it was declared unconstitutional. And it wasn’t until 1913 that the Constitution was amended to permanently allow it.
“It was thought it’d be a fairer way of distributing the tax burden by having higher income Americans pay more,” he said.
Irwin points out the federal government was a lot smaller then than it is now. We didn’t have social security or Medicare or a whole bunch of other federal agencies, so we didn’t have to fund them. But as the government grew, it needed the money that came from income tax.
“Tariffs simply weren’t an adequate source,” said Scott Lincicome with the Cato Institute.
He says that when tariff rates get higher, fewer goods are imported, which limits the amount of money they can generate.
“So there’s only so much juice you can get out of that turnip,” said Lincicome. “And so income taxes were a much larger potential source of revenue because it was a much larger tax base.”
Lincicome says if the U.S. were to turn back to tariffs as its major way of generating income, it would run into a math problem pretty fast.
“The maximum amount of money a blanket tariff regime could raise in a single year probably wouldn’t be enough to pay for any major federal spending category, not social security, not Medicare, Medicaid, not defense,” he said.
Lincicome says the executive branch can raise tariffs on its own. But for any change to the income tax, Congress would have to get involved, just like it was with tariffs in the beginning.
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