County / Region | Percentage |
Gambia | 41.6% |
West Bank and Gaza (pre-war) | 37.6% |
Liberia | 30.0% |
St. Lucia | 29.2% |
United States Trump/Vance proposal | 25.6%?** |
Argentina | 24.6% |
Bahamas | 19.6% |
Somalia | 18.0% |
India | 4.5% |
China | 2.9% |
Brazil | 2.0% |
United States current | 1.8% |
Canada | 1.6% |
Korea | 1.4% |
New Zealand | 1.3% |
Japan | 1.2% |
United Kingdom | 0.7% |
European Union | 0.5% |
* World Bank, Taxes on International Trade (% of Revenue)
** Assuming the $2.18 trillion personal income tax is scrapped and replaced with a tariff yielding the maximum feasible revenue, likely $780 billion at rates of 50%.
In PPI’s newest paper, It’s Not 1789 Anymore: Why Trump’s Tariff Agenda Would Hurt America, Fiscal Policy Analyst Laura Duffy examines the Trump campaign’s apparent hope to replace the U.S. income tax with a much higher tariff. Drawing from modern analysis and the Tariff Act of 1789 — Congress’ first-ever tax bill — she bluntly concludes that:
“Contrary to Trump’s claims that imposing Depression-Era level tariffs will restore America to a supposed former state of greatness, leaders of the past long recognized the weaknesses of relying on tariffs for revenue, and their concerns offer valuable lessons today. In particular, tariffs:
1. Fail to raise enough revenue to finance a modern federal government
2. Are especially non-transparent taxes that invite preferential treatment
3. Undermine equity by imposing arbitrarily unequal tax burdens on different households
4. Cause damage to downstream industries and the economy as a whole.”
Background: At least twice this fall, Mr. Trump has suggested replacing the U.S. personal income tax, and possibly the corporate income tax, with tariff revenue. This would scrap a broad-based revenue tax and swap in a big national surcharge on energy, OTC medicines, clothes, food, and other goods purchased abroad. His argument for this is a claim that in the 19th century (until the creation of estate and income taxes in the 1913 and 1916 Revenue Acts), the U.S. government relied mainly on tariffs for revenue; that during the 1890s, a period of particularly high tariff rates, the U.S. was the “wealthiest we ever were” (quite wrong: see “Further Reading” for a look at that impoverished and unpleasant decade); and that 19th-century tax policy is therefore right for 21st-century America.
To put real-world numbers to this, in 2023, the personal income tax raised $2.18 trillion. This was just under half of the Treasury’s $4.44 trillion total. Tariffs got $0.08 trillion, or 1.8%. Tax scholars report that the most money a theoretical high-tariff system could raise (setting aside the trade policy* and other economic problems it could cause) is about $780 billion. Assuming repeal of personal income taxes but no other tax changes, this would mean about 25.6% of U.S. revenue. No “developed” country now uses tariffs for more than 2.7% of revenue; World Bank tables find Gambia, whose government gets 41.6% of its money from tariffs, the most tariff-reliant country in the world. At 25.6%, the U.S. would be below Gambia, but in the neighborhood of tariff-heavy jurisdictions such as Somalia, the Bahamas, pre-war West Bank and Gaza, Nepal, and Ethiopia — that is, countries too small, politically disordered, and/or poor to operate professional bureaucracies able to assess and collect revenue from broader sources such as income, wealth, or consumption.
Going to the really primary sources, Duffy notes that the original U.S. tax writers in 1789 — sophisticated analysts such as then-House of Representatives figures James Madison and his Federalist sparring partner Alexander Hamilton at the Treasury Department — did not choose tariffs as the main early-republic and 19th-century revenue source because they believed tariffs were a particularly great form of taxation. Nor did they think a tariff would somehow off-load taxation onto foreigners. (With the Tea Party events and “taxation without representation” in recent memory, no early-republic politician would ever make such a claim.) Rather — much like governments in today’s high-tariff small island state and least-developed countries — they were aware that with no professional civil service and no way to calculate income or consumption, the U.S. could not tap broader revenue sources. By contrast, tariffs are easy to collect – seaports are few, and ship arrivals easy to monitor – and therefore the best of their unattractive options.
What would happen if someone tried to cut and paste this 18th- and 19th-century approach into the 21st century? Duffy makes the obvious point that it is not 1789 anymore, our options are better than theirs, and a Trump-like attempt to return to the distant tariff-based tax past would immediately run into one big problem and then cause another three:
(1) Tariffs can’t raise enough money: Very high tariff rates cause trade to collapse rather than raising money; with $3.1 trillion in goods imports and the theoretical maximum tariff revenue at $0.78 trillion, the income tax/tariff arithmetic doesn’t work at all. Replacing a $2.18 trillion income tax with an $0.78 trillion tariff system would nearly double annual U.S. fiscal deficits to $3.1 trillion — even before adding in the effects of lower growth, foreign retaliation, and the Trump/Vance campaign’s many additional trillions of dollars in tax cuts and spending increases over the next decade. The likely result is fiscal crisis and some combination of interest spike, inflation, and collapse of public services.
(2) Tariffs are less transparent than income or consumption taxes: Since tariffs are more ‘opaque’ than income, consumption, or other broad-based taxes, more reliance on tariffs would mean less public understanding of taxation. On the government and policy side, the Treasury Department publishes no annual analysis of tariff revenue by product or incidence by income level; in daily life, American shoppers never learn how much the tariff system adds to the prices they pay for shoes, food, bicycles, etc. The extreme complexity of nearly all tariff systems amplifies this failing. Even the 1789 Tariff Act, Duffy shows, immediately evolved from the simple across-the-board 5% rate Madison proposed to an unwieldy system awarding well-connected industries with especially high rates on nearly a hundred products — from rope, beer, nails and tacks, to soap and shoes. The 1789 Act’s descendant, today’s 11,414-line U.S. Harmonized Tariff Schedule, is far worse (though less important as a revenue source), with only a few specialists knowing the main rates and fewer still knowing who pays. Trumpist ideas, with their new layers of complexity, would spread this opacity across half the tax system.
(3) Tariffs are by nature regressive and typically get worse over time: Reliance on tariffs makes taxation more ‘regressive’ and tougher on low-income and working people. In principle, as a tax on goods but not services, a tariff system taxes low-income families more heavily than wealthy households, because lower-income families spend more of their income on clothes, food, and home goods. Likewise, tariffs tax goods-intensive businesses (e.g., retail, manufacturing, construction, and farming) more than they tax investment- or service-buying industries such as real estate, law, or financial services. And in real life, 19th-century experts — say, Albert Gallatin, Treasury Secretary for the Jefferson and Madison administrations — knew by experience that the opacity of the tariff systems makes them easy for wealthy people and businesses with direct connections to government to manipulate. This means tariff systems usually grow more regressive over time, as rates fall on expensive luxuries but stay high for cheap goods whose buyers don’t know they’re paying. Again, the contemporary U.S. Harmonized Tariff Schedule illustrates the point, taxing cheap stainless steel spoons much more heavily than sterling, infant formula more than champagne, polyester shirts more than silks, and women’s clothes more than men’s.
(4) Economic harm: Finally, tariff increases invite economic harm — directly through damage to ‘downstream’ industries buying tariffed goods, and indirectly by encouraging foreign governments to retaliate against successful U.S. industries. Mr. Trump’s tariff increase on fertilizer, for example, will raise farming costs and simultaneously invite angry foreign governments to block American agricultural exports. In the same way, a new tax on metals, paint, and wiring, meanwhile, means higher costs and lost competitiveness for American auto plants and machinery manufacturers, higher prices for families buying homes, and more retaliation.
All this set out, here’s Ms. Duffy’s close:
“Replacing tariffs with direct taxes on incomes [in the 1913 and 1916 bills] was a huge step in making American public finance more rational and equitable. … Returning to tariff-heavy policies, as suggested by Trump, would be fiscally irresponsible and counterproductive. Beyond their revenue-generating limitations, tariffs are extremely susceptible to lobbying from protected industries at the expense of other businesses, workers, and consumers. Finally, the distortionary effects of returning to pre-modern tariff rates would be extremely damaging to the American economy and undermine the strong wage and job gains the country has seen in the past three years.”
* For example, abrogation of international agreements, and of basic Constitutional principles if a hypothetical Trump administration attempted to impose a tariff by decree; unprovoked harm to U.S. allies; retaliation against successful U.S. farm and manufacturing industries; etc.
Laura Duffy on Trumpism, tariffs as taxation, the Tariff Act of 1789, transparency and regressivity, and the folly of using tariffs as a 21st-century revenue source.
U.S. background:
Revenue from income taxes, tariffs, and other sources from OMB’s Historical Tables. See Table 2.1 for overall revenue shares, and Table 2.5 for “other revenue” sources for tariffs, excises, and other small taxes.
The White House’s Council of Economic Advisers on tariffs as revenue, regressivity, and inequality.
Albert Gallatin’s tariff analysis (1833) cites lack of transparency, bias against low-income families, and other drawbacks.
International context:
World Bank data on tariff share of government revenues.
And the 1890s weren’t a good time at all. Four points:
Life and health: An American’s average life expectancy in 1900 (Table 13) was 47. To put this figure in context, World Bank tables find the world’s lowest current national life expectancies in Chad and Lesotho, both at 53. The short lives of 1890s Americans reflected very high infant mortality — more than one child in ten died before the age of one — and frequent death in early life and middle age to accident, infection, and contagious disease. (No vaccines, blood transfusion, antibiotics, or anti-inflammatory drugs.)
Wealth and poverty: Americans were poor and spent most of their money on life necessities. Per BLS’ “100 Years of Consumer Spending,” the average family spent 58% of its income on food and clothes as against today’s 12%. Even the top end of “Gilded Age” society had only 8,000 automobile owners and 600,000 mostly communal telephones, in a country of 76 million.
Civil rights: Work and daily life in 1890s America were deeply unjust and getting rapidly worse. Between 1890 and 1895, 16 states adopted segregationist constitutions and laws covering marriage, voting, education, railroads, streetcars, and other matters, validated by the Supreme Court’s 1896 “Plessy v. Ferguson” decision. The National Archives remembers.
Economy: Whatever the impact of high tariffs, the 1890s economy was bad. The decade’s main economic event, the four-year Depression following the “Panic of 1893,” introduced the word ‘unemployment’ to common English-language discourse. It also prompted the first mass protest in U.S. history, when “Coxey’s Army” of 6,000 desperate Ohio and Pennsylvania workers marched to the National Mall to appeal (unsuccessfully) for federal relief.
Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.
Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.
Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.
Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.