Short note 2024

And extending the idea to where the IRS can be abolished has enormous appeal and is an idea that I have often mulled. In an economy as large as America it could well be workable without seriously affecting the availability of goods and services. Capitalistic American businesses would leap at the opportunities opened up

During his recent trip to Capitol Hill, former President Donald Trump floated a plan to finance the federal government in large part with revenue raised by import tariffs. The details are sketchy, but the proposal’s main idea is to rely much less on the complex U.S. income tax code, which penalizes work and imposes huge compliance costs on both individual and business taxpayers.

The former, and possibly future, president’s idea draws attention to eighteenth- and nineteenth-century U.S. public finance, when, in fact, tariffs ranked among America’s principal sources of government revenue, along with the proceeds from selling public lands and from imposing selective excise taxes on consumer goods—most notoriously Alexander Hamilton’s tax on alcohol, which triggered the 1794 Whiskey Rebellion. The national government was of course much smaller then.

It was not until the 1860s, when Abraham Lincoln’s Treasury levied taxes on income to help support the Union’s military operations, that Americans first faced such levies. Although Lincoln’s income tax was declared unconstitutional, the ratification of the 16th Amendment on February 3, 1913—one of the fruits of an earlier Progressive Era—made income taxes a fact of life.

Individual income taxes have accounted for more than half of the federal government’s revenue ever since ($1.7 trillion of the $3.3 trillion total raised in fiscal year 2024). Payroll taxes to finance the New Deal’s Social Security and the Great Society’s Medicare programs rank second (34.3% of total federal receipts). Import tariffs (“customs duties”) generate only $48 billion nowadays, just 1.5% of the total. The Trump plan would stand this on its head.

Implementing Trump’s all-tariff revenue plan would require a major retooling of American public finance. I and many other taxpayers would cheer the elimination of income-tax withholding and doing away with the intrusive and reviled Internal Revenue Service (IRS), some of whose criminal investigating “special agents” are authorized, as we recently were reminded, to carry firearms.

No one has estimated the level of tariff rates necessary to offset $3.3 trillion in income tax revenue that possibly would be “lost” under Trump’s plan. Would some tariffs be set at 100% of a product’s pre-tariff domestic price, as the Biden White House recently recommended for electric vehicles imported from China to “protect American manufacturers from [China’s] unfair trade practices”?

Tariffs are simply taxes that domestic consumers pay when they purchase goods from overseas. If a tariff is set high enough, imports could drop to zero, along with any anticipated tariff (tax) revenue. Many Americans willingly pay 69 cents a pound for bananas; how many would pay $1.40 a pound? Or think big: The base price for a 2024 Porsche Boxster is currently $70,400; would you pay $140,800 for the identical car?

Like income taxes, there are ways to avoid tariffs. Tariffs encourage smuggling, for example, which would likely lead to the hiring and deployment of more customs agents. During colonial times and other high-tariff periods, customs agents often were as abusive as today’s IRS agents.

Tariffs imposed by one country also invite retaliation by others—a tit-for-tat among trading partners known as “countervailing duties.” The problem is: Tariff wars shrink international trade, increasing their harmful economic effects. Many economists are convinced that the Smoot-Hawley Tariff Act of 1930, along with other domestic policy blunders, triggered the Great Depression, or at the very least made it worse.

Despite the harm they cause, tariffs appeal to politicians because it gives them an opportunity to do what they do best: give away goodies to special interests at public expense.

The recipients in this case are domestic manufacturers and suppliers—and especially their unionized employees, who in an open, competitive marketplace often can’t compete with overseas producers of the same or similar products. Tariffs exploit the power of government to raise the costs of those overseas products, giving advantage back to the locals. While domestic producers (and their employees) might gain from protectionism, consumers lose, especially low-income consumers, who can least afford the higher prices.

Asking tariffs to replace income taxes and other federal revenue sources asks the wrong question. The right question is whether government is too large. If the answer is “yes,” tariffs would be a plus if they generate less revenue than other methods of public finance.

Unfortunately, in addition to taxing, Washington has other options for financing its profligate spending, including borrowing. The beast cannot be starved—a mantra of tax reformers during the 1980s—if those options remain on the table.