US president-elect Donald Trump has floated a seemingly radical policy idea, although it goes back to the early days of the American nation: financing the Federal government with revenue from tariffs rather than income taxes.
After gaining independence in 1783, under the Articles of Confederation the US federal government had no authority to collect taxes directly. Instead, it was bound to rely upon voluntary contributions from states. With the adoption of the US Constitution in 1789, the federal government was granted the power to levy taxes and tariffs. To generate revenue efficiently and with minimal burden on citizens, the Tariff Act of 1789 put a mandatory 5 percent impost on most imports. This tariff was one of the first actions under the new Constitution, signed into law by President George Washington. By the twentieth century, the economic playbook grew to include income taxes as an additional channel of government revenue alongside tariffs. But the emergence of post-World War institutions, like the General Agreement on Tariffs and Trade, enabled the world to wield free trade as a tool for mutual cooperation and prosperity, effectively diminishing the utility of trade barriers as a rational economic policy.
But while reviving such a policy might appear a bold reimagining of fiscal policy, it is in reality deeply problematic. Trump’s claim that tariffs are a tax on a foreign country misconstrues common economic understanding of the domestic impacts of tariffs, including on employment, economic growth, and national debt, let alone impairing international relationships. This policy, if enacted, would likely result in job losses, lower growth, inflation, larger federal deficits, and other potential side effects. By shifting the tax burden away from income earners — particularly the wealthy — and onto consumers, such a move is likely to disproportionately harm low- and middle-income households. Tariffs are an economic tool in theory but another tax on Americans in practice. Moreover, such a move would antagonize international trade partners, ignite global trade wars, and likely destabilize both the global economy and US national security.
At the heart of this idea is a fundamental misunderstanding of the limitations of tariffs as a revenue source. In 2023, total US imports amounted to $3.1 trillion, which serves as the base for any tariff revenue. In contrast, income taxes — both individual and corporate — generated more than $2 trillion in revenue that year, forming a cornerstone of the federal budget. To match income tax revenues, tariffs would need to be set at implausibly high levels. But as tariff rates rise, the volume of imports would shrink as foreign goods become prohibitively expensive. That diminishing base would make achieving Trump’s $2 trillion revenue goal impossible. Estimates suggest that even with aggressive tariff hikes, such as a 10 percent across-the-board rate and 60 percent tariffs on Chinese goods, revenues would only reach about $225 billion annually – far short of income tax collections. As of last year, tariffs brought in about $80 billion – 2 percent of the US government’s annual total tax income ($4.4 trillion).
Beyond revenue inadequacy, the economic consequences of such a policy would be catastrophic. High tariffs would distort economic activity by incentivizing production in sectors where the US lacks a comparative advantage, such as textiles and furniture, while penalizing sectors where it excels, such as aerospace and technology exports. The consequent inefficiencies would reduce overall economic output, harming both producers and consumers.
Those who claim national security must prevail over exploiting our comparative advantage may counter argue that the price tag of protectionism is well worth the benefits of owning domestic production capabilities in strategic industries, like steel, solar, and semiconductors. The Section 201 tariffs on solar cells and modules were enacted for this very reason, but the results have been devastating on the industry it was intended to safeguard. In a situation where a high-income country, like the US, relies on low-wage manufacturing economies to supply cheaper goods, the more germane debate may not be one where national security is pitted against economic principles. Rather, policymakers should focus on strengthening multilateral trade relationships with like-minded partners to build stronger supply chains while leveraging one another’s unit economics strengths.
Additionally, tariff hikes are guaranteed to provoke retaliatory measures from trade partners, leading to a contraction in US exports. The manufacturing sector, which is heavily reliant on imported components, would face increased costs, reducing its global competitiveness. A recent study projected that even a modest 20 percent tariff targeting East Asia would shrink US GDP by more than 1 percent if trade partners retaliated. Trump’s broader tariff proposals could lead to far worse outcomes, possibly outcomes fitting the definition of stagflation — a combination of stagnant growth and high inflation. In not so distant history, during Trump’s previous presidential term, an expensive tit-for-tat trade war with China and allies in Europe alongside an unfruitful trade deal resurfaced a familiar history lesson on how tariffs can harm both sides and undercut domestic interests. Outgoing President Joe Biden’s continuation of and additions to Trump era tariffs were estimated to reduce GDP by 0.2 percent and terminate 142,000 jobs, effectively making Americans worse off.
The regressive nature of tariffs further underscores the economic and social harms they threaten. Unlike income taxes, which are progressive and adjust based on an individual’s earnings, tariffs act as a de facto consumption tax that disproportionately impacts lower-income households. Poorer families spend a larger share of their income on goods, many of which are imported, and would therefore bear the brunt of higher prices resulting from tariffs. For example, a 50 percent tariff could increase after-tax costs for the bottom quintile of earners by 8.5 percent, while the wealthiest Americans, who save more and consume fewer imported goods, would face relatively minor cost increases. Wealthier households would likely benefit from accompanying income tax cuts, leaving them financially better off, while the middle class and poor would shoulder a heavier tax burden overall.
A tariff-intensive fiscal model would also undermine global financial markets. A sharp increase in tariffs would strengthen the US dollar as foreign central banks cut interest rates and investors bid up dollar-denominated assets in anticipation of trade disruptions. A stronger dollar would make US exports more expensive abroad, reducing their competitiveness and widening the trade deficit rather than shrinking it, as Trump claims. Furthermore, the inflationary effects of tariffs would ripple through the domestic economy, raising prices for consumers and businesses. Unlike other countries, the US doesn’t benefit from lower import prices during currency appreciation because most of its imports are denominated in dollars.
Advocates for tariffs often argue that they can spur an industrial renaissance by protecting domestic industries and creating jobs. But despite the recent rise in the U-3 headline unemployment rate and the triggering of the Sahm Rule, the US economy is near full employment, meaning a shift in resources toward protected sectors would come at the expense of more productive industries. Historical experience and economic studies show that previous rounds of Trump-era tariffs harmed job growth and reduced industrial competitiveness, contradicting the notion that tariffs boost long-term economic vitality. Additionally, the disruptions to global supply chains caused by steep tariffs would likely harm American businesses and consumers far more than they would benefit protected industries.
The Trump administration is attempting to leverage tariffs yet again as an economic tool to assuage political problems. The inefficacy of this approach is none more apparent than when examining government budget management. If tariffs are imposed, retaliatory tariffs and attempts to circumvent the rules makes this policy an unstable source of revenue where unpredictable revenue is a byproduct of inconsistent flows in imports distorted by trade barriers. If foreign governments do not, in fact, pay their dues as the policy intends, then nearly 55 percent, or $192.73 billion, of the government’s budget as of fiscal year 2025 will be at risk. Policymakers will contend with budget cut decisions across critical publicly funded services, military and defense expenses, welfare programs, and national debt interest payments. A policy boomerang back to income tax increases is not entirely unlikely and neither are tax hikes in more predictable areas of taxpayer behavior, like sales taxes, to ultimately re-establish a robust revenue stream, secure national interests, and tame America’s $36 trillion debt problem.
Finally, examining a case study of a country with double digit tariff rates is the most straightforward way to demonstrate the negative effects tariffs have on both the nation and the industries they are meant to protect. According to the latest confirmed data, only emerging economies ranging from low to high middle-income enacted tariffs over 10 percent.
Nigeria is the closest economically comparable country on the basis of the size of its economy relative to the region, abundance in natural resources, and the constitution of its economic productivity by economic sector. Nigeria’s tariff rate was 12.7 percent as of 2021, but in comparison to historical figures, this is just nearly half of what tariff rates were in the 90s. Studies conducted on the impact of tariffs on Nigeria’s economy determine that medium-term protectionism has protected the country’s nascent industries all while sustaining a GDP annual growth rate of approximately three percent year to date. However, the validity of this claim that high tariffs brings economic benefits becomes more dubious when the acceleration of the country’s consumer price index to an unprecedented 825.4 points and a stagnating GDP per capita of $2,460 in 2023 shows a country’s people growing poorer, not richer.
If there is an insatiable desire to embrace tariffs for revenue purposes, why not shift the overarching focus toward ensuring that spending does not exceed revenue? Instead of attempting to impose tariffs to match the roughly $2 trillion taken in by income taxes, why not attempt to force the government to live within the parameters of existing tariff income ($80 billion)? It’s a concept no more ridiculous than jacking tariffs up by disastrous proportions, and would require the strictest prioritization as to where and how public funds are allocated, in turn forcing a more disciplined and transparent evaluation of government expenditures. Such a shift in perspective would not only eviscerate bloated spending overnight, but encourage a healthier, more resilient economic dialogue — one centered on sustainability and accountability, rather than perpetuating the fragile cycle of growing deficits and ballooning debt. By aligning spending with revenue, as opposed to trying to lift revenue to match rising spending, policymakers could foster a more stable and enduring fiscal system.
Nevertheless, the idea of replacing income taxes with tariffs represents a misguided return to a nineteenth century economic model, or perhaps the emergence of a ‘neo-mercantilism.’ In pushing such a policy, the US would undermine its own economic growth, strain international relations, and jeopardize its role as a global economic powerhouse. While bold ideas can sometimes lead to meaningful reform, this one should remain dusty and moldering on the shelves of long-outgrown policies.
Courtesy of AIER.org and originally published here.
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