In history class, I distinctly remember talking about tariffs. It’s usually something you learn about first especially in American history. The American revolutionaries were unhappy with the tariffs being put on their exports by the British. This is what the revolution started over to a degree. You might not remember what a tariff or tariffs are. The definition of tariff is: tax or duty to be paid on particular class of imports and exports. In other words, a tariff is a tax on imported or exported goods. Every country typically imports and exports goods and services. The goods that are typically exported are those in surplus in that country. The goods that are imported are those which are either cheaper or not in supply in that country. Tariffs have been long a part of the American economy. Tariffs have even long been a part of the government.
In the post, I’m going to first review why tariffs were such an integral part of our nation’s history. Then I want to discuss how we went from a tariff based revenue system to the current system of income tax. After that I want to put forward an idea that seems to have been lost in time. The tariff in the United States was after the revolution used to fund the government. Almost as the sole source of income. Alexander Hamilton had designed the whole system. He set up and got funding for a series of lighthouses and inspection clerks up and down the Atlantic coast. There clerks were to inspect all incoming and outgoing goods. They also had to determine the tariff on each item. They were called Customs Officers. Hamilton became the Secretary of the Treasury and further install his government revenue engine on the back of the Tariff act of 1789. The act is simply explained in its first section:
“Whereas it is necessary for that support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures, that duties be laid on goods, wares and merchandise:” — Section 1; Tariff Act of 1789
The tariff is essentially an indirect tax on goods coming and going out of the country. Hamilton saw the huge war debt from the revolution and knew that the US government had no source of income. There was no income tax or anything like that. (Wouldn’t come til 1912, I’ll explain later) So Hamilton being the genius he was, decided to convince President Washington to take out a loan and install the customs system (Tariff Act). He argued in one of many papers that America need to build credit. If you have a credit card or student loans like me then you know that building credit is paying off your debt. Hamilton’s system allowed the US government build credit, in fact one of the best credit ratings in the world for many years. Not everyone was on board with the plan. People like Thomas Jefferson and James Madison. However, they couldn’t stop Hamilton’s plan because war debt was owed to France and other creditors. The US didn’t have many options at that time.
So tariffs were the main source of income from 1789 to about 1911. The US government added liquor taxes, postage taxes, corporate taxes, tobacco taxes and the Panama canal as other sources of revenue. In 1912, tariffs made up about 20 percent of the income of the government. In 1913, the government passed a law that changed the source of US government forever. The law called the Revenue Act of 1913 or the Underwood Act was passed to impose an income tax and lower tariff rates from 40 to 25 percent. This marked the end of tariffs making up a significant portion of US government income. This act was possible by the newly passed 16th amendment. (For another post, the 16th allows for income tax under the direct taxation requirements in the constitution, which was previously ruled unconstitutional by the Supreme Court) Since 1913, our tariff income has only been about 1 percent of revenue. This figure is according to this website here, it also breaks down the tariff income based on type of good. All in all, 2013 saw about 30 billion dollars of income. This is compared to 311 million in 1912. In 2016 dollars, that tariff income would be about 7 billion. Obviously, since the early 1900s the conditions of the economy and our government budget has exploded.
You might be asking yourself but isn’t 7 billion dollars in 2016 or 2017 (Happy New Year) like chump change for the US government whose budget is around 2 or 3 trillion dollars. My answer would be yes. However, if you look at these numbers in terms of percentage and scale then you can imagine a viable tariff system for 2017. Remember tariffs made up 20 percent of the 1912 budget. Now tariffs make up 1.7 percent approximately in 2013. So lets say for argument that our budget under President Trump is 3 trillion. Trump decides in order to cut taxes he needs to increase revenues. (In some alternate logical world) So Trump orders an increase on tariffs. His cabinet comes up with about 600 billion in tariffs or about 20 percent of the budget. I think that 600 billion dollars is a pretty nice chunk of change. Imagine what that could pay for? Social Security? War? Food Stamps? But what would those tariffs look like?
Obviously to understand the role of tariffs, you need have an understanding of the global economy. I think its obvious that the world is complex. A significant part of an economy is trade. The trade between two countries or more is essential because it allows scarce resources to be spread. It also widens the markets for such goods. Its been in the news a lot lately about all the trade agreements. These agreements in a basic way remove the barriers and allow trade to flow freely. One of those barriers can be tariffs. There are two types of tariffs. Import tariffs are a tax on goods that imported from other countries. Import tariffs are often seen as protective to a country economy. This was the primary tariff beginning in 1789 because it (artificially) protected the US economy. Export tariffs are a tax on goods being exported to other countries. Export tariffs are typically seen as way to limit the exports of a certain good. For example, if oil became very scarce then the US might want to put a high export tariff to help curb the sale of oil abroad and keep here in the US. (An export tariff would increase the price of oil outside the US)
I believe that introducing a new tax plan including tariffs might be beneficial to the US. I think you have to carefully consider what to put tariffs on and what kind of tariffs. But its definitely a source revenue that is not used as it once was. Now we rely on income tax so heavily, its crushing many Americans. Its a liberal fallacy to think that you can tax your way out of poverty. Its an irony. Taxes create more poverty than eliminate. I think I need to do another post on the subject of trade because this post is merely just one part of it. I need to do some further research before I offer any specifics on what a tariff revenue might look like. So I will leave this post as to be continued, my next post will try to figure out how to successfully incorporate tariffs into a free trade world.
Thanks for reading!