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July 2, 2018
Tax History: Trump Touts Tariffs for Revenue — Don't Count on It

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Tariffs do more than regulate trade; they also raise money. Last week, President Trump waxed nostalgic for the days when tariffs paid most of the tab for American government.

“You know, in the old days, when we had tariffs, we didn’t have income tax,” he remarked to a group of congressional lawmakers June 26. “When people wanted to come in — if you look at the days of McKinley and some others, when people wanted to come in, they had to pay a price. When they want to come in and raid our treasury, they had to pay a price. We didn’t have income tax. You didn’t need income tax. We didn’t have debt.”

As a matter of history, Trump’s observation is mostly right. But as a matter of contemporary policy, it’s also irrelevant. The world has changed too much over the past century to make this comparison useful. Moreover, if we widen the historical lens just a bit, the story of McKinley-era tariffs is not encouraging for anyone hoping to make tariffs great again — at least as a source of federal revenue.

Persistent Debt
Before diving into the tariff debate, let’s look at Trump’s claim about federal debt — specifically, its ostensible absence in the late 19th century. As it happens, the federal government was not debt free during the era of President William McKinley — or any other period, for that matter, save for a fleeting moment during Andrew Jackson’s presidency.

“Public debt is a fact of life,” the Treasury Department observes on its debt-centric website. “The U.S. has had debt since its inception.”

In January 1835 federal debt held by the public fell to zero. But it returned almost immediately, and while fluctuating dramatically over the years, it has generally increased over time. In December 1899, almost three years into McKinley’s presidency, federal debt stood at 7.5 percent of GDP. Modest, to be sure, but not nothing.

Trump is right that Americans were paying no income tax during the McKinley years (thanks to the Supreme Court, which had invalidated the income tax law of 1894). But they were certainly paying other kinds of non-tariff, internal taxes. Indeed, while tariffs raised slightly more than 40 percent of total revenue in 1900, various internal taxes (chiefly excises) raised about 52 percent. In the three decades after the Civil War — salad days for fans of a high tariff — the amount of total revenue coming from internal taxes ranged from a low of 32 percent to a high of 54 percent.

Unnoted by Trump but still relevant, both the tariffs and the excises of that period were highly regressive. To be sure, some of the excises were “optional,” in the sense that they applied to non-necessities like alcohol and tobacco; that helped make them politically tolerable. But the overall burden of the federal revenue system at the dawn of the 20th century was distinctly regressive — a fact that did not escape the notice of most Democrats and more than a few Republicans.

Inapt Comparison
Still, when narrowly construed, Trump’s observation about tariff revenues is mostly defensible. To the extent that Trump intended the comparison to shed light on current debates over tariff policy, however, it was almost entirely irrelevant. (Trump was characteristically vague about the implications of his comment, but because he made it during a discussion of current tariffs, it seems fair to treat it as more than a passing observation.)

Yes, tariffs raised a large (although not dominant) share of federal revenue during the McKinley era. But that has no bearing on their capacity to play a similar fiscal role in the Trump years. Total federal spending in 1901 was $525 million; in 2018, it will clock in at just above $4 trillion. As a share of GDP, that increase is no less impressive; expenditures rose from 2.7 percent of GDP in 1900 to 24 percent of GDP in 2012, according to helpful estimates from the Tax Foundation. (It’s worth noting that the distinction between gross national product and GDP is not entirely irrelevant in this discussion, but it does not change the principal argument.)

It’s not useful to compare tariff revenues in 1900 and tariff revenues today without taking note of the vastly different governments they help fund. The mammoth federal government of 2018 has almost nothing in common with its relatively tiny predecessor of 1900. If that fact simply underscores your conviction that government is too big, keep in mind that much of the increase has come from military spending in addition to popular entitlement programs.

Returning the federal government to a size that McKinley might recognize is unrealistic — as is any hope of funding today’s government with McKinley-style tariffs.

Tariffs Were Never Enough
The problem of scale is serious. But there’s an even bigger issue with Trump’s tariff nostalgia. Even during the McKinley years, political leaders understood the limits of using tariffs to fund the national government. There were two major problems, one political and one fiscal.

First, as noted above, the regressive burden of tariff duties made them deeply and broadly unpopular with taxpayers of modest means. But the conflict was not simply about class; it was also sectional. In general, import duties hurt the economies of Southern and Western states, which relied heavily on export-dependent agriculture, while helping Northern states where manufacturing was concentrated.

Class and sectional conflict over the tariff was evident throughout the latter decades of the 19th century, pitting high-tariff Republicans against low-tariff Democrats. By 1900, however, even many Republicans recognized that high tariffs were unsustainable, at least unless they were supplemented by some sort of compensating revenue source—hence, the arrival of the income tax.

McKinley may have won his campaign for the presidency on a tariff-not-taxes platform in 1896, but by 1909, his GOP successor, President William H. Taft, was endorsing an income tax amendment to the Constitution.

Politics, however, was not the only problem facing champions of a tariff-based revenue system. The bigger hurdle was a nuts-and-bolts question of revenue adequacy, made repeatedly evident in a series of wars. The problem first surfaced during the War of 1812, and then became blindingly obvious during the Civil War. In both cases, Congress was forced to impose internal taxes to help preserve the nation’s credit.

Even the relatively modest Spanish-American War forced lawmakers to look beyond tariff duties; the 1898 conflict with Spain prompted Congress to enact an array of new excises, which together raised the percentage of total revenue coming from internal taxes from 42 percent to 52 percent.

World War I put the nail in the coffin of a tariff-based revenue system, underscoring both its vulnerability to trade disruptions and its inadequacy in the face of rising expenditures. Between 1917 and 1918, tariff revenues as a share of total revenue fell from 21 percent to just 5 percent. They recovered somewhat after the war, but they never again played a leading role in funding the federal government — not even during the small government/high tariff era of the 1920s.

Indeed, the great Republican revenue debate of the 1920s was not about how lawmakers might return tariffs to their pride of place in the nation’s fiscal structure. Rather, GOP leaders were more concerned with determining which internal taxes should be used to replace those disappearing tariff dollars. Yes, Republicans remained the party of high tariffs through at least the early 1930s, but their focus was on tariffs as a tool for managing trade, not raising revenue.

Bad Use of History
History is useful for contemporary policy formulation, but it’s not the place to look for off-the-shelf solutions to contemporary problems. Just because something worked in the past doesn’t mean that it will work now. Indeed, in most cases, old solutions do a poor job with new problems. That’s why facile historical comparisons are useless and often misleading.

The history of the tariff, especially as a revenue source, is not a story of lost glory waiting to be reclaimed. Rather, it’s a tale of gradual obsolescence, with a once-functional tool gradually succumbing to broader political and economic changes.