Donald Trump rocked Washington last week with his proposal to fund the federal government solely from tariffs. Until roughly a century ago, tariffs composed the vast majority of national revenue, but today income and business taxes make up the lion’s share. Can Uncle Sam go back?
Taxing imports to pay Washington’s bills has a certain political appeal. Domestic taxes, often progressive in nature, are unpopular. Better to tax foreigners if we can.
The problem with this thinking, however, is that non-Americans largely don’t pay for tariffs in the end; U.S. households and businesses do, in the form of higher prices and reduced trade. The former president is relying on one of the oldest fallacies of “folk economics.” Supply and demand, not statutes or executive orders, determine who really pays a tax.
Yet, there’s an even bigger flaw in Trump’s plan. Government spending as a share of GDP is approximately 22 percent. Import spending as a share of GDP is 14 percent. To fully cover federal outlays, we would need to find a way to generate tariff revenue in excess of 150 percent of what we spend on all imports. Even if we wanted to cover current receipts only—remember, we run perpetual deficits—we would still have to squeeze an additional 100 percent of revenue out of current imports. There’s no way to make the numbers work.
The figures look even starker in dollar terms. In fiscal year 2024, the national government has taken in $3.29 trillion. Tariffs account for 1.5 percent of that, at $49 billion, meaning that we would need to scale up customs duties by a factor of nearly 70.
The commentariat has already recognized several of these difficulties. Even so, they understate the problem. At Forbes, Andrew Leahey claims we would need an 85 percent tariff rate to make Trump’s plan work. But this ignores the secondary effects of Americans switching to domestic goods when foreign goods become more expensive. In reality, tariff rates that high would generate little revenue, precisely because households and businesses would alter their consumption and production patterns.
If this argument sounds familiar, it’s because it’s another version of the well-known relationship between tax rates and tax revenues: past a certain point, you can’t generate more money by raising rates. This is because the additional gain from a higher tax rate winds up offset by reductions in the activity that the tax discourages. Tax rates can even get so high that raising them further actually reduces intake. An 85 percent tariff rate would not generate the revenue Leahey assumes because imports would become too expensive compared with domestic equivalents. (Those are subject to other taxes such as sales taxes, but Washington doesn’t get that money; state and local governments do.)
At The American Conservative, Mason Stallings argues that high tariffs would “provide greater incentives to reshore manufacturing in the United States.” If he has in mind the substitution effect, this is correct. But he overlooks how many imports are already used as inputs for domestic production. Demand for complementary inputs, most notably labor, would almost certainly take a hit. That means fewer jobs and lower wages. Furthermore, like all taxes, tariffs raise prices without correspondingly boosting incomes, meaning American households and businesses would feel poorer because of diminished purchasing power. Tariffs are a source of economic malaise, not strength.
It’s often said about Trump that we should take him “seriously, not literally.” Doing so suggests a probable conclusion: he doesn’t care about the size and sources of federal revenue. His remarks were merely intended to cause a ruckus (they have) and strengthen his electoral coalition (they will). So be it. Though economics has little to say about how to win a presidential election, it has much to tell us about the consequences of a president’s proposed policies. Even if Trump meant nothing more than imposing a more restrictionist trade regime, that, too, will create real economic costs for Americans. We should be honest about those costs.
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