📈  Chart of the Week 2/2/2025
By Michael Allison, CFA
This week’s Chart is very interesting to me in light of the recent discussion of tariffs, or potential tariffs by the Trump administration. It shows the mix shift in the sources of federal government receipts over the course our country’s history.
For much of America’s early history, tariffs were the workhorse of federal revenue. From 1790 through the late 19th century, tariffs routinely accounted for 80-90% of federal receipts. This made sense in an era when the federal government was smaller, economic activity was concentrated around trade, and administratively, collecting tariffs at a few key ports was far simpler than tracking individual income across a sprawling, agrarian nation.
The pivot away from tariffs began with the introduction of the federal income tax. Although the first income tax appeared during the Civil War to fund the Union war effort, it was temporary. The real shift came with the ratification of the 16th Amendment in 1913, which gave Congress the constitutional authority to levy income taxes without apportioning them among the states. Almost overnight, income taxes surged as a primary revenue source, especially as corporate and individual tax rates rose to fund World War I and, later, the New Deal and World War II.
By the mid-20th century, tariffs had dwindled to a rounding error in the federal budget, replaced by the broad, reliable base of income taxes. This shift reflected not just fiscal needs but also an ideological embrace of free trade, particularly in the post-World War II era, as the U.S. championed global economic integration.
However, tariffs have made a political comeback during the Trump administration, framed less as a revenue tool and more as leverage in trade and other negotiations.
But could tariffs ever again materially fund the federal government? Not likely. For tariffs to rival income taxes, they’d need to be massive—think double-digit rates on a broad swath of imports. Given that U.S. imports totaled around $3 trillion in recent years, even a 10% across-the-board tariff would raise just $300 billion annually.
That sounds substantial until you realize federal receipts exceed $4 trillion a year. In other words, tariffs could supplement, but never supplant, income taxes without causing significant global economic disruption.
Source: Council of Economic Advisors, Tax Foundation, Federal Reserve Economic Data (FRED).
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