Tariffs Can’t Replace the Income Tax

The 1870s were a golden age for tax policy—at least if you ask Donald Trump. 

“The United States from 1870 to 1913 had all tariffs, and that was the richest period in the history of the United States, relatively speaking,” he said in a speech to the House Republican conference earlier this year.¹ Speaking after the implementation of broad reciprocal tariffs in April, Trump stated that “our country was the strongest from 1870 to 1913. You know why? It was all tariff based. We had no income tax.”²

It’s true that the US had tariffs, and no income tax, in the late 1800s. It’s worth remembering what else the US didn’t have: Medicaid, federal assistance for primary education, the Environmental Protection Agency, the National Science Foundation, financial support for families struggling to pay the costs of food, utilities, and housing, and so much more. 

In the absence of an income tax, the fiscal system of the 1890s relied on tariffs on a wide range of goods, including at various times basic essentials such as wool, cotton, and sugar (plus excise taxes on alcohol and tobacco).³ As well as raising far less revenue, the system put a greater share of the burden of financing the federal government on low- and middle-income people in the form of increased costs—and increased rather than reduced inequality.

In 1894, Congress enacted an income tax on high-income individuals and profitable corporations, with the intention of “shift[ing] the [tax] burden from the less wealthy to the wealthy.”⁴ But in 1895, the Supreme Court struck down that income tax as unconstitutional, a decision that the dissenting justices ridiculed as “nothing less than a surrender of the taxing power to the moneyed class.”⁵ It would be nearly another two decades, after the 16th Amendment to the Constitution effectively overruled the court’s decision, before the federal government would again enact an income tax in 1913. 

More than a century later, the income tax raises more than half of all US federal revenue and is one of the most progressive parts of the tax code.⁶ Revenue raised by the income tax enabled major public investments such as Medicaid and primary education and shored up the dedicated revenue streams for other vital resources such as the federal highway system, Medicare, Social Security, and unemployment insurance.⁷ Despite these achievements, the income tax has become one of this century’s key battlegrounds between progress and regress. 

President George W. Bush’s tax cuts in the 2000s shrank the income tax and made it less progressive, and President Trump’s 2017 tax cuts went after both individual and corporate income taxes. Both cut the estate tax, and both increased income, wealth, and racial inequality.⁸ Trump’s new twist is to ultimately swap the income tax for tariffs—and in gradual steps rather than all at once. But it leads to the same place of gutting the government and having workers and families pay the price. 

It should come as no surprise that tariffs are an inadequate and shaky revenue source to replace the income tax. Targeted tariffs can sometimes be a tool for advancing national security and supply chain goals, and excise taxes such as nicotine and carbon taxes can correct for costs inflicted by the market. But the more successful targeted tariffs are at changing behavior—by reducing imports and purchases of goods and services subject to the tariff—the less revenue they will raise. Even massive across-the-board tariffs would replace only about 40 percent of income tax revenue.⁹ In the process, they would increase inequality: The burden of taxation would shift to low- and middle-income workers and families, simply because necessities consume a greater share of their incomes than they do for the wealthy. 

The core goal of moving from income taxes to tariffs isn’t to fund the government but to shrink it, perhaps small enough to “drown it in a bathtub,” as some anti-tax activists have long dreamed.¹⁰ In the 1870s that Trump looks back on wistfully, all of government spending was 2–3 percent of GDP, or about one-tenth the size of today.¹¹

Trump and his allies know it would be difficult to eliminate the income tax in one swoop. Instead, they appear ready to play a long, incremental game. They are promising, for instance, to exempt various kinds of income from taxation in ways that try to buy off various political constituencies. Trump has already proposed exempting from the income tax cryptocurrency capital gains, tips, overtime, and more, in addition to deep outright cuts in the corporate tax rate, the estate tax, and individual income taxes.¹² 

But dialing the clock back to the 1870s hour by hour is just as harmful as doing it all at once.

Instead, we need a fiscal long game for a stronger income tax, supplemented with new revenue sources. That is the fiscal foundation needed to achieve higher levels of public goods, lower levels of inequality, fewer opportunities for cronyism and corruption, and broadly shared prosperity.