Taxed to Earn, Taxed to Spend: Why Tariff Reform Belongs in the Economic Conversation
All throughout the 19th century, the United States relied on tariffs as a revenue tool but they were also a key factor that lead to the Industrial Revolution of the early to mid 19th century and then the Gilded age of the late 19th century that was accompanied by tremendous economic growth.[1] It would be a disservice to context to leave out the role that tariffs played during these time while having a discussion on economic impact of tariffs today. The reason for this is that the impact that tariffs have on an economy do not happen in a vacuum – there are several variables that would make them useful or detrimental to our national economy.
In terms of this context, let’s consider a couple things. First of all, tariffs were at the heart of the U.S. economic strategy from the founding of the republic through the early 20th century.[2] Unlike European countries that took their revenue more directly from the people in the form of property and excise taxes, the U.S. was predominantly funded through customs duties.[3] These tariffs were responsible for 90% of U.S. revenue and funded infrastructure as well as nearly all government functions.[4]
The tariff policies instituted during the first half of United States history were protectionist in nature but that doesn’t mean we weren’t importing or developing trading relationships around the world. In fact, Alexander Hamilton argued that tariffs would promote industrialization and self sufficiency until we would have enough production to compete as a major economic force in global trade.[5] In the early days of the country, we simply didn’t manufacture and produce enough and having more manufacturing and production of goods in the U.S. was vital to economic success in the long term. Tariffs protected our manufacturing base allowing us to scale until we could find competitive advantage or at least competitive parity.
It matters to context to also remember that during these era of tariffs, there was an incredibly small regulatory state and there was no taxes on income – in other words, building, innovating, starting a business and everything else that came with pursuing prosperity was more accessible than it is otherwise under a heavy regulatory state.[6] Consider the fact that today, if you want to mow your lawn you can, but if you cross the street and mow your neighbors lawn you can also mow it for free but it your neighbor and you decide on payment for your time and material, the government will step in and require that you fist register a business with the state, purchase a local business license, insurance policy, in states like Hawaii or New Mexico, you might have to acquire a state sales tax permit first, and then of course, you have to disclose how much you earned when your neighbor paid you to mow their lawn because the federal and most state governments will want their cut. When you put all this together, it may seem like to much trouble to start a small business. Imagin now if you didn’t have to pay all these costs. Would your neighbor still pay you to mow their lawn? Probably. And if you did a good job the rest of the street might pay you to mow their laws as well. It might seem like a silly example but the point is that today in America, it can be costly and it becomes incredibly risky to start a business.
How tariff policies were beneficial before the early 1900s.
Well, that depends strongly on a few other factors. The high import duties imposed by the U.S
on imported goods during our early history discouraged foreign goods and favored domestic production.[7] The U.S. regulatory state was very supportive of markets, allowing people to take big risks, innovate, manufacture, and compete wherever a market for a good or service could be found. Policies such as the Tariff of 1828, the Morrill Tariff of 1861, and the McKinley Tariff of 1890 all supported external revenue collection rather than a direct tax on production within the U.S.[8]
In the early days especially, American industry was still in its infant stage. The textile, iron and steel industries for example could not compete globally with the same industries in Europe. Rather than tax our own production, the U.S. took the position of taxing the production from other countries – giving way to greater economic freedom American entrepreneurs needed to create and produce.
These early tariff policies, although protectionist in nature, were necessary to encourage a growing manufacturing base in the U.S. leading not only to participation in the Industrial Revolution but the Gilded Age that put America on the map as an industrial superpower.[9] All of this happened without any one paying a penny in federal income tax.[10]
Is this policy protectionist? Yes, but in more ways than one. Wouldn’t it be better to have those products we rely on for nation security actually made in the U.S. so we wouldn’t be dependent on the politics of other countries for our own security? Here is a small list of industries that we need total self-dependency:
Semiconductors (Microchips) used in weapons systems satellites, aircraft, consumer technology. We mostly depend on Taiwan, South Korea and increasingly China for these. This poses a strong national risk and has been called out in government reports as a vulnerability.[11]
Rare Earth Elements (REEs) used in guided missiles, radar, night vision etc. are clearly vital to our national defense and yet 70% of all rare earth process is done in China, who by the way has threatened to cut these exports as leverage in trade disputes.[12]
Active Pharmaceutical Ingredients (APIs) of which a massive share comes from China and India.[13]
So are the Trump tariffs going to help or hurt?
The Trump tariffs will hurt us if we think new higher tariff policies are the answer to bring back economic growth and prosperity. They won’t. Why? Because like any added cost to doing business, the cost of tariffs ultimately get passed on the consumer as companies raise prices to offset the new cost of exporting to the U.S.[14] I am not inclined to believe that this is President Trump’s position. He has already used tariffs as a negotiating tool with Canada and Mexico to arrange a more favorable border security agreement.
It could be that the president is looking to bring people to the negotiating table to discuss dropping tariffs altogether. Barron’s reported this week that over 50 countries have requested such talks.[15] It could also be that President Trump aims to return our nation to the same economic posture that helped to usher in the prosperity of the late 1800’s and early 1900’s but to do this he would have to get congress to drop the income tax.
If the latter is Presidents Trumps inclination, here is what needs to happen:
Freeze and eliminate bureaucratic power that has gutted and disemboweled our economy and the risk takers and job creators that grow it.
Eliminate the income tax. Completely. I don’t mean give us a flat tax, I’m saying there should be absolutely zero taxes for individuals or corporations.
Reduce the regulations and cost to import raw materials. This will be beneficial to foreign and domestic manufacturers who depend on rubber and other raw materials needed from other areas of the globe.
Let me summarize – tariffs will not be a good idea if they’re just stacked into all the big government we already have. If Americans are forced to burn their dollar from both ends with taxes, either earning the dollar or spending the dollar at higher levels as tariff costs are passed down to the consumer, then that will seriously cramp our economy.
I’m for sure willing to have that discussion if it’s part of a deeper discussion that involves reform and repeal of the IRS and bureaucracy - both of which would be necessary to achieve what the president says is his goal for economic growth.
[1] Douglas A. Irwin, Clashing Over Commerce: A History of US Trade Policy (Chicago: University of Chicago Press, 2017), 278-289.
[2] Ibid., 14-17.
[3] W. Elliot Brownlee, Federal Taxation in America: A Short History, 2nd ed. (Cambridge: Cambridge University Press, 2004), 11.
[4] Nelson W. Aldrich, History of the Tariff: A Series of Lectures (Providence: Knowles, Anthony & Co., 1888), 24.
[5] Alexander Hamilton, “Report on Manufactures,” communicated to the House of Representatives, December 5, 1791.
[6] Brownlee, Federal Taxation America, 21-23.
[7] F.W. Taussig, The Tariff history of the United States, 8th ed. (New York: G.P. Putnam’s Sons, 1931), 144-150.
[8] Ibid., 153-185.
[9] Irwin, Clashing Over Commerce, 302-310.
[10] Brownlee, Federal Taxation in America, 36.
[11] U.S. – China Economic and Security Review Commission, Annual Report to Congress (2020), 295-298.
[12] U.S. Department of Energy, Critical Materials Strategy (Washington, D.C., 2011), 13.
[13] Rosemary Gibson and Janardan Prasad Sigh, China Rx: Exposing the Risk of America’s Dependence on China for Medicine (Washington, D.C.: Prometheus Books, 2018)
[14] Gary Clyde Hufbauer and Euijin Jung, “The Economic Cost of Trump’s Tariffs,” Peterson Institute for International Economics, March 201.
[15] Barron’s, 50 Countries Have Approached Trump to Negotiate Tariffs: Bessent, April 2025.
Great research and thought provoking