The Republican Party recently adopted a campaign platform that supports a baseline tariff on all imported goods, which Republican presidential nominee Donald Trump has suggested could be ten percent. Trump has also floated the idea of raising import tariffs significantly higher to generate revenues sufficient to allow the elimination of personal income taxes. However, the Biden administration’s Council of Economic Advisers recently issued a paper asserting that the latter proposal is not viable.
CEA states that import duties have not provided a meaningful share of federal revenue since the early 1900s due to, among other things, a recognition that “it was both fairer for American households and better for businesses, many of whom increasingly imported inputs to aid their domestic production, to raise revenues through a progressive income tax rather than regressive tariffs.” Now, with income taxes and payroll taxes accounting for 85 percent of federal revenues and import duties just two percent, “it is mathematically unlikely that a broad tariff could ever replace the revenue raised by the individual income tax.”
For example, CEA states, given the value of goods imports during fiscal year 2023 ($3.12 trillion), an across-the-board 70 percent tariff would be required to replace the equivalent revenue raised by the individual income tax. However, the real tariff level would likely be even higher because of the changes consumers, producers, and trading partners would likely make in response to the tariff increase.
- Retaliatory tariffs would reduce U.S. exports and subsequently induce transfers of collected duties to impacted U.S. businesses (e.g., in the form of federal subsidies) to offset the loss of export revenues, thus reducing the amount of revenue actually flowing to the federal government.
- Consumption and production patterns are likely to change to avoid the expense of the higher tariffs, thus further reducing expected revenue.
- Severe inflation would result as higher tariffs raise the prices of imported consumption goods and imported inputs.
The CEA concludes that while strategically targeted tariffs remain an important tool to protect U.S. economic and international interests, “the potential for a broad tariff to serve as a major revenue raiser in a modern, global economy is limited.” Moreover, relying more on tariffs to fund the federal government “would likely exacerbate long-running trends in income inequality” and is “highly likely to generate large, negative distortions to the macroeconomy.”
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