Tariffs have played a pivotal role in the economic history of the United States, serving as a major source of government revenue for over a century. In fiscal year 2024, the U.S. government collected $77 billion in tariffs, accounting for approximately 1.5% of all federal revenue. This represents a significant contribution, despite the sharp decline in reliance on tariffs following the reestablishment of federal income tax in 1913. Historically, tariffs such as the McKinley Tariff of 1890 have had profound impacts on the U.S. economy, often sparking debate among policymakers and economists.
President William McKinley, who championed the McKinley Tariff, is credited with making the U.S. prosperous through tariffs and talent. President Donald Trump echoed this sentiment, highlighting tariffs as a tool for economic growth. Under the law, importers are responsible for paying these tariffs, which can be as high as 40% or more on imported goods. David Gantz notes that tariffs are "also very easy to collect," as they are imposed at the border and must be paid to release goods.
"Import tax is collected at the border, and if you don't pay the tax you don't get your good." – David Gantz
Tariffs can potentially benefit U.S. consumers by making it more expensive for companies to import goods, thereby encouraging domestic production and job creation. However, they can also lead to retaliatory measures from other nations. The Smoot-Hawley Tariff Act of 1930 exemplifies this, having raised levies on a broad range of imports during the Great Depression to protect U.S. businesses. Unfortunately, this led to retaliatory tariffs by other countries, exacerbating economic hardships.
"If we raise our tariffs, other countries raise their tariffs," – David Gantz
President Trump has been an ardent supporter of tariffs, imposing new levies on goods imported from Canada, Mexico, and China. For instance, energy products imported from Canada face a 10% tariff under Trump's policies. In retaliation, China imposed additional tariffs of 15% on coal and liquefied natural gas from the U.S., along with extra 10% duties on crude oil, agricultural machinery, and some cars.
Douglas Irwin provides insight into the nuanced impact of tariffs on economic prosperity. While acknowledging that Trump's depiction of tariffs is not entirely inaccurate, Irwin suggests that Trump may exaggerate their role in generating prosperity.
"It's not like [Trump's] painting a completely inaccurate picture." – Douglas Irwin
"But I think he tends to exaggerate the role of the tariff as generating all this prosperity," – Douglas Irwin
The historical context of tariffs reveals their importance in shaping U.S. economic policy. When the United States was founded in the late 18th century, tariffs served as the principal source of government revenue due to the absence of a permanent income tax until 1913.
"When the United States became a country in the late 18th century, tariffs 'were the principal source of government revenue, because we did not have a [permanent] income tax until 1913,'" – David Gantz
"For well over 100 years they were the major source of U.S. government revenues," – David Gantz
Tariffs during that era could reach heights of 40% or more on imported goods.
"Tariffs during that time could be as high as 40% or more on imported goods." – David Gantz
The imposition and collection process is straightforward; import taxes are determined by the declared value of goods by exporters.
"The tax is determined by… the value of the goods declared by the exporters." – David Gantz
The McKinley Tariff of 1890 marked a significant increase in import levies to protect burgeoning American industries, particularly those in New England. This move was aimed at fostering domestic growth and reducing dependency on foreign goods.
"came up with a very detailed list of about $150 billion of U.S. imports that they were going to increase import taxes on," – David Gantz
Despite their historical significance, tariffs remain a controversial topic in modern economic discourse. Advocates argue that they protect nascent industries and promote domestic job creation, while critics warn of potential trade wars and increased costs for consumers.
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