
Within a decade, however, both elements of the tax-swap bargain collapsed. Congress quickly discovered that income taxes yielded far more revenue than the old tariff system they replaced. To pay for U.S. entry into World War I, they jacked the top marginal rate up to 77 percent in 1918. Attempts to bring the income tax under control succeeded briefly in the 1920s, but President Hoover raised the top rate to 63 percent and Franklin Roosevelt raised it to 79 percent. Under FDR, Congress also reduced the exemption threshold for lower-income earners. What started as a low “class tax”—a tax on only very high-income earners in 1913—became, by 1942, a “mass tax,” a broad-based tax on most American families.
When Congress flipped back to the protectionist-dominated Republican Party in 1920, it restored the average tariff rate to 38 percent. In 1930, Congress again opened its doors to industries seeking government protection from the stock market crash. Its intended “stimulus” became the notorious Smoot-Hawley Tariff, which jacked average rates up to 59 percent and instigated a global trade war.
The damages from the collapse of this original tax swap took decades to disentangle. Congress recognized its error and ceded its trade policy oversight to the State Department in 1934 as an emergency measure to bypass the tariff system. The liberalization of the global economy since World War II came about through treaties and trade agreements. These measures remain fragile, and they depend on an executive branch that continues to honor international agreements. If Trump abandons our free trade obligations with other countries, the Smoot-Hawley schedule still remains on the books.
This is from David R. Henderson and Phillip W. Magness, “Don’t Substitute Tariffs for Income Taxes: You’ll Get Both,” National Review, January 28, 2025.
Read the whole thing, which is not long.
READER COMMENTS
Scott Sumner
Feb 3 2025 at 12:32pm
Good points. I worry that tariffs might eventually lead to a VAT being added to the income tax.
Andrew_FL
Feb 3 2025 at 12:53pm
I also worry we will get a VAT, but moreso because of Social Security and Medicare. I don’t see how we can spend like a European country without the European tax system.
Alan Goldhammer
Feb 4 2025 at 4:33pm
I’m willing to accept a VAT in return for lower marginal tax rates and a markedly lower corporate tax rate. TR Reid had a very good book on this back about 2018. Let’s get rid of all the tax preferences, every single one of them. There is a good model for this HERE courtesy of the Penn Wharton Budget Model group. For me as one of the lefties who post here, this one makes a lot of sense. Too bad Mark Rowan was not picked as Treasury Secretary, he would have been far better than the guy in the office right now.
Thomas L Hutcheson
Feb 5 2025 at 10:08am
A VAT should replace the tax on wage income for financing social insurance and a consumption tax should replace the corporate and personal income taxes.
I’ve never seen any good arguments for taxing income instead of consumption. Has anyone reading this?
Craig
Feb 3 2025 at 1:32pm
“Don’t Substitute Tariffs for Income Taxes: You’ll Get Both”
You could be right of course but some pushback, today we already have both. So I’d suggest if your warning is true why don’t we already have ‘both’ (in the sense of say a 25% across the board uniform tariff)
Killing the income tax? For tariffs? Honestly makes me absolutely salivate.
On top of which the income tax makes every transaction such that it is recorded somewhere and slowly and surely the surveillance state grows to ensure one complies with all of these taxes. Latest iteration the BOIR filing. And if I pay somebody it might trigger a 1099 reporting requirmwent and when I employed people I became a deputized tax agent filing reports and withholding funds (ADP did that for me of course). Its ridiculous, but for the fact its constitutional in an amendment it clearly violates the IV Amendment.
Tariffs? To enforce that, suddenly the government will get very interested in policing the border.
Jon Murphy
Feb 3 2025 at 2:12pm
Why? To get that level of revenue, you’d need a tariff that is insanely high. It’d destroy the economy more than an income tax!
robc
Feb 3 2025 at 3:36pm
I support a single land tax. It is impossible to get the same level of revenue with it, which is a (small) part of the reason I support it.
Craig
Feb 3 2025 at 4:27pm
“To get that level of revenue” <– If I can’t eliminate the federal government, perhaps I would have to settle on enfeebling it, but I digress, I support this tradeoff in no small part because the tariff is fundamentally incapable of generating current revenue.
Jon Murphy
Feb 3 2025 at 4:34pm
Which would be great…if the government was actually fiscally responsible. But I have no reason to think their behavior would change.
Jose Pablo
Feb 3 2025 at 5:37pm
you’d need a tariff that is insanely high
Tariffs are undoubtedly a tax that follows the Laffer curve. They are specifically designed to shrink their tax base, which inherently limits the maximum revenue they can generate.
Even with a 100% tariff—which I believe Trump sees as the highest possible rate—this fundamental constraint still applies.
Mactoul
Feb 4 2025 at 2:26am
But Trump or at least Musk is also committed to reducing the federal government and bureaucracy. Surely this calls for some support here. To make bureaucrats uncomfortable is being openly spoke. Who could have foreseen such a Randian statement?
Alan Goldhammer
Feb 5 2025 at 8:50am
Who could have foreseen such a Randian statement?
Never underestimate the ignorance of the American public where 99.99% don’t even know who Ayn Rand was or even care. I like the Waffle House surcharge on eggs as a way of highlighting the inflationary cost of that staple even though it might be transitory. I wonder if the President is concerned about the price of the Egg McMuffin. Maybe he should take some time out from his busy day and go make a couple at the local McDonalds (there are a couple that are a short golf cart ride away as he doesn’t walk).