April 08, 2025

By Michael Mix, Managing Director and Portfolio Manager

 

“Tariff” is a term closely associated with President Donald Trump, but the history of tariffs in the U.S. economy dates back to the days of George Washington. And while the tariff trail is easy to track, what is far less clear is how the 47th president will apply this long-time trade tool and its potential impact.

Tariffs were a significant source of federal revenue through the early 20^th century but eventually proved insufficient to fund the modern U.S. government; personal and corporate taxes now carry most of the burden.

Trump appears to think that, like President McKinley in the late 1890s, tariffs can be ramped up to drive significant federal revenue and generate economic growth. Others think that in today’s far more global economy Trump’s plans will lead to inflation, beggar-thy-neighbor tariff retaliation from U.S. trading partners, international animosity and a weaker U.S. economy.

As tariffs are under greater consideration, Conning examines their historical significance and explores potential implications of new tariff measures.

A Historical Revenue Source

Congress authorized the federal government to levy taxes and tariffs in 1789, and that year President Washington signed the “Tariff of 1789” bill that imposed a tariff of about 5% on nearly all imported goods.

Tariffs were a good fit for our then mostly agrarian economy in which individual income was harder to measure than goods being offloaded at ports. By 1860, tariff revenues accounted for over 90% of federal revenues (see Figure 1). 

However, a growing U.S. government required more revenue, and as ever-higher tariffs reduced imports, an income tax was seen as a way to broaden the payer base and force higher-income individuals to pay a larger share of government expenses. A 1913 constitutional amendment created the U.S. income tax and the Underwood Tariff Act of that year lowered tariff rates from about 40% to 25%. Tariff revenues dropped sharply and by 1920 accounted for approximately 5% of federal revenues (also illustrated in Figure 1).

Click below to continue reading Conning’s Viewpoint, “Tariffs, Trade and Taxes in the Time of Trump."

 

 

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