Can High Tariffs Fund the Federal Government?

Tariffs, or taxes on imports, were once one of the main sources of government revenue throughout the world, including the United States. They were easy to collect: Simply post customs officers in ports and on major highways, and count the cash.

In the first decades of the United States’ existence, customs accounted for over 90% of the federal government’s revenue. Following the Civil War, the federal government relied more on different excise taxes, but tariffs still accounted for around a half of all federal revenue, with average tariff rates on imports hovering at around 25-30%.

The fiscal importance of tariffs declined with the onset of World War I. The need to radically increase military spending meant that the federal government had to resort to other, larger sources of taxation, primarily the federal income tax created in 1913. Still, the post-WWI period saw some large increases in tariffs, such as the Fordney-McCumber tariff of 1922, which increased the average tariff rate on all imports from 6.4% in 1920 to 15.2% in 1923 and increased the tariff revenue by almost 60%. However, customs’ share in federal government revenue only increased from 4.8% to 14.6% over the same period, signaling a decreasing importance of this source of tax revenue. The infamous Smoot-Hawley tariff of 1930, which brought the average tariff rate from 13.5% in 1929 to 19.8% in 1933, actually failed to increase tax revenue or its share in total government receipts, as international trade volumes collapsed during the Great Depression, in part due to higher tariffs worldwide.

Following World War II, a liberalization of international trade and a corresponding reduction in tariffs meant that their share of federal revenue continued to decrease. In the fiscal year 2024, the federal government collected $77 billion in customs duties with the average tariff rate on imports of 2.4%, which accounted for 1.6% of all government receipts.

Bottom Line: Could tariffs once again be a major source of government revenue? That seems unlikely. In fiscal year 2024, the United States imported goods worth $3.2 trillion, compared to the federal government revenue of $4.9 trillion. Although a significant increase in tariffs could generate annual tax revenue of up to a few hundred billion dollars, high tariffs would also discourage international trade, eroding trade volumes, tax bases and customs receipts. Given the current size of the federal budget, even the most restrictive tariffs would struggle to cover more than 10% of government spending. In addition, high tariffs would also have some undesirable side effects. First, most U.S. imports consist of intermediate goods used as parts or components to produce other products, so the impact of tariffs would spill over into many sectors of the economy. Second, the tariffs would most heavily fall on low-income households, which spend a significant share of their income on inexpensive imported goods.