PPI: Tariffs Are One Percent of American Tax Revenue, But Once Were Half

Tariffs Are One Percent of American Tax Revenue, But Once Were Half
PPI Trade Fact of the Week March 4, 2009

The Numbers: U.S. government tax revenue:

[see table in the original article]


What They Mean:

How has taxation changed in a century?

For one thing, it is larger. In 1909, William Taft's revenue men collected $604 million in taxes, or about 5 percent of GDP. By comparison, the $2.2 trillion forecast for 2009 will be about 16 percent of GDP, with the extra money going to pay for a long series of 20th-century innovations. In rough chronological order: food-safety inspections, a permanent standing army, Social Security, national highways, Medicare, clean air programs, space exploration, AIDS research, and so on.

For another, it is fairer. Of Taft's $604 million, $301 million came from tariffs, with clothes and food bringing in half of tariff revenue and a quarter of federal money: $84 million from clothes and household linens; $56 million from sugar; $18 million from other foods. As in every age, taxation of clothes and food hits poorer families hardest, as they spend more of their income on necessities; the then Ways and Means Committee Chairman, Tennessean Benton McMillin, called the tariff system a "tax on want."

Woodrow Wilson's creation of the income tax in 1913, joined by the 1916 estate tax, remains the most revolutionary of all American tax reforms. It shrank the tariff system to 5 percent of revenue by 1920, shifted tax payment from poor to rich, and joins the payroll tax Franklin Roosevelt created in 1936 to pay for Social Security and later for Medicare at the heart of the 2009 tax system. The 1040 forms American workers fill out in coming weeks will accordingly raise about 45 percent of the government's money this year; payroll taxes add 40 percent. Another 9 percent comes from corporate taxes, and 1 percent from estate taxes. Taft's tax system survives in vestigial form, with excise taxes raising 3 percent and tariffs 1 percent.

But though taxation generally has changed, the tariff system has not. Now a small part of the tax system, tariffs nonetheless remain the government's most effective tax on want, as it still relies on clothes, shoes, and food for most of its money. Of last year's $26 billion in tariff revenue, clothes brought in $9.5 billion. Shoes added $1.9 billion, about the same as cars; household linens and luggage came in at a billion each. Altogether, low-cost household necessities account for about 6 percent of imports, but raise 60 percent of tariff money; and foods -- mainly orange juice, cheese, and canned tuna -- raise another half billion. Further tilting tariff policy against poor families, the system taxes the cheapest products most heavily: acrylic sweaters are taxed at 32 percent, and cashmeres at 4 percent; women's polyester underwear is taxed at 16 percent, but 0.9 percent on silks; 48 percent tax on cheap sneakers, but 8.5 percent on leather dress shoes; and so on. A triviality for most Americans, the tariff system likely costs single-mother families (whose clothing and food bills are highest relative to income) a week's salary each year, more than any tax but the payroll tax, as it quietly raises prices for life necessities.

Further Reading:

New -- The Internal Revenue Service traces its ancestry to Abraham Lincoln's Civil War revenue policy, which imposed the first income tax and created the excise taxes. Tax forms and advice, for free from the IRS:http://www.irs.gov/individuals/index.html

Old -- The modern Harmonized Tariff System stretches out through 97 chapters and about 11,000 separate products, from live horses to statuary. See chapters 61 and 62 for high clothing tariffs, chapter 27 for zero-tariff energy, chapter 64 for shoes, and chapter 79 for goods made entirely of zinc:http://www.usitc.gov/tata/hts/bychapter/index.htm

And money -- The 2009 Budget's Summary Tables lay out grim tax revenue forecasts for 2009:http://www.whitehouse.gov/omb/budget/

Analysis and ideas -

Next wave -- PPI's Paul Weinstein suggests a reshaping of the tax system:
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=450020&subsecID=900200&contentID=254831

PPI's Ed Gresser looks at tariffs, taxes and the single mom:
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=108&subsecID=900010&contentID=250828

... and, in left-right collaboration with the Heritage Foundation's Daniella Markheim, on shoe tariffs as America's single-worst tax:
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=108&subsecID=900010&contentID=254538

And context -

Tariffs around the world -- Japan, Europe, and Switzerland join America in drawing about 1 percent of revenue from tariffs. Norway, Hong Kong, and Singapore are lower, at zero or essentially zero; Korea is a bit higher at 3 percent. The World Bank's World Development Indicators 2008 finds only a few Sub-Saharan African nations -- Namibia, Lesotho, Swaziland, Cote d'Ivoire -- relying on tariffs for 40 percent or more of tax revenue. Latin American countries are usually below 10 percent, and the normal range for mid-tier developing countries tops out at the 15 percent and 20 percent recorded for India and the Philippines. The WTO's world tariff summary:
http://www.wto.org/english/res_e/publications_e/world_tariff_profiles08_e.htm

Tariffs as employment policy -- Tariffs in the United States are rarely debated as tax policy; the standard arguments revolve around trade flows and employment. But as 2009 passes, tariffs (at least the light-industry tariffs that bring in the most money) have mostly lost their power to affect employment and trade flows, and are reverting instead to their 18th-century origins as excise taxes whose sole function is to raise money. In 1970, the four big high-tariff industries -- clothes, shoes, linens, and luggage -- accounted for 1.7 million out of the 58 million private-sector U.S. jobs. By 1980, they were down to 1.4 million; then 1.0 million in 1990, 0.6 million in 2000, 0.35 million by the end of the textile quota system in 2004, and now 0.22 million out of 112 million private-sector jobs.