Could Tariffs Replace the Income Tax? Lessons From U.S. History

Robert Goulder and Joseph Thorndike of Tax Notes explore how America’s first tariffs shaped the nation’s fiscal policy and set the stage for today’s federal income tax.

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Credits
Hosts: Robert Goulder, Joseph Thorndike
Executive Producer: Paige Jones
Producer: Jordan Parrish
Editors: Christopher Trigo, Carolyn Kuimelis

Transcript

SPEAKER_01 0:00

What does the Constitution say? Article one. The Constitution says that only Congress has the power to levy tariffs, not the executive or any other kind of tax. Okay, then we'll next question level.

SPEAKER_00 0:17

Hello and welcome to the podcast. I'm your host, Bob Goulder, contributing editor with Tax Notes. Joining me is Joe Thorndyke, the tax history guy over at Tax Notes. Joe runs our tax history project. That's where, among other things, you'll find timelines of major tax events and a impressive catalog of all publicly available presidential tax returns. Can't find that anywhere else. Now, I've been reading all of your writings. Okay. That's scary. That's scary. But you're a very impressive author, very accomplished, but sometimes you raise a point that I just don't get intuitively. I see the words, but I don't make the connection. You said that tariffs made the income tax. And and today there's a whole lot of people saying they don't like the income tax. Let's give us tariffs. You're saying it's almost like the reverse causation. We have the income tax today because we had high tariffs in yesterday. You gotta work me through this. All right.

SPEAKER_01 1:17

Well I think the key word there was high in high tariffs. So here's what I would say. People today, including the president of the United States, of course, foremost among people who like tariffs, say, hey, you know what would be great if we could get tariffs to be big enough, high enough, steep enough, heavy enough that we could actually get rid of this income tax entirely. Yeah, because we have so much money from tariffs that we wouldn't even need an income tax. We wouldn't need a corporate tax, we wouldn't need an individual tax. We're gonna replace it all with tariffs.

SPEAKER_00 1:45

Abolish IRS gets everyone's attention.

SPEAKER_01 1:47

So here's the problem. We used to have exactly that kind of tariff that was providing most of the federal revenue for a long time. So uh there were other taxes too. But in the late 19th century, if we just dial back uh a little bit to when, you know, the time when the income tax is about to be birthed, we have a high tariff, and it's providing, you know, roughly 50% of federal revenue. Um, and the way that they do that is they have very high rates on a whole lot of things that get imported into the country. So lots of tariffs that very high rates, and people hated it. People really hated it because they were aggressive, right? So tariffs are consumption taxes, they're disproportionately hard to pay for poorer people rather than richer people. So that's a lot of people, right? So there are a lot of people complaining like, I hate these tariffs because they're hard for me to pay. I think rich people should be paying more taxes. That we need something that'll hit them as hard as this tariff hits me. And they're like, let's have an income tax, right? That's where the income tax comes from. People are so unhappy with the tariff that they create an income tax. So all I'm saying is this if what your hope is today that we could have a really high tariff that would mean, you know, we didn't have to raise money in any other way, you might find that that just reignites some love for the income taxes, strange as that may seem.

SPEAKER_00 3:01

So if you dial back the clock, as you say, to the early republic, how did they raise taxes? You had internal taxes and external taxes. And what were people used to? As a colony, right? We were paying a lot of tariffs.

SPEAKER_01 3:13

Right. In the very early days of the republic, you know, right after the country is uh established by the Constitution and Congress starts to meet for the first time. The second law that Congress ever passes is a tariff law to try to raise some money to pay the bills of this new government. And and they impose a bunch of tariffs uh because these are believed to be tolerable to the public, right? That Americans understand, okay, it's kind of normal to tax goods as they're imported into the country. Um, it's also kind of easy because all we got to do is erect customs houses in these ports of entry. I think there are like 39 ports of entry or something like that, um, which is a limited number of places, right? So we can and we can hire a bunch of customs officers in those places to do the job, as opposed to other kinds of taxes, like say an excise tax, which might be collected in every one of the states, right? And then you got to have tax collectors out there looking for whatever this tax good is, like say that it's whiskey. Um, then you'd have to be out there looking for stills in every place that you know creates whiskey around the country.

SPEAKER_00 4:16

It's a big yeah, that's problematic.

SPEAKER_01 4:17

Right. So tariffs are much easier, uh, they're well understood, they're well tolerated. So they rely heavily on tariffs. And in these early decades, uh tariffs are providing like 90% of federal revenue. So they do have other taxes. They have a tax on alcohol. Uh, they have a tax, they have taxes on kinds, certain kinds of tobacco. Eventually, they tax carriages as well, and a bunch of other things. Like a horse and buggy. Like a horse and buggy, because mostly that's a rich person's tax. Oh, so it's like a luxury tax, and it's a little bit like a luxury tax. So they have these other taxes, these are internal taxes as opposed to external taxes like a like a tariff. But they're only raising like 10% those internal taxes. So we rely very heavily on not tariffs in the early years. And those excise taxes are unpopular, and like that whiskey tax in particular prompts a rebellion in western Pennsylvania among the farmers who are growing the products that are then turned into whiskey. Was George Washington involved in that, by the way? A domestic insurrection? Yes. Apparently, he didn't get very far. Washington was kind of old at this point.

SPEAKER_02 5:24

Yeah.

SPEAKER_01 5:25

But uh he did for at least a while lead the the forces into battle. There was no real battle.

SPEAKER_00 5:31

But we've never really liked paying taxes as a nation. Oh, having the tea in Boston Harbor, we're having whiskey rebellions in Pennsylvania. It's always something.

SPEAKER_01 5:40

Uh I think that there are things that people don't like about taxes. And one of them is when they fear they they fear that they are unfairly being picked on. Yeah. That's how those excise uh paying farmers felt in Western Pennsylvania.

SPEAKER_00 5:51

So we get to the 19th century and things have to change, right? Because the Federalists, they didn't stay around forever.

SPEAKER_01 5:57

No. And and so, and let's also remember that what what are tariffs doing in this period, what's their main goal? It's to raise money, right? That's not necessarily what our main goal is today. It might be, you know, depends on when you what day you ask President Trump. Sometimes it's about raising money, sometimes it's about protecting use fruits. But let's just first just jump back to a little bit of the history. It's around 1800, right? Mostly tariffs, a couple of excises. Thomas Jefferson gets elected president. He hates excise taxes. He hates these internal taxes. Uh, there's also a federal property tax. Nobody likes that. Is that because it's a southern party? Yeah, partly. Uh the southern parties, because the south is is more purely agricultural in this period, and the north is sort of like proto-industrial, not really industrial yet, but starting to develop industries and businesses. And as a general rule, uh agricultural interests don't like tariffs because they export a lot of the crops that they grow. And also they need to import a lot of stuff because they're not making things really, right? They don't have an industry there. So they're engaged in a lot of international trade. As a result, they don't love tariffs. They are okay, tariffs can be used to raise revenue. That's reasonable. Everybody accepts that. But when you start saying we're going to use it to protect industries or sometimes agricultural uh producers from foreign competition, that gets a little dicey with agricultural interests, especially in the South. So anyway, Thomas Jefferson comes along, in 1800, he gets elected. And by 1802, his party, the Democratic-Republicans, have engineered wholesale repeal of all the internal taxes. They get rid of all them, they don't like them. And they rely just on tariffs again. And they do that all the way up to the War of 1812. In the War of 1812, they find themselves in need of new money. They need, you know, they need to buy ships, build ships, and buy cannons and that sort of thing. And so they um they create new taxes to do that. These new taxes are old taxes. They're those excises that we got rid of. They come back ago, but they bring the excises back. Again, though, tariffs are still the mainstay of federal finance in this period. And and that remains true even after the end of the War of 1812.

SPEAKER_00 8:01

So that's an argument for tariffs. And these are all the points that you've made. They raise money, it's administrable, there's only so many ports you have to control, and people are used to it.

SPEAKER_01 8:11

There's a lot good about tariffs in the 19th century, and they're widely recognized uh to be doing their job pretty well. The key is what level should they be at, right? As long as we're keeping them at sort of moderate levels, using it to raise a modest amount of revenue. I mean, remember, the federal government's small during peacetime in this era. There's no, there's no like Social Security administration, right? There's no agriculture department, none of that. Yeah. So uh small government. That says pretty, pretty small government. You can fund it with very moderate tariffs, and almost everybody's on board for that. The problem starts to develop in the say around 1820, when the Whigs, it's a party that many people have forgotten even exists. And the Whigs believe in promoting industry and commerce. And one of the things that they think will do that is a protective tariff. They're like, let's impose tariffs on imported goods. That'll make it harder to import, like, you know, manufacture, like cloth or say, from from Great Britain. It'll make that cloth more expensive. That'll allow US producers to undercut those foreign competitors, and that'll build up our our industry. You know, that sounds like Trump. Well, it is. That's protection. And that's just what is what Trump believes in, among other things. And the Whigs start to argue for that in the 1820s. The Democrats, who are sort of the heirs of the Jefferson Democratic-Republicans, say now we're just calling them Democrats by uh uh the late 1820s, 1830s. They don't like high tariffs, they don't like protective tariffs, they're just on board with tariffs that for for revenue only, as is often said at the time, but not with protective tariffs. And that is that's where the battle lines get drawn, right? You have the Whigs who are more northern than Southern, although those these parties cross boundaries. And you have Democrats who are more southern than northern, but also in both places. And these parties are starting to really divide over this question of how high should tariffs be and what should be their principal goal, revenue or protection? And maybe both. And you know, there's a way to like split the difference. But that's a lot of bitter argument. And by 1830, there's a huge argument over a high tariff that the Whigs managed to get over the line. And this really outrages the South. And a bunch of Southern states say that, you know, we're not gonna recognize the legitimacy of this tariff. We're gonna we're gonna declare it null and void. It's called the nullification crisis. They say this is this is not fair, it's unconstitutional. So we as a state say we're not gonna pay this stuff anymore. There's a big constitutional crisis over this, and it does get resolved within a couple of years by a moderate tariff, which is always the way we're gonna resolve these things, right? Where you try to split the difference. But again, the battle lines are there. The South arguing for low tariffs, the north arguing for higher tariffs to protect industry. And that argument continues up through the Civil War, although it doesn't quite reach the heights of the early 1830s again.

SPEAKER_00 11:01

All right. So that divide you're talking about, it's both sectoralism, as in industry versus agriculture, and sectionalism, as in North versus South.

SPEAKER_01 11:11

Yep, and just some politics. You know, parties like to have clear positions on things because it helps them to get elected. And again, it's all it's a lot messier than you might think because there are northern Whigs, there are Southern Whigs, there are Northern Democrats, there are Southern Democrats. So the all these things intersect. But in broad terms, it's fair to think of the South as being low tariff and the north as being higher tariff.

SPEAKER_00 11:33

Okay, so I'm trying to put this into context now because it sounds like the tariffs are working. Okay. And you're saying tariffs really made the income tax. We get to the Civil War, and then what happens? Because that's when we had the first experience. Right. So embryonic experience with a tiny little income tax, not the income tax we know today. Right. Some so primitive version of it.

SPEAKER_01 11:56

Tariffs, so South leaves the union, and the remaining northern legislators say, well, now we can have a high tariff. Yeah. Southerners aren't in Congress anymore, but they start to make it do what they want. They start to impose uh to raise tariff rates. Tariffs are not gonna do all that great a job raising money in these years because tariffs don't raise money very well during a war. They, you know, what the war disrupts trade. As trade falls, tariff revenue falls. So tariffs are not gonna be the whole answer to paying for the war if you're in the if you're in the north. So uh they create a bunch of other taxes. They revive excise taxes for the first time since the early part of the century. Just tobacco and alcohol? Uh no, no, whole slew of them, hundreds of them, on all sorts of consumer goods and intermediate, you know, business goods, uh, whole slew of excise taxes, and uh a federal property tax, which they haven't used since the War of 1812, uh, which is gonna fall heavily on farmers and because they're the one they have all of their wealth and lands. And they come up with a new income tax, which had never been used in the US before, uh, but had been used in Great Britain. And the income tax um is designed to put more of the burden on rich people. Because the idea is, again, uh tariffs are regressive. They fall, are they a consumption tax there and they fall more heavily on poor people than rich people. Um, so are many excises, right? Lots of excises are on things that regular people use all the time. And it and if it's something you don't have an option about buying, and the classic example for that is salt. It's like a necessity, then that's even worse because people can't just avoid the tax by avoiding the purchase. So people think that tariffs and excise taxes are regressive. We need some way to balance that out. And the income tax partially is an answer to that question. It's a way to balance out the regressivity of excise taxes and the tariff, also that federal property tax, which irritates the farmers. Yeah. And they're like, well, if we can make the farmers feel better if we tax the finance, the financiers on Wall Street, right? And if the finance bros have to pay, yeah, then the 19th century version of a finance bro needs to pay an income tax, that'll that'll like assuage the complaints, the unhappiness of those.

SPEAKER_00 14:04

Joe, when you say a consumption tax is regressive, you're saying that not just in the context of what was going on then, but it's almost sounds like a universal truth. That's true now. Like even with a European VAT or something like that. Consumption taxes or tariffs or a retail sales tax. Yes.

SPEAKER_01 14:20

Unless you get fancy. Yeah. You can try to get fancy and craft these taxes in such a way as to make them less regressive. You can exempt certain things.

SPEAKER_00 14:27

So it's close to a universal truth. It that any consumption tax, tariff, excise tax is going to be regressed.

SPEAKER_01 14:33

A lot of what lawmakers do is spend a lot of time trying to figure out how to square that circle, right? Well, we really want to consumption tax. Yeah, it never really works. Yeah. But they're like, this will be great. It'll raise lots of money, it'll be convenient to collect, whatever. But we got we got to find some way to make it less unfair. And so often what they'll do is they'll exempt, say, food, yeah, and and that'll make it a little bit more progressive. But that's kind of a tax base. Yeah, and it's a messy answer.

SPEAKER_00 14:56

So sticking with the the late 19th century, this guy comes along, his name is William McKinley. Trump talks about him a lot, kind of like a sort of hero. But did he really call himself the king of tariffs, or was that the media call it?

SPEAKER_01 15:09

Uh, I think it might have been a name given to him at the time. But again, we have to go back to the Civil War. So Civil War ends, income tax goes away, almost all the excise taxes go away, just alcohol and tobacco. Um, because nobody really likes the hassle of collecting all right stuff. Federal property tax, they only tried it once and they were like, oh no, never again. No, they go back to tariffs. They go back to tariffs. They say tariffs are going to be our mainstay.

SPEAKER_00 15:32

This is a recurring theme. Every time peace breaks out, they go back to tariffs. There has to be something to it.

SPEAKER_01 15:38

Because tariffs are kind of well tolerated. They're easy to collect. Again, remember those customs houses, it's like centralized collection. So they do. They return to tariffs. It's not everything. It's like somewhere in the neighborhood of, say, 40 to 60 percent of total revenue is coming from tariffs in the decades after the Civil War. Um, and the rest is being paid by with those, is being made up with those excise taxes because the alcohol and tobacco taxes turns out people love alcohol and tobacco, and they will keep buying it even if you if you tax it heavily. As a result, those taxes raise a lot of money too. So those are the two ways that they they fund the government. All right, so fast forward, Republicans are in charge, right? Democrats are are thrown for a loop by the Civil War. Takes that party a long time to recover. Uh, we have a series of Republican presidents, and then in the decades after the Civil War, we rely very heavily on tariffs for revenue. We're also using them for protection. We're doing both. So we have high tariffs. Who's that going to irritate? Who do you think? The South. The South, right, the rejoined South. Also, farmers everywhere, including, say, farmers out in the West. The West turns out to be a place uh where they don't much like high tariffs. Farmers don't like these high tariffs, and they keep agitating. Hey, let's bring that income tax back. We kind of like that idea. We could swap it, right? We could get rid of these tariffs, or at least some of the tariffs, moderate them, make them more tolerable, and make up the lost revenue with an income tax. Well, that's the opposite of what Trump is saying we should do today. Okay. But that's what they're arguing in the 1880s and the 1890s. So the tariffs are unpopular. Tariffs are pretty unpopular, but not so unpopular that they don't keep passing new ones, right? So you asked me about McKinley. He's most famous for being the author of the McKinley Tariff, which was uh passed in 1890, which raised tariff rates to a very high level. And again, the idea is the Republicans are saying we're gonna have these high tariffs, they're gonna protect American industry. That's great for the guys on Wall Street, sure, because they own these companies, but that's also great for the people who work for these companies. We're gonna protect American jobs. Jobs. So, you know, if you're working in a textile mill, you don't want to lose your job to some guy in Great Britain. You want to actually hold on to that job. So we're gonna protect your company from foreign competitors. And so it's uh, you know, it's not a, it's not just a rich guy's argument, although the rich guys are very much on board with this for the most part, but it is an argument about fairness and it's getting fought out in the political realm and it goes back and forth. It's increasingly going back and forth. So in 1890, you get this high tariff, but then the re the Democrats are a resurgent, you know. Uh, we have Grover Cleveland, he gets elected twice. Uh, he's a sort of moderate tariff reformer. He's not exactly a low, low tariff guy. The Democrats are increasingly powerful, and in 1894, they manage to get their income tax, right? They finally get it back. They say, okay, it's this little tiny income tax, but we're going to use it to replace some of the tariff revenue. Uh, that makes a lot of farmers happy. And it is, in fact, the populist, which is uh an agricultural party, pretty much, that's pushing for this so hard. They finally get the tax back in 1894, and then the Supreme Court says, no, no.

SPEAKER_00 18:35

Yeah, that's a good tax. Historically, the thing that's significant there is that the the political impetus to go after a a progressive income tax that was considered populist. Oh, yeah. Uh today we have the flip side of that, don't we? I mean, today the populists are just saying, let's get rid of the income tax and get tariffs.

SPEAKER_01 18:56

Right. So when you say go after, you mean as in pursue. Yeah, yeah. So yeah, it's a that is the populist, that is the progressive position of the time, which is let's scale back these regressive tariffs and replace them with something that's more progressive.

SPEAKER_00 19:09

The working man wants an income tax, not the tariff.

SPEAKER_01 19:12

Yeah. And again, it's complicated. Those people who are working in protected industries, those people who work at textile mills, they're really happy with a high tariff for the most part. Although it's complicated even for them because they recognize, wow, I am paying a lot of money for a lot of stuff, too. Yeah. So all of us, all of us, are both consumers and producers, you know. That's what it comes down to. Right. So we hate the regressive taxes on consumption because we're all consumers, but we also hate taxes which endanger our jobs because foreign competitors might eat us alive. So it's complicated for those people. But, you know, again, we're talking in broad strokes here. Farmers are getting what they want, they're moving away from high tariffs, and and uh, and labor is increasingly not happy with these high tariffs because it is such a heavy burden on consumption. So in 1894, they have this little momentary experiment with the uh 18 with the uh income tax, gets uncont found unconstitutional, gets brought back in the early 20th century, and it is again presented as a tax swap, right? We're gonna use the the income tax revenues to reduce the tariffs on imported goods. And and so that's the way that this is ushered into the law in 1909 with the corporate tax, and then in 1913 with the individual income tax. And and it is uh it is very much a way of reducing the role of tariffs. Now, what really reduces the role of tariffs is what do we know, what causes problems to wars. Yes, so World War I, right? Another big war does terrible things for trade. They're sending you know, U-boats are sinking American ships, and so tariff revenues fall through the floor. They really need another revenue source, and conveniently, they have this new income tax they just created a couple of years ago. So they establish uh, you know, they they scale up the income tax very quickly, also an excess profits tax, which is just another kind of income tax on corporations. And and so the tariff never returns to its former glory after that, right? It's it's raising like half of federal revenue up until, roughly speaking, World War I, but it never recovers from World War I. After that, it's not real the tariff stuff is not really about revenue. We're really talking about tariffs in terms of protection after that.

SPEAKER_00 21:17

So they fall out of favor.

SPEAKER_01 21:19

They do fall out of favor, although the republic they don't grow a ray. Republicans are holding the torch for him. The Republican Party continues to favor high tariffs to protect American industry.

SPEAKER_00 21:28

Even in the 1920s.

SPEAKER_01 21:30

Even into the 1920s. And so there are three Republican presidents in the 1920s, and they are pushing very hard for the government.

SPEAKER_00 21:36

If you're keeping store, that's Harding, Coolidge, and Hoover.

SPEAKER_01 21:40

And what we end up with at the end of this uh decade is the Smoot Hawley tariff. Famous, infamous, the infamous Smoot Hawley tariff. Which incidentally is the last general tariff law ever passed by Congress. It's still on the books. But the Smoothawley tariff raises tariffs to uh a really very high level to protect American industry. industry. And then the world plunges into a disastrous uh depression. It the the tariffs are not what caused that depression, but they but they certainly made it worse and and made recovery harder. And everyone recognized that the Smoothawley law was was well flawed. So high tariff people still liked it. But everyone could recognize that the way that law was made was crazy. Right. So this is the way all tariff laws get made that people people go to Congress like uh people who own textile mills, I keep picking on the textile guess, but they own they go to Congress and they say, I need something to protect my business from foreign competitors.

SPEAKER_00 22:40

And we're now now hold on. You're talking about Congress.

SPEAKER_01 22:42

Yes that so Congress is the one who who has to impose tariffs back in the day.

SPEAKER_00 22:49

What does the Constitution say? What does the Congress now what does the Constitution say?

SPEAKER_01 22:53

Article one Constitution says that only Congress has the power to levy tariffs or any other kind of tax. Okay then not only question that thought we'll get back to that Congress has the taxing power. Congress has the taxing power so the textile guy goes and says I need a big tariff to protect my business from foreign competitors and the Congressman says okay uh you know maybe so okay what do you get what have you done for me lately? Like what could you do for me? And let's say that he went goes to his own member of Congress who's you know because he's representing the tariff guy the textile guy he's inclined to listen that member of Congress goes to his friend and says hey I need your vote for this I want to impose a high tariff on textile imports. And that other congressman actually comes from a place where they you know they have like lumber industries and he was like well okay I'll give you your high tariff on textiles but only if you'll give me a high tariff on imported lumber because oh yeah and they're like oh that's a cool deal. We'll both do that. Well now we have two really high tariffs, right? That's how you end up with Moodley is that all that back scratching and all that log rolling going on in Congress just ends up raising and raising and raising these things. And it's not done on the basis of like well which ones would actually be good, which industries are worth preserving which are are not as important to preserve none of that. It's all the politics it's very messy and and people recognize that this is dysfunctional. So here's how we're going to get away from Congress and into the White House. How? In 1934, there's a new president Franklin Roosevelt Roosevelt wants to be able to reduce some of these high tariffs from Smoot Hawley because he's like we need more trade so that we can recover from this depression a little faster. And Congress says okay we're good because you know what stop us before we tariff again like that was it was just a disaster. They don't trust themselves they don't trust themselves. They recognize that Smoothay was not make the keys I can't drive so they say okay here's the deal you can you can as president renegotiate these tariffs and you can reduce them up to 50% in negotiations with other countries. They call that reciprocal tariff uh negotiation and and we'll well as a result of that we'll have lower tariffs won't ask me in Congress to vote for them because I don't want to remove protection from any of my constituents whatever but you as the president will be more dispassionate more high-minded about it you'll be able to do a better job.

SPEAKER_00 25:11

Really?

SPEAKER_01 25:12

So they give power to the president it's not unfettered it isn't like do whatever you want. They say you can only be 50% and we're going to have to renew this every couple of years because it's not you know it's not good forever.

SPEAKER_00 25:22

So they expire.

SPEAKER_01 25:23

And uh the this authority to renegotiate expires but Congress does renew it over and over again.

SPEAKER_00 25:28

So the Constitution gives the tariff power to Congress Congress delegates it with strings attached.

SPEAKER_01 25:35

Some element of it is delegated or some components of it are delegated. It's not a blanket delegation doesn't say like do whatever do whatever you want it doesn't say that lots of strings attached you can do it you know you can go to a country you can negotiate a better deal up to 50%. So that's 1934 that's yeah and this is 90 years of that and this is a big moment. It's a big handoff even though there are strings attached this is a handoff from the the legislative branch to the executive branch and they say you're going to have a lot more control over trade policy going forward.

SPEAKER_00 26:02

And it isn't they've unprecedented for 150 years they weren't doing it that way.

SPEAKER_01 26:06

And there have been more delegations since then to give the president more authority under certain circumstances to establish tariff rates. And that's part of how we end up where we are today with a um a president who you know will announce a whole slew of tariff rates against every country in the world. So that's that's how we get there. So the the fun part of the tariff story really does end in around 1934. There's a lot of trade policy that happens after that which is basically about the US favoring lower tariffs, more trade, fewer obstacles to trade on the theory that hey, if there's a fair fight between countries, we can win it. We can if it's just we don't need protective tariffs because our industry is so competitive and so efficient that we can win a fair trade fight anytime. And so the U.S. argues consistently not purely but mostly consistently for lower tariffs throughout the rest of the 20th century.

SPEAKER_00 27:03

So the whole post-World War II period let's say from from the end of World War II up until like I don't know say say NAFTA. Yeah right so that Joe that's a period overall of great American prosperity job growth profits. You could say free trade had a really good run. Not maybe a smooth run but for decade after decade the 50s the 60s the 70s things went pretty well it had a good track record but it doesn't end well it seems the causality is a little hard to pin down right yes the U.S.

SPEAKER_01 27:36

has a great run after World War II. It's also true that all of our main competitors are in ruins at that point. It takes Japan a long time to recover. It takes Europe a long time to recover. So the US has a has a real great head start uh so it's easier for us to win a trade fight. But it's true that the American economy is also quite healthy at that point. And so yes the U.S is doing very well uh with these low tariffs in place. But the problem is so economists will tell you that everybody gains from trade. Yeah that inland that uh yeah because countries will specialize in the things that they do well and we'll get cheaper goods and we'll make a lot of money and it all works out in the end. And that's true, I think, on balance, but it's not true in specific cases. Such as so let's say that we're not able to produce textiles as cheaply as other countries can. Let's just say we're making cloth or shoes I should pick on somebody else. Yeah. And to making shoes turns out we can't really make them all that cheaply. So the the economists are like that's cool. You guys go make Apple computers and we're gonna have someone else make the shoes for us. They'll get cheaper Apple computers we'll get cheaper shoes it'll be everybody will win. That's great unless you work at a shoe factory in the US who has all their stuff exported over has all those jobs exported overseas. That's a disaster for people who work in the shoe factory. So on an individual level individual companies or individual workers that free trade can be extremely painful and disruptive it can cost people their livelihoods. And I think that's the problem that free trade runs into. So while the U.S. is riding high in those decades after World War II, we're not losing too many fair fights but we start to lose some jobs overseas as the century wears on. And by the 1980s and into the 1990s there's a lot of complaining going on that that other people are taking our jobs. They're worried about Japanese car manufacturers beating out Detroit and that sort of thing. So they're looking for ways to protect American jobs tariffs sort of are you know resurging at least politically if not legally yet as I said that like one of the great crowning achievements of the free trade movement in the U.S. is the NAFTA agreement the North American Free Trade Agreement lowers slash eliminates tariffs in the free trade zone of the Americas but that's not great for people whose jobs move to other countries.

SPEAKER_00 29:56

Well you call it a crowning achievement yet some people in the political sphere would say it's it's toxic it's pretty word it's they don't want to be associated with NAFTA for the movement.

SPEAKER_01 30:06

Whether it's an achievement for the country is up for some debate. Right. And again we we can we have to take it apart the country well for what parts of the country for what cities in the country you know it and that's the problem with free trade is that the gains from it are widely shared but the cost can be very concentrated in certain places. And so uh you start to get a lot of pushback on this free trade argument this low tariff argument and and that the fight over NAFTA is so bitter that like even uh you know Bill Clinton is president even the Democratic leader of the House of Representatives Dick Gephardt comes out against NAFTA and lobbies actively against it. So it splits Democrats. This is a problem and it is a sign of things to come that the free trade agenda which has been dominant for decades is not going to be unchallenged anymore. And in both parties you get real pushback and you get divisions within the parties. So there were you know we got Dick Gephardt and Bill Clinton arguing but you also have Pat Buchanan and the other Republicans arguing about it too. Pat Buchanan big fan of raising tariffs so the country's dividing the parties are dividing there's a lot of instability in the political alignments here and and I think that to just jump forward all the way that is the story of Donald Trump in 2016. He capitalizes on that brewing discontent this rising discontent with free trade and he rides that issue along with some other issues into the White House.

SPEAKER_00 31:28

So Joe to conclude you're a historian and what historians do is they look at the past and they draw inspiration for commenting on the present and looking forward into the future.

SPEAKER_01 31:38

If it's true that high tariffs of yesteryear made the income tax what's the message for folks today be careful what you wish for if you're a tariff fan is that you you we do have the highest tariffs that we've seen in decades now.

SPEAKER_00 31:54

Be be careful what you wish for how if if I don't do this because I'm sort of not in that camp.

SPEAKER_01 31:59

But if I'm rooting for high tariffs what is the downside what what is the be careful what you wish for thing that's going to come about the same people who were mad about tariffs in the 1880s and the 1890s those workers who didn't like the regressive incidence of tariffs those people are still around today. Any one of us who's a consumer is already seeing the effect of higher tariffs you know if you bought a cup of coffee lately you know that coffee has has seen a dramatic run up in prices. And it's going to be true of many things that we buy in this country and it's I think that's just starting to really play out now you may find that these high tariffs that you like so much prove to be enormously unpopular like most regressive taxes are unpopular. And so at the end of the day as I said earlier it can revive interest in progressive alternatives like an income tax or you know a wealth tax.

SPEAKER_00 32:50

Goodness crazy thought. Crazy thought okay so be careful what you wish for. Yep and tariffs have never thoroughly been that popular if you tolerate what it would be easy. All right. Joe thanks much thanks for the insights into America's fiscal history. Thank you for tuning in and I want to say that this podcast series is produced by Jordan Parish. It's edited by Chris Trigo and Carolyn Humulus. And the executive producer is Paige Jones. Thank you and see you next time Tax Analyst Inc. does not provide tax advice or tax preparation services. Nothing in the podcast constitutes legal accounting or tax advice. A full disclaimer is included in the transcript