Summary: This article encourages usage of the revenue tariff as the first source for funding the U.S. federal government, calibrated at a rate to maximize the cash flow into the federal treasury. These funds should be used to exempt corporate taxation and other fees on U.S.-based manufacturing, allowing them to produce items at a lower, more competitively priced cost. More domestic employment and reduced cash transfers overseas will result in cost savings for the government that grow over time. Apply those savings in turn towards having ever-higher minimum income thresholds before the personal income tax comes into effect.
Revenue tariffs--a method of funding the government's responsibilities by means of a tax we place on ourselves when we buy a new foreign-made product--play just a minor role in the federal budget today. In 2018 they provided only about $41 billion or 1.25% out of a $3.3 trillion budget, with personal and corporate taxes providing about 57% (the payroll tax for Social Security and Medicare making up the bulk of the remainder). However, with the exception of an income tax for a twelve year period during the Civil War and Reconstruction, providing about 20% of the nation's income, we did not have an income tax until the passing of the 16th Amendment in 1913 which allowed the federal government to collect tax not proportional to a state's population. The 1960 Treasury Report (four pages in question, compare customs vs. total receipts) show revenue tariffs supplying 80-90% of government needs up to the Civil War, and about 60% through the second half of the 19th century and first decade of the 20th. Income taxes first overtook revenue tariffs in 1917 ($360 million to $226 million), and in the following year blew past them for funding World War I ($2.3 billion vs. $180 million). In the 1920's tariffs bounced back a bit, providing about 10-20% of government revenue, before decreasing in importance again. Since the end of World War II tariffs have been providing the 1-2% that they deliver to this day.
In discussing tariffs, it is necessary to distinguish revenue tariffs--the subject of this article--from protective (or prohibitive) tariffs, as they differ in their manner in which they boost domestic manufacturing and are at opposite ends of whether the purchase of foreign-made products should play a role in funding of government. Most journalists supporting tariff-free access for foreign-made products to the United States (i.e., free trade) use "tariffs" in the easier-to-rebut protective sense, causing revenue tariffs to miss proper consideration.
The revenue tariff is a tax placed on new foreign-made products that is intended to fill government coffers allowing taxes to be reduced elsewhere in a targeted manner. For the case of a $120 Chinese-made computer monitor that presently could not be made for less than $400 in the United States, for example, a 20% revenue tariff places $24 in the federal treasury, making the item $144 for consumers. It still does not cause one to buy the $400 U.S.-made monitor, however the tariff money raised allows for removing taxation on U.S. manufacturers of all products, dropping their prices and hence expanding the fields of other U.S. products which can now be competitively priced. For the case of a foreign-made item selling for $10 and a U.S.-made one that can be produced for $13, a 20% tariff raises the price of the former to $12 and removed corporate taxes and other revenue-generating fees from the latter may drop its price to $11, enabling that product to be domestically made.
Protective tariffs are not intended to provide revenue for the U.S. treasury but are instead meant to compel purchase of the American-made product. For the case of the $120 Chinese vs $400 US computer monitor, we place a 300% tariff on the former, making it $480, so the American monitor gets bought instead and no tariff revenue sent to the federal treasury. Without this additional source of government revenue, America's tax reliance on personal and corporate income taxes remains largely the same, although probably reduced somewhat due to higher employment creating more taxpayers. Protective tariffs form a direct way of forcing people to buy domestic even where it's not cost-effective, dropping standard of living in the process. Although American manufacturers would still need to compete against themselves, providing such competition exists, there would be reduced incentive to compete well against foreign manufacturers as they can always rely on a protective tariff to make the foreign product more expensive.
It is perhaps instructive to note that free traders and supporters of protective tariffs find themselves in agreement on the inappropriateness of government using the sale of foreign-made products to fund its responsibilities, but for different reasons, the former because that would mean the tariff rate is nonzero, the latter because that would mean the tariff rate wasn't sufficiently high enough to compel the purchase of the American product. Free traders and supporters of revenue tariffs on the other hand differ on whose manufacturing--domestic or foreign--they want to see taxed. With the former, corporate taxes on domestic manufacturing and income taxes are to be used however much is necessary to avoid needing to obtain revenue from foreign products, keeping the latter at the lowest possible price. Their position seems analogous to arguing that foreign-made products should be exempt from state sales taxes, as that would form an unacceptable "barrier to trade", with the sales tax doubled on American-made products to make up for the lost revenue, and when American products get sold less as a consequence, to raise the sales tax on those dwindling American-made products even higher to make up for that lost revenue, a snowballing effect pushing most all production overseas.
Supporters of revenue tariffs are not hostile to foreign-made products, as per this system imports are needed to pay the taxes. Due to wide divergences in labor costs and employee regulations many products will continue to be made overseas. It is not acceptable, however, for foreign-made products to gain an edge because the U.S. government, in exempting taxation on foreign-made products, had to place taxes on domestic-made ones to make up the lost revenue, unnecessarily inflating the latter's price and causing domestic unemployment. Free trade, the increasing of the price of domestic products via taxation in order to drop the price of foreign-made products by keeping them tariff-free, is really reverse protectionism of foreign products over American-made ones.
What makes revenue tariffs such an efficient form of taxation, and why government should therefore always look at them as the first source of funding, is that they not only provide income for the government but play an unparalleled role in reducing the need for government outgo, the latter of which income taxes simply don't provide. When we're not buying $450 billion a year from China, our military doesn't need to spend as much to defend against her (or North Korea for that matter), saving money and creating more peace of mind. With greater meaningful employment in domestic manufacturing, social costs (welfare, crime/prisons, drug addictions, etc.) are also reduced. While mitigating the economic ills of free trade provides lots of jobs for government workers--perhaps making many of them and their private-sector contractors among the bigger supporters of free trade--these public sector positions require high taxation and mounting debt to support. Further, with manufacturing providing more decent non-college-degree requiring job opportunities, there would be a reduction in people seeking university degrees in an attempt to avoid the main alternative of lower-level service-sector jobs, degrees that often provide little more but a return to the same service-sector jobs but with the additional burden of four lost years and sizeable college loan debt.
Support for the revenue tariff is based on the belief that paying one dollar in revenue tariffs will save several dollars in income taxes over time and the belief that the society brought about by revenue tariffs is much better than one based primarily on income taxes. With the latter, one is usually just fixing the problems of an underperforming society due to lack of meaningful employment and heavy cash transfers to our Chinese adversary. With the revenue tariff, we're instead directing our taxes towards fellow Americans having meaningful work in the private sector and taking advantage, at income tax time, of the societal benefits that result.
An eloquent defense of tariffs can be found in Abraham Lincoln's Circular from the Whig Committee of 1843, in which he compares tariffs vs. direct (property) taxes: The tariff is the cheaper system, because the duties, being collected in large parcels at a few commercial points, will require comparatively few officers in their collection; while by the direct-tax system the land must be literally covered with assessors and collectors, going forth like swarms of Egyptian locusts, devouring every blade of grass and other green thing. And, again, by the tariff system the whole revenue is paid by the consumers of foreign goods, and those chiefly the luxuries, and not the necessaries, of life. By this system the man who contents himself to live upon the products of his own country pays nothing at all. And surely that country is extensive enough, and its products abundant and varied enough, to answer all the real wants of its people. In short, by this system the burden of revenue falls almost entirely on the wealthy and luxurious few, while the substantial and laboring many who live at home, and upon home products, go entirely free. By the direct-tax system none can escape. However strictly the citizen may exclude from his premises all foreign luxuries,—fine cloths, fine silks, rich wines, golden chains, and diamond rings,—still, for the possession of his house, his barn, and his homespun, he is to be perpetually haunted and harassed by the tax-gatherer.
Another special characteristic of revenue tariffs is that it is no longer necessary to be concerned about buying made-in-America products. Either you're buying American (great!), or you're flushing money into the U.S. treasury, providing the financing to keep domestic manufacturing cheaper, with other U.S. products being more easily sold to others as a consequence. It's win-win. This is a considerable improvement over the status quo which punishes caring for your fellow Americans, where those doing the right thing by buying American end up paying more in taxes (both directly via sales tax on higher priced U.S. products and indirectly built into the product by the taxes the American manufacturers and their workers pay) than those buying tariff-free foreign goods.
An tariff rate for initial consideration might be 20% world-wide with the exception of China which would have a 30% tariff. Why more for China? Similar to the gasoline tax meant to pay for roads -- the more gasoline one buys, the more one is driving, and hence the more of the road upkeep one should pay -- when we buy Chinese products we're strengthening their military and indirectly, North Korea's, causing us to need to spend more on defense to counteract them. Therefore we should be helping to cover those extra costs at the point of sale, so the more Chinese products each individual buys the more of the tax that individual properly pays.
One of the concerns about relying on revenue tariffs is that "other countries would retaliate!" and that American businesses would be worse off as a consequence. That would be a stronger argument with protective tariffs, but with revenue tariffs the level of blockage is less (again, we need imports to pay the taxes.) It's also based on an incorrect perception, that they haven't already been putting revenue or protective tariffs on our products all along. Much if not most free trade the U.S. has engaged in the past is of the one-way variety of them to us, seemingly the only direction that most free-trade supporting editorialists care about. As Patrick Buchanan noted, most countries use a VAT system which they exempt on products leaving their shores and place on foreign products coming in, serving effectively as a tariff that a VAT-less USA isn't counteracting.
Ultimately, we can't sell a product in foreign nations unless we're first manufacturing and selling the product here, and exempting U.S. domestic manufacturers from taxation provides the broadest nationwide benefit in allowing us to find and produce more things that, after being sellable in the USA, can next be sold world-wide. Also, as for retaliation, the $100 billion or so China buys from us, usually in agriculture, is primarily paid from the $450 billion that we buy from them, so those sales are easily made up as we spend more of our money on ourselves. Being their military competitor on Japan, Korea, and Taiwan, China has clear strategic reasons to buy as little from us as possible, making that country a poor investment for us. As for the oft-stated concern that tariffs on manufactured products would hurt the economic situation of our farmers (e.g., tariffs on Chinese products resulting in China buying less U.S.-grown soybeans), President Calvin Coolidge noted in his 1927 State of the Union address:
It is often stated that a reduction of tariff rates on industry would benefit agriculture. It would be interesting to know to what commodities it is thought this could be applied. Everything the farmer uses in farming is already on the free [i.e., untariffed] list. Nearly everything he sells is protected. It would seem to be obvious that it is better for the country to have the farmer raise food to supply the domestic manufacturer than the foreign manufacturer. In one case our country would have only the farmer; in the other it would have the farmer and the manufacturer. Assuming that Europe would have more money if it sold us larger amounts of merchandise, it is not certain it would consume more food, or, if it did, that its purchases would be made in this country. Undoubtedly it would resort to the cheapest market, which is by no means ours. The largest and best and most profitable market for the farmer in the world is our own domestic market. Any great increase in manufactured imports means the closing of our own plants. Nothing would be worse for agriculture.
Finally, even if it may be considered retaliation, it should be noted that the revenue tariff system is a legitimate tool for all nations to expand their wealth, particularly those not relying on a VAT, ensuring the products that can be made domestically are done so instead of relying on environmentally wasteful cross-oceanic shipping. In so doing, revenue tariffs provide another effective way of encouraging "Buy Local."