Tariffs, Tea and Taxes

To paraphrase Benjamin Franklin, the only certainties in life are death and taxes. Ancient Egyptians paid a portion of their agricultural production to finance the pyramids. King John’s barons, tired of funding his unsuccessful wars with France, forced him to agree in the Magna Carta to limits on his ability to tax without their consent. An unfair system that heavily taxed commoners while largely exempting the clergy and nobility pushed Bourbon France to revolution. Following their baronial forbearers, English colonists in North America complained of taxation without representation, famously dumping a ship’s load of tea into Boston harbor, inching toward revolution and independence.

Today, President Trump’s aggressive tariff policy has revived debate on the role of taxation and, more specifically, the type of tax system used to fund the federal government. The United States Constitution granted Congress the power to levy taxes and tariffs. President George Washington signed the Tariff Act of 1789, imposing a 5% tariff on almost all imports to the United States. Washington’s brilliant and controversial Treasury Secretary, Alexander Hamilton, championed the tariff system as a means to promote domestic industry while funding the federal government. His views held sway through most of the nineteenth century.

Facing the staggering expense of the Civil War, Congress passed — and Abraham Lincoln signed — legislation to create the Commission of Internal Revenue, establishing the first federal income tax, which ranged from 3% to 5% depending on income. Congress repealed the legislation ten years later. In 1894, Congress again attempted to implement an income tax of 2% on incomes over $4,000. (That equates to 2% on incomes over $148,000 in today’s dollars.) A year later, the United States Supreme Court ruled that the Constitution’s power to tax did not envision, and therefore did not permit, a federal income tax. This lead, ultimately, to the ratification of the 16th Amendment on February 13, 1913. It provides: “Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and regard to any census or enumeration.”

The federal income tax has remained the primary source of revenue for the federal government ever since. The rate of taxation, however, has varied dramatically. The cost of World War I increased the top rate to nearly 80%, and funding World War II pushed it to an all-time high of 94%. Many people recall the post-war Baby boom era as the high-water mark of American prosperity. They may not remember that the top marginal rate stayed over 90% throughout this period. Rates have fallen and deductions have proliferated since the 1960s. The Tax Cuts and Jobs Act (“TCJA), signed by President Trump during his first term in office, lowered the top rate to 37% and narrowed or eliminated entirely various itemized deductions.

According to USAFacts, individual taxpayers paid $2.18 trillion in income taxes in 2023, representing almost 49% of the federal government’s revenue. By comparison, corporations (through corporate income taxes) contributed less than 10% of total revenue. Customs and duties, i.e., “tariffs,” contributed a mere 1.8% of total federal revenue.

As I write, the president is holding firm on a 10% across-the-board tariff, and Congress is trying to find consensus on a budget package that extends the TCJA. For better or worse, the tax system will certainly continue to evolve and change. But don’t bet against Dr. Franklin: you’re still going to die, and you’re still going to pay taxes.