Wednesday, August 8, 2007

PPI | Trade Fact of the Week | August 10, 2005
Tariffs Are 1 Percent Of Total Tax Revenues

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The Numbers:

U.S. Government Tax Receipts, 2004:

Income tax: $765 billion
Payroll tax: $732 billion
Corporate tax: $169 billion
Excise taxes: $71 billion
Tariffs: $21 billion
What They Mean:

In 1897, when the young Louis Brandeis testified on tariff and tax policy before the House Ways and Means Committee, tariffs made up more than half of government revenue. That year's receipts totaled $348 million, with tariffs bringing in $178 million. (Before the Civil War, tariffs had been still more important, sometimes supplying 90 percent of government money. The wartime search for revenue left tariff rates higher, but had also created other permanent new revenue policies that reduced the relative importance of tariffs.) Brandeis, appearing as perhaps the first "consumer advocate" in American trade debates, argued that the tariff system was unfair to families and poor people. About half the money at the time came from food and clothes: Of the $178 million, $41 million came from sugar, $9 million from other foods, $42 million from clothes and fabric, $20 million from tobacco, and $8 million from liquors.

Brandeis seems to have gotten a chilly reception, in particular from the committee chairman (a man named Nelson Dingley, from Maine, described by the modern Committee as "destitute of humor but soundly versed in finance.") His appearance nonetheless foreshadowed a Progressive-era tax revolution that is still decisive, at least in trade policy, today. This arrived in 1913 with Woodrow Wilson's "Underwood Tariff Act," named for its sponsor Oscar Underwood, which cut tariff rates sharply and compensated for the lost money by creating an income tax. By 1920, this law -- together of course with the interruption of trade during World War I -- had reduced tariffs to only about 5 percent of revenue. Warren G. Harding's administration cancelled Wilson's tariff cut in 1921, but not the income tax. When Franklin Roosevelt came to office in 1933, he found tariff revenue still only 10 percent of government finances; by 1945 they were down to 1 percent, where they remain today. Roosevelt and Truman were thus free to begin the modern series of trade agreements without worrying about lost revenue.

In 2004, tariff collection was $21 billion, just over 1 percent of the total $1,800 billion in American government revenue. But Brandeis could still make an appeal to Congress much like that of 1897. Food is a smaller part of tariff revenue, but clothes have become much bigger. The $21 billion includes $9.3 billion on shoes and clothes (which make up 6 percent of imports); rates are especially high on cheap shoes and mass-market clothes. Another billion came from food, and another billion from miscellaneous small manufactures like luggage, bicycles, and silverware. The cost of the system for families is much more than this, though, since tariff costs are magnified by retail markups and sales taxes. The total is not easy to calculate, but (1) the border cost of shoe and clothing imports was about $85 billion; (2) tariffs added $9.3 billion; (3) the total store cost was about $320 billion; (4) including about $40 billion in locally made shoes and clothes; meaning that (5) the price of shoes and clothes triples from border to store. Thus clothing and shoe tariffs alone seem likely to cost families about $30 billion.

Further Reading:

PPI on family-friendly tax reform:

PPI on the modern tariff system as America's most regressive tax:

How do we spend our money? Poor families spend more on shoes, clothes, and food; wealthy and middle-class families on travel, education, and housing. The Bureau of Labor Statistics explains:

The Census Bureau's Statistical Abstract of the United States is published annually. The Bureau has all editions dating to 1878 online:

Nelson Dingley:

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