There was no income tax before 1913, only tariffs and excise taxes. President Trump and his advisors believe we can eventually get back there with a coordinated set of policies that includes tariffs, drill-baby-drill, deregulation, spending cuts, and of course, tax cuts. All of these planned policies get simulated by super smart econometricians – economic rocket scientists – but it is hard to see how this rocket lifts off given the arithmetic.
Eyeballing the chart to the left for the year 1913, federal revenue as a percentage of GDP was less than 2.5%. For the 2024 fiscal year, federal revenue was 17% of GDP.
There is no way we can go back to 1913 from a federal revenue perspective. For 2024, our military budget alone was almost $1 trillion or 3.4% of GDP, and interest expense on federal debt was $1.13 trillion or 3.8% of GDP. Each alone exceeds federal revenue as a percentage of GDP for 1913.
So, if we are to eliminate the income tax with tariffs, then tariffs will have to produce a lot more revenue today than they did in 1913. For fiscal year 2024, federal revenue from individual income taxes was $2.4 trillion. U.S. imports were $4.11 trillion or 13.8% of GDP. Assuming a 10% average tariff rate after bilateral trade negotiations and substitution effects, tariff revenue on current import levels would be $411 billion a year, missing the tax revenue replacement goal by about a factor of six, and this analysis is naively static.
Import levels dynamically respond to tariff rates. From 1929 to 1933, U.S. imports fell by 66%, 40% coming in the two years after Smoot-Hawley tariffs were enacted in 1930.[1] If a 66% decline in imports were repeated today, revenue from a 10% average tariff rate would fall to just $140 billion a year.
What if we lowered the goal of eliminating income taxes for households earning less than $200,000 per year only? This represents about 90% of all households but only 28% of federal income taxes paid, and the tariff revenue goal becomes a more “manageable” $670 billion a year. This is still a big number that would require an average tariff rate of 16.5% on 2024 import levels.
To get a sustained 16.5% average tariff rate without significant retaliation nor a decline in imports will require a master class in negotiation by President Trump. Recent stock market performance suggests a growing confidence he can pull it off. We have 67 days left in the 90-day reciprocal tariff pause to find out.
[1] It is important to note that while there is a causal link between Smoot Hawley tariffs and decline in imports, other contributing factors include declining income, fed policy, deflation, and foreign retaliation