Tariffs: Protective and Revenue

by Don Boudreaux on March 27, 2011

in Budget Issues, Seen and Unseen, Trade

I normally do not reply to Muirgeo’s comments, except to correct his egregious blasphemies against worthy scholars (such as his frequent repeats of the misreadings of Adam Smith trumpeted by the likes of the fatuous William Greider) and when – as today – they present a teachable moment.

Muirgeo, in his effort to justify the alleged economic benefits of tariffs, asks:

Do you realize during the majority of this nations [sic] history most of its tax revenue came from tariffs?

Indeed, this claim is true.  But it does not make the case for government policy that Muirgeo assumes it to make.

Precisely because Uncle Sam, until WWI, depended for his revenues chiefly upon tariffs, these tariffs could not generally be so high as to choke off trade.  A truly protective tariff brings in little or no revenue: tariff revenues are not paid on goods and services not imported into the country.

So Uncle Sam had an incentive not to go full-bore in raising tariffs.

On the other hand, protectionist interests were generally politically powerful (for protectionists were a chief constituency of the GOP – which helps to explain why the GOP still has the reputation of being the party of “the rich,” because it was rich industrialists who were the principal beneficiaries of whatever protection was supplied by 19th-century tariffs).  So to the degree that Uncle Sam in the 19th century used tariffs to protect domestic industries from foreign competiton, Uncle Sam likely reduced the revenues he raked in.

Protective tariffs, therefore, likely kept Uncle Sam from bloating in size (thus reducing whatever temptation he would have had to involve himself in aspects of the economy that would have further reduced economic growth), while the need to rake in positive sums of revenue from tariffs likely kept protectionism in 19th-century America less restrictive than it would otherwise have been.

I say “likely” in the previous paragraph because it’s an empirical question which effect, if any, dominated the other.  Did the national government’s need for revenue in fact keep tariffs lower (and, hence, less ‘protective’) than otherwise?  If so, 19th-century U.S. tariff policy – in intent and in effect – might not have been as protectionist as it is portrayed.  Or did the forces of protectionism dominate?  If so, then while these resulting restrictions on imports (and – it follows – on exports) unquestionably reduced the rate of American economic growth from what it would have been with less-restrictive tariffs, the accompanying strict limits on Uncle Sam’s revenues at least partly offset the negative consequences of the protective tariffs by keeping the national government smaller and less intrusive than it might otherwise have been.

I wonder if empirical research has been done on this question.  I’ll ask Doug Irwin.


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