The United States became the largest economy in the world, at the apex of the global industrial revolution in the late nineteenth century, with a tariff as its predominant form of national taxation. This inescapable association retains essential significance for the political economy of the nation today. Identifying and reflecting upon that significance can have the salient effect of nourishing our contemporary political-economic discourse with the formidable resources of our past. 

The tariff was the first law of consequence passed by the United States Congress, in July 1789. Thereafter in addition to the tariff, the federal government experimented with domestic, or “internal” (as the language went), forms of taxation, but found that, as in the Whiskey Rebellion of the 1790s, the domestic population was so averse to being taxed directly that internal revenue agents were tarred and feathered, and subjected other indignities. The federal government got the message and retired internal taxation. For that one extended period then, from 1817–61, the tariff was the only federal tax. 

After the temporary expansion of internal taxation in the Civil War, the federal government once again largely retired all forms of federal taxation save the tariff, except for one other major tax, that on alcohol and tobacco. From the 1870s through 1913 (the year of the income tax amendment) federal revenue came, approximately, 65 percent through the tariff and 35 percent from alcohol and tobacco excises. As for other levels of government, localities relying on property taxes collected about as much revenue in total as the federal government, perhaps two-to-three percent of national economic output (or GDP) per year. State governments had no tax or financial significance. Typically, state revenues amounted to less than one percent of national output. In 1880, for example, total state revenues were 0.4 percent of GDP. 

In the latter nineteenth century, when the American economy became the largest in the world at the greatest peak in global economic history, the country had a tax system that was collecting 5 or 6 percent of national output in revenues and had tariffs, alcohol and tobacco excises, and property levies as the components of that tax system. Nostalgia for previous forms of taxation in the United States, in particular regarding the tariff, should take these realities into consideration. When the tariff was dominant in the federal tax system, the total tax complement in the country was small. Today the tax system regularly reels in a third of GDP, some six times what was regular 125 years ago. And state governments (today nine percent of GDP) in a financial sense barely existed. 

Oren Cass has good reason to wonder why economics speaks in unprecedented single accord about the evils of tariffs—why a tariff rate of zero is, generally, the uniform recommendation of the discipline. Examining the history of American economic policy, it’s fair to note that when the tariff reigned in the federal tax system (through the first decade of the twentieth century), the American economy redefined what it meant to be stellar—there were growth rates far beyond the present norm, endless employment opportunities, constant wage increases, and wide vistas for entrepreneurialism. Should the nation not seek, if possible, to replicate the policy conditions that accompanied such past glories, and therefore invite real curiosity about tariffs?

There are reasons to resist this conclusion. Two essential features of the tariff era of American economic history were, first, the small size of total government spending and revenues; and, second, the absence of income taxation on any scale before the sixteenth amendment of 1913. 

In that year, as the first permanent income tax became law, Congress proportionately reduced the tariff, beginning that form of taxation’s long decline in the federal revenue system. Tariff revenues today are negligible in the fiscal accounts. The income tax quickly proved that it could yield far more government revenue than the tariff ever had. In the 1920s, for example, the income tax captained a tax system that funded federal budget surpluses every year of the decade, even as the immense World War I debt service payments were an expenditure item. The old ways of reliance on “external” tariff revenue had come to an end. Because the “internal” income tax proved itself to be a revenue machine, in opting for it over the tariff, the federal government (and states and localities as well) could entertain the prospect of getting much bigger. 

When economics indicates that tariff rates should be zero, it does not say the same thing about income tax rates. If income tax rates and tariff rates were both zero, after all, the federal government would have no significant revenue source. The question we have every right to ask is why economists insist that tariff rates should be zero while income tax rates can be well above zero. Do not the same economy-deadening forces that arise with positive tariff rates apply to positive income tax rates as well? 

Economists disagree about the optimal income tax rate, but the lowest serious recommendation is just under 20 percent (as in the Robert Hall-Alvin Rabushka flat tax), with a notable group led by Emmanuel Saez of Berkeley contending that a top progressive income tax rate as high as 73 percent would entail minimal economic costs. Clearly, the discipline does not hold that there are severe costs to income tax rates above zero, as it does for tariff rates. Perhaps conditions justify such a discrepancy. Perhaps since the most the tariff ever yielded in revenue was 2 percent of GDP (the federal government spends 24 percent of GDP today), it cannot base a revenue system for a government determined to be big. And perhaps since the income tax has proven that it can base such a system, yielding with payroll taxes (a form of income taxes), over 20 percent of GDP per annum, it has proven that it can base big government. But the core issue remains. Do economists prefer income taxes as the primary source of revenue merely as a matter of fiscal convenience? Or is there some other reason for permitting them, while accepting as a matter of course that tariff rates should be zero?

One reason for the zero-tariff consensus in economics is, surely, a historical and sociological one. Antipathy to the tariff is “the date that economics brought to the dance,” so to speak. It would be impolitic for economics to jilt antipathy to the tariff, to accept the possibility of positive tariff rates, because the cause of free trade made economics what it is today. Economics first developed in the United States, as an academic discipline in the latter nineteenth and early twentieth centuries, as a scholarly initiative at the margins of the main institutions of American political and economic life. Its agenda was to bring greater intellectual substance and purity to political-economic policy. The great issue of the day was the tariff, and economics set itself up in opposition to it. 

In its heyday, the tariff was the business of men-of-affairs. Owners of successful businesses with cash to spare routinely sponsored agents in Washington, DC, to pressure members of Congress to write “lines,” as the term went, in each new tariff bill that either dinged foreign competitors or put inputs on the “free list.” The tariff was easily the most-discussed issue on the floor of Congress, let alone in cloakrooms and high-end capital city eateries (with the bill picked up by a lobbyist), from the antebellum period through the early twentieth century. The traffic between captains of business and captains of politics was the procedure, the practical mechanism of the tariff. 

The early academic economists were not part of this potent scene, unless they wanted to ingratiate themselves with the relevant players by spouting pro-tariff economics, in which case they got occasional attention. Rather, the inside people ignored economists, who responded by committing themselves to developing an adversary culture whose premise was that the current political economy was wrong in theory. The zero tariff rate that became the centerpiece of this economics was itself a marker of the practical irrelevance of the members of the discipline. Zero implies no traffic in interests, no compromise, no discussion, no business, no politics, no nothing. Zero was purity, the purity of theory. 

But as legal historian Ajay Mehrotra and others have pointed out, as economics challenged tariffs (and property taxation, the workhorse of local taxation in the nineteenth and early twentieth centuries), it also built up a theory of the reasonableness of positive-rate, progressive income taxation. When reforms ensued, the economists prevailed. After 1913, the income tax came to replace the tariff almost completely as a revenue source for the federal government, providing far more in resources to that entity than the tariff ever could. 

It should therefore not come as a surprise that in the main, economics has not viewed income taxation as the primary culprit for economic troubles that have occurred since 1913. For example, economics places astonishingly small weight—if any—to the income tax regime in its assessments of the causes of the Great Depression. Income taxation had never existed in scale sixteen years before the Depression’s start in 1929, yet the top income tax rate of 24 percent of that year, and 63 percent three years later, attracts almost no mention in standard economic histories of the origins of that epic calamity. Economics has, in contrast, gone on about the gold standard as a cause of the Great Depression to a very high degree, even though gold and bimetallic specie standards had been the norm for decades upon decades before 1929. A naïve examination of economic history, unaware of the explanations of economics, would surely, on examination of the event, first suspect the tax regime as the principal cause of the Great Depression. 

The income tax was the wedge issue that economics first used to gain entry into the world of public policymaking, at the expense of the tariff, which had been the favored form of the policymakers and business players who had excluded scholarly economists from their world. This historical sociology retains its impress today in the wildly divergent recommendations of the discipline with respect to these two tax forms. The discipline’s peace with the income tax as an alternative to the tariff has not come about with anything like the critical scrutiny that the discipline has put on the economics of tariffs. The first standard argument against tariffs is that they reduce the purchasing power of the domestic consumer and investor and therefore the standard of living and employment opportunities. Surrendering a fifth of one’s income to taxation (the current average including payroll and state income taxes) is perfectly consistent with the contention that the income tax reduces the standard of living. Having a corporate profits tax—which not long ago at the federal level was 52 percent—will, one need not have any reluctance to say, give investors pause and therefore endanger employment. A second argument is that tariffs cause retaliations. Yet “retaliations” abound in the income tax world. We have heard repeatedly from the current treasury secretary of a global “race to the bottom,” in which other countries espy their competitors’ domestic tax rates and then set their own rates lower, to lure investment from the high domestic-tax places. Third, the mass federal individual income tax is progressive, a feature tariffs have lacked. Progressivity stifles economic activity at the margin. 

Oren Cass, in advocating tariffs, presumably does not intend to abolish income taxes. He is probably happy to use both forms of taxation—a recipe literally on par with the high-tariff, high-income-tax regime of the early 1930s that gave us the Great Depression. He has nonetheless called out a blind spot in economics, its dogmatism about zero rates—which applies only to the tariff. James Madison recommended a low-rate common impost on external trade when the nation formed in 1789. Tariffs of such nature would be fully applicable today, in concert with both dramatic reductions in income tax rates and the size of government, if this nation bid to have a truly stellar economy once again.