President Trump has floated the idea of replacing the income tax with tariffs. As he correctly notes, tariffs were the primary funding source for the federal government until the 16th Amendment was ratified in 1913, which allows Congress to levy an income tax. However, attempting to return to tariffs to raise government revenue over a century later will encounter a practical difficulty, namely the federal government is much, much larger now than it was then.
This year, the federal government is on track to spend nearly $7 trillion with about $2.4 trillion raised from income taxes. In contrast, the federal government collected only $79 billion in revenue from tariffs. A trillion is equal to a thousand billion, meaning personal income tax revenues are 30 times what tariff revenues are. Thus, tariffs would have to be increased by a factor of 30 to make up this revenue. Such an increase in tariffs would grind international trade to a halt, cause tariff revenue to fall to zero, crash the stock market and plunge the economy into a massive recession.
Note that in 2024, the United States imported $3.2 trillion worth of goods and services while exporting $2.1 trillion. Raising $2.4 trillion from tariffs would require a 75% tariff on all U.S. imports. Such a tariff would result in no imports as the U.S.-produced goods or services would be cheaper, thus no tariff revenue, as well as the problems described above.
Prior to the Civil War, federal government expenditures were only about $450 million, adjusted for inflation. This is 0.006% of what the federal government currently spends today. During that time, federal spending was limited to modest military, infrastructure, government operations and land acquisitions.
If the federal government were that size again, it could finance itself through tariffs. Beginning with the Civil War, the government began to get permanently larger. The Civil War, Reconstruction, the Progressive Era, World War I, the New Deal, World War II, Social Security, Medicare, the modern military and the welfare state are all examples of permanent governmental expansion.
During the Civil War, Abraham Lincoln established the first income tax to raise revenue to pay for the war, signing the Revenue Act of 1862 and establishing the Commissioner of Internal Revenue. In 1872, the Revenue Act was repealed by Congress. As the federal government continued to grow, Congress tried to reimplement it in 1894 but was ruled unconstitutional by the Supreme Court in 1895, hence the need for the 16th Amendment.
Reducing the size of the federal government to 1800s levels would be lightyears beyond what even the most optimistic forecasts believe DOGE could achieve. Even balancing the budget by closing the $2 trillion annual budget deficit seems unfathomable. That would require doubling income taxes, or making massive cuts to entitlements, the military, and non-defense discretionary spending. For better or worse, choices of previous generations of Americans have given us a federal government that cannot be financed by tariffs alone.
