Source: The Surplus of the Rich Man’s House
This article is “Does the King of Sichuan Pay Taxes When He Comes?” A sequel to the article.
In yesterday’s article, we mentioned that from the founding of the country until 1913, overall, the entire United States has not had an income tax.
So, here comes the problem:
Before 1913, what did the US federal government rely on for its livelihood?
The answer is:
Tariffs, consumption taxes and land sales revenue.
On October 31, 2024, at a closed-door meeting with some Republican lawmakers on Capitol Hill, Trump first proposed considering completely replacing income tax with tariffs.
Is this feasible?
So, let’s talk about the issue of U.S. tariffs.
Let’s observe the ratio of tariffs/consumption tax, income tax, and social security tax to the US GDP since the establishment of the US federal government in 1792 (please view horizontally).
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(Simply put, income tax refers to the taxation of income for enterprises and residents, while social security tax is the deduction of social security funds from personal wage income after the establishment of the social security system. Tariffs are taxes imposed on imported goods, while consumption tax is a tax on domestic consumption of goods).
With the chart, we can observe that from 1792 to 1912, during these 120 years, the income tax and social security tax of the US federal government were close to zero, only tariffs and consumption taxes were imposed.
The origin of income tax can be traced back to the 16th Amendment to the Constitution in 1913, which gives the federal government the power to levy income tax on institutions and individuals; as for social security tax, it originated from the Social Security Act passed by the US Congress in 1935, which established a pension system for American workers and later expanded to other groups, eventually forming the social security system, and the social security fund is referred to as payroll tax or social security tax.
Since the establishment of the United States, there has been a metal currency era for more than 100 years, and only gold and silver were considered as currency. The government couldn’t just print money at will, although it could borrow money through national debt, it had to be repaid in metal currency, which was like a tight spell on the government’s head.
At this time, the US government mainly relies on tariffs for its survival, but the amount of tariffs itself is not large, accounting for only 2-3% of the total US GDP, so the federal government’s revenue is so small.
In this case, the government must spend money prudently, live within its means - absolutely not like today’s federal government, spending money recklessly without any sense of financial responsibility, borrowing heavily when there is no money, and never thinking about repayment after borrowing, accumulating the US national debt to a terrifying level of $35 trillion, with an average debt of $100,000 per American.
Because the government has less income, it will not think about “spending money to do big things”, and the government intervenes very little in the lives, work, and economic activities of the people. Therefore, for more than 100 years after its founding, the United States has been a “small government, large society” social model, and it was the most economically free country among the major countries in the world at that time. People from all over Europe who wanted to pursue religious freedom, economic freedom, and the American Dream immigrated to the United States in large numbers.
Until the eve of the outbreak of the First World War, even including consumption tax revenue, land sales revenue, the total income of the US federal government, as a percentage of GDP at the time, was still less than 5%.
I have written an article listing the tariff revenue and land sales revenue of the US federal government from its establishment in 1792 to the outbreak of the Civil War.
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Trump said that using tariffs instead of income tax is not just a whim, but a carefully considered and strongly inherited idea. After all, the US government has been relying on tariffs to survive for hundreds of years.
To illustrate the difference between the previous US government and the current US government, and how shameless the federal government is in spending money, here are a few figures for everyone:
From 1789 to 1849, over a period of 60 years, the total revenue of the U.S. federal government amounted to $1.16 billion, total expenditure was $1.09 billion, with a surplus of $0.07 billion. The annual GDP of the United States in 1849 was $2.4 billion;
From 1850 to 1900, over a period of 50 years, the total revenue of the United States federal government amounted to 1.446 billion US dollars, with total expenditures reaching 1.545 billion US dollars, resulting in a deficit of 0.99 billion US dollars. The annual GDP of the United States in 1900 was 20.6 billion US dollars.
From 2017 to 2020, during the first presidential term of Donald Trump, the federal government’s total revenue was $13.53 trillion, total expenditure was $19.09 trillion, resulting in a deficit of $5.56 trillion. In 2020, the U.S. GDP was $21.3 trillion;
From 2021 to 2024, during President Biden’s term, the total revenue of the federal government was $18.31 trillion, the total expenditure was $25.98 trillion, resulting in a deficit of $7.67 trillion. The US GDP in 2024 was $29.35 trillion.
From the perspective of being responsible for the national finances, Biden and Trump are the most shameless, extravagant, and irresponsible presidents in American history - it’s quite magical for someone like Trump, who historically spent money the most irresponsibly, to talk about saving money for the federal government and replacing income tax with tariffs!
The chart below shows the proportion of tariffs in the total federal revenue from the founding of the United States to 2023.
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According to the above chart, apart from a few years relying on land sales, before the outbreak of the Civil War, tariff revenue consistently accounted for over 90% of federal fiscal revenue. After the outbreak of the Civil War, in order to fund the war expenses, the federal government began to significantly increase various consumption taxes and even temporarily added income taxes, which then reduced the proportion of tariffs in federal revenue to around 50%.
In 1913, after the constitutional barrier to federal income tax was removed, the proportion of tariffs in government revenue truly dropped to below 10%.
However, during the Great Depression, the US Congress came up with the infamous Smoot-Hawley Tariff Act, which raised tariffs and prolonged the global economic depression for 10 years. At this stage, the proportion of US tariff revenue to total federal revenue rose to about 15%.
After the end of World War II, the United States led the establishment of a global economic order with the US dollar as the global currency, the General Agreement on Tariffs and Trade (GATT, later replaced by the World Trade Organization WTO) as the basis for trade, and the IMF, World Bank, and World Clearing Bank as the financial framework, promoting free trade globally. Tariff revenue in the United States has significantly decreased, accounting for even less than 5% of fiscal revenue, and in the latest 2023 and 2024, tariff revenue accounts for less than 2%.
In the 2023 fiscal year, the US federal fiscal revenue was $4.47 trillion, with tariff revenue of $80.3 billion, accounting for 1.8%.
In the 2024 fiscal year, the US federal fiscal revenue reached 4.92 trillion US dollars, with tariff revenue of 770 billion US dollars, accounting for 1.6%.
By contrast, total U.S. income tax revenue for fiscal years 2023 and 2024 is $2.6 trillion and $2.96 trillion, respectively.
Trump said that if we want to completely replace income tax with tariffs, first we need to look at how much the total amount of goods “imported” into the United States each year is, and whether we can increase tax revenue by 10 times, 20 times, or 50 times from this.
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From 1960 to now, the annual amount of goods imported by the United States has skyrocketed from $1.47 billion to around $32 trillion, and in recent years, it has remained stable at around $31 trillion.
Many people use calculators to calculate. Now the average customs duty rate in the United States is only 2%, importing $30 trillion worth of goods each year, and receiving around $800 billion in tariffs. If it were increased to 70% or even 100%, wouldn’t it be possible to collect $2 trillion or even $3 trillion in tariffs?
Substitute income tax is completely feasible!
This linear thinking reminds me of something someone said—
The pattern is broken, and Sam Tim’s is also nothing!
Let’s take a look at the history of the average tariff rate on imported goods in the United States…
The chart below shows the average tariff rate for all imported and dutiable goods in the United States from 1820 to the present…
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As you can see, even after the catastrophic Smoot-Hawley Tariff Act was signed in 1930, the average tariff rate on taxable goods in the United States skyrocketed to 59.1%, but the average tariff on all imported goods was only 20%.
Even though Trump launched a trade war against China in 2018, the average tariff rate on all imported goods in the United States only reached 4-5%, and it returned to around 2.5% in 2023 and 2024.
Who can imagine what it means to impose a 100% tariff on all imported goods from the United States?
Trump cannot possibly raise tariffs on all imported goods to 100%!
First, it is because there is such a low tariff rate of 2%, so the import amount of the United States can be so high. 'If you add 50% tariffs, it means that imported goods become incredibly expensive, and Americans will not be able to buy so many things, and this is non-linear, which means that a slight increase in your import tariff rate may result in a significant decrease in your import amount. Not to mention if you raise the tariff rate to above 50%, even if you raise the average tariff rate to above 20%, the import amount may be HalvingHalving or even Halving again, you simply cannot collect that much money.
Second, other countries will not stupidly bear the Trump administration’s tariffs. They will take retaliatory measures and increase their own tariffs. As a result, US exports will also be greatly affected. As the world’s largest importer, if the US enters an era of high tariffs and other countries follow suit, the globalization that has been in place since World War II, the largest in human history, will completely come to an end.
Just as after the signing of the Smoot-Hawley Tariff Act in 1930, the world fell into a Depth economic depression, if Trump dares to impose such high tariffs, it will definitely push the entire world economy into a disastrous abyss. The Great Depression forced out Hitler, Mussolini, and Tojo Hideki. What kind of monsters will emerge in the next world? Everyone can only fend for themselves…
Thirdly, even if Trump insists on imposing such high tariffs, regardless of the consequences, the majority of industrial products consumed by Americans on a daily basis, including their clothing, personal goods, and even most electronic products, are actually imported from foreign countries. If the Trump administration indiscriminately imposes such high tariffs, the inflation rate in the United States will immediately soar, and the American people will not be able to bear it and will rebel.
To know, Trump is still boasting during the campaign that he can drop inflation when he takes office!
Fourth, a sharp increase in tariffs beyond market expectations will only lead to the collapse of the US import and export industries. The collapse of these two industries implies an extremely tight credit situation globally, which is extremely detrimental in the contemporary financial system, and may very likely lead to a great depression in the US economy and the global economy;
Fifth, if global trade collapses due to Trump’s high tariffs, then the US dollar, which has served as the world’s currency since World War II, will lose its significance.
It is precisely because the United States continuously imports goods and has had a significant trade deficit for several decades that it exchanges the dollars made from waste paper for goods produced with real gold and silver in other countries. This is why the US dollar has a global circulation status. If global trade collapses, what would everyone do with such high reserves of dollars? Are we waiting for Trump to repay 1 trillion US dollars with 1 BTC?
Wait, wait, there are many other reasons, not just Trump’s ability.
To illustrate the impact of skyrocketing tariffs, let’s briefly introduce the Smoot-Hawley Tariff Act and its subsequent effects.
In the 1928 presidential election, Republican candidate Hoover proposed to increase agricultural tariffs to protect American agriculture, which was his campaign promise. When Hoover actually took office, the more radical Republicans Smoot and Hawley, in April 1929, proposed the Smoot-Hawley bill to impose tariffs on more than 20,000 imported goods at the time.
Just these two goods.
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In the United States at that time, it had been the world’s largest economy for more than 30 years, and its foreign trade volume had always been the largest in the world. In April 1929, the proposal was submitted to the U.S. House of Representatives and passed on May 28 in the House, but most economists believed that the bill would be difficult to pass in the Senate. Even if it did pass in the Senate, it would be vetoed by President Hoover.
In 1929, despite the apparent rise in the US economy, it also faced the risk of economic recession. The labor market had already started to decline, and politicians began to point fingers at foreign countries. As time went on, more and more signs indicated that the bill might pass in the Senate. By October 1929, when people learned that the bill was likely to be passed in the Senate, the US stock market immediately reacted and began a big dump on October 24th.
So, the big dump of the US stock market in 1929 was not a sudden and inexplicable outbreak!
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Not only that, when the governments of other major economies in the world learned that the bill had passed the House of Representatives, resistance activities immediately broke out, and foreign governments began to raise tariffs on American products. By September 1929, the Hoover administration had received protest notes from 23 trading partners, but the threats of retaliatory actions were ignored by the American president - I am the president elected by the American people, not by you, so what does it have to do with you!
On March 24, 1930, the bill passed the Senate;
On June 13-14, 1930, the amended bill was passed by both houses of Congress.
Although Hoover himself and economists opposed the bill, calling it “vicious, extortionate, and odious”, he eventually signed the bill on June 17, 1930, under the influence of party, cabinet, and business leaders, making it official law.
The global trading system and economic order that was finally established after the First World War began to collapse from 1930 onwards.
In May 1930, Canada, the most loyal trading partner of the United States, imposed new tariffs on 16 products for retaliation. Germany established a trading system through liquidation, followed by retaliation from Cuba, Mexico, France, Italy, Spain, Argentina, Australia, New Zealand, Switzerland, and all Commonwealth countries against the United States.
At first, the tariff policy seemed to benefit the U.S. manufacturing industry, and factories, construction contracts, and industrial production that relied on foreign supplies all increased sharply. However, the global economy was already closely interconnected at this time, and because normal trade was forcibly disrupted, many industries began to experience crises.
The export industry collapsed first. In 1929, the export volume was 5.4 billion US dollars, but by 1933, it had dropped to only 2.1 billion US dollars. Among them, exports to Europe plummeted from 2.3 billion US dollars to 800 million US dollars in 1932.
With the collapse of the import industry, the export volume in 1929 was $44 billion, which dropped to only $15 billion in 1933. Among them, the import goods from Europe plummeted from $13 billion to $4 billion.
Other industries are also gradually falling into a recession under the influence of these two industries, and the import substitution industry, which was once prosperous for a few months, is also falling into a recession because the entire society cannot afford the high costs.
The decline of many industries has brought countless bad debts and non-performing loans to the credit, which has led to the tightening of credit in the US financial system. At that time, when the gold standard was still in place, the Federal Reserve did not dare to print money casually, and the federal government was also responsible, so there was no massive increase in national debt. This credit tightening fell into a self-reinforcing spiral.
The credit crunch in the financial system has brought further Depth decline and recession to various industries; ……
In just two years, the total size of the US economy fell by nearly 30%, from $103.1 billion in 1929 to $75.8 billion in 1931.
Smoot and Hawley, these two guys, boasted that the tariff bill could drop the unemployment rate, raise Americans’ wages, and make America great again. When the Smoot-Hawley Tariff Act of 1930 was passed, the unemployment rate was 8%. However, after the new law was implemented for a year, the unemployment rate doubled to 16% in 1931, and rose to 25% in 1932-1933.
This is the highest level of unemployment in the history of the United States.
This is not the end yet.
Before the tariff bill, the United States was already the most important trading partner in the world. When the United States erected tariff barriers, other economies that heavily relied on import and export trade also began to collapse, leading to a big dump in the economy and triggering a global credit crisis.
Under the global credit crunch, it has become even more difficult for countries to lower interest rates, defer debt payments, or provide emergency loans, let alone international cooperation.
In 1931, when the Austrian Creditanstalt collapsed, the global disaster of the Smoot-Hawley Tariff began to emerge. Global credit began to tighten, from the United States to the United Kingdom, from Germany to Italy, from Japan to Spain, most of the global economy almost entirely fell into the Great Depression…
And this Great Depression continued until the end of World War II.
The subsequent plot is well known to everyone. Faced with the Great Depression, nationalism began to rise in various countries. Germany, Italy, and Japan successively gained ruling positions in their own countries, and used war as a means to solve the depression. And then, there was no more after that.
As for Smoot and Hawley, due to the devastating impact of the Tariff Act, they soon lost their congressional qualifications, and then, in a tacit understanding, they died one after another on the eve of the United States’ participation in World War II.
So far, the bill has been identified on the official website of the US Senate as the "** most disastrous behavior " in congressional history, and Smoot and Hawley, also known as the dumbest congressmen in American history, signed the bill. The president, Hoover, who originally held the idea of free trade economy, passively became the " most trade protectionist **" president in American history.
Next, let’s take a look at whether Trump’s tariff replacement with income tax is intended to challenge the title of the most foolish congressman in American history?
Or, at least challenge the most trade protectionist president?
