Record tariff revenue is no match for record spending

Tariffs raised a record $16.3 billion of tax revenue in April, according to the Wall Street Journal. Averaged out over a whole year, this would add up to nearly $200 billion. The administration has touted its tariffs as a way to raise revenue, fund an income tax cut, and in one flight of fancy, maybe even replace the income tax. These revenue arguments are not as strong as the president thinks.

Expected federal outlays for 2025 are $7 trillion. This record tariff revenue, if it holds its current pace, would fund the federal government for less than 11 days.

The federal deficit this year is expected to be about $1.9 trillion. This record tariff revenue pace would cover barely a tenth of that, or a little more than a month of deficits, without touching general federal spending.

It is possible that subsequent tariff increases will raise even more revenue, though that is no guarantee. Similar to the Laffer Curve that supply-side economists use for income tax revenue, tariff revenue has diminishing returns. Higher rates discourage imports. So while high tariffs might raise more revenue per dollar of imports, there are fewer imports. At some point, those reduced imports outweigh the higher per-unit tariff revenue.

In the extreme case, a tariff high enough to discourage all imports would raise zero revenues. Just as 1980s supply-siders never knew where that inflection point was for income tax rates, trade protectionists do not know where the tariff rate inflection point lies.

The 145 percent China tariff might have been close to that extreme. Thanks to the recent US-China agreement, we will likely never know for sure; some knowledge isn’t worth the price.

That makes two arguments for why tariffs are poor revenue raisers. One, even record-setting tariff revenues can only fund the government for about a week and a half. Two, there is an upper bound on how much revenue tariffs can raise, because they discourage the very thing they depend on for revenue.

A third argument is that other tariff objectives contradict the goal of raising revenues. My colleague Iain Murray has written eloquently about this.

Let’s grant for the sake of argument that tariffs can boost American manufacturing by keeping out imports (economists are skeptical). Keeping out imports means less revenue.

Trump has also touted tariffs as a negotiating tool for other policy goals. If he gets what he wants and withdraws the tariffs, that also means less tariff revenue.

As Iain concludes:

To sum up, the three arguments for tariffs can only seriously be advanced by someone suffering from advanced cognitive dissonance. They are poor revenue raisers, they cause net harm to manufacturing, and they backfire as negotiating tools. These three objectives are mutually exclusive, and ineffective even when taken individually. A better policy would focus on reducing costs to the consumer.

Tariff revenues are at an all-time high. They are still useless for serious deficit reduction, let alone replacing the income tax. Even if tariffs did have stronger revenue effects, the economic damage they cause means that their fiscal benefits are not worth the costs.