The Long History of Tariffs in the U.S.: A Tale Illustrated in Two Charts | Money News

A chart has recently gained attention after it was tweeted by American entrepreneur Marc Andreessen and subsequently shared by Donald Trump.

This chart is straightforward: it illustrates the share of American federal government revenue derived from tariffs, tracing back to the early days of the United States’ independence.

At first glance, it tells an intriguing story. For most of the 19th century, the tariffs on imported goods generated over half of the government’s revenue.

The president interpreted this as: “Tariffs, and only tariffs, created immense wealth for our nation. Then we turned to income tax. We have never been as prosperous during that era. Tariffs will alleviate our debt and, MAKE AMERICA WEALTHY AGAIN!”

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The initial part of his statement holds a degree of truth. The federal economy of the United States largely relied on tariff revenues. When Alexander Hamilton was establishing much of the federal framework, including settling debts from the War of Independence, he opted to finance it through tariffs and duties on imported goods.

While revenue was a significant reason for the tariffs, they also served to shield the nation’s emerging industries. However, tariffs remained the primary income source for an extended period. What shifted? Starting from the late 19th century, the size of the American government expanded. The costs of the Civil War were staggering, and the subsequent financing of a welfare state and national infrastructure proved similarly expensive.

Nevertheless, tariffs have their limits. There’s only so much you can raise these fees before they suppress economic activity, driving up import prices to a point where consumers face financial strain. This brings us back to the data shown in the chart admired by the president.

If you take the same numbers and calculate them in relation to GDP – the total size of the US economy – you get a different perspective (indeed, this is how you’d typically evaluate such long-term historical data). You’ll find that at no point in American history – even during the time when tariffs were considerably higher than today and a more critical revenue source – did the revenues from tariffs surpass 6% of GDP. This is not coincidental.

The limitation of tariffs in financing the Federal administration prompted successive administrations to introduce various taxes on Americans, starting with excise and income taxes established during the Civil War. Over the years, those taxes, administered by the Internal Revenue Service, expanded significantly alongside the growth of government.

Today, the scale of the American federal budget is exponentially larger than it was two centuries ago (although still smaller than many budgets found in Europe). The current administration has planned to curb waste, led partly by Elon Musk and his DOGE (the Department of Government Efficiency, with a name seemingly devised to realize Mr. Musk’s goal of turning everything into a meme). However, there are limits to how much can be cut: a superpower with a significant military and extensive infrastructure, including roads and rail, as well as public health and educational systems, incurs substantial costs.

Despite this, collecting revenue is just one function of tariffs. They can also serve as a bargaining chip in negotiations with other nations (which might be their primary role under Mr. Trump). Furthermore, they can help protect domestic industries from foreign competition.

Regardless of their intention, following decades of relatively free trade globally – especially in the United States itself – we now find ourselves in a period where tariffs have returned. This is just the beginning of the story.