Trump Wants a Regressive Tariff System to Replace the Progressive Income Tax

Not enough time exists in the 24-7 news cycle for the media to spotlight every crazy comment that comes out of Donald Trump’s mouth. And it’s much easier to focus on the shocking statements that don’t require much explanation, as with Trump’s observations on Arnold Palmer’s genitalia or his threats against “the enemy from within.” Bonkers talk about policies is easier to ignore.

But on October 21, during an event staged for Fox News at a Bronx barbershop with African-American men, Trump shared some truly ludicrous views on tax and tariff policy that deserve your attention.

Asked if he thought it was possible to eventually “eliminate federal taxes,” Trump responded without hesitation:

There is a way. You know in the old days when we were smart–when we were a smart country, in the 1890s and all, this is when the country was relatively the richest it ever was–it had all tariffs. It didn’t have an income tax. OK? 

Now we have income taxes and we have people that are dying–they’re paying tax and they don’t have money to pay the tax. 

You know, in the old days–1890, 1880–we had so much money, they had to set up committees–blue ribbon committees–how to spend our wealth. We had no idea how to spend it, it was so much money. 

Then we went to the income tax system and the rest is sort of history. 

Trump is plainly stating he believes Americans would be better off if we turned back the proverbial clock 130 years–to a time when our system of raising revenue was severely regressive and contributed to the massive inequality that defined the “Gilded Age” of the 1880s and 1890s.

A little history is in order. But first, here’s what’s leading the Washington Monthly website:

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The Gilded Age was a time of much smaller government with less need for revenue— before America was a military superpower, before widespread public education, before Social Security and Medicare, before anti-poverty programs, before farm subsidies.

Federal spending in the late 19th century was around 2 percent of Gross Domestic Product. It crossed 10 percent during World War II and for the last 50 years it’s been around 20 percent.

But while in the 1880s and 1890s funding the government with tariffs was mathematically possible, it worsened the yawning wealth gap between the monopolistic “Robber Barrons” like J.P Morgan and John D. Rockefeller and the millions who toiled in brutal unregulated factories or scraped by on family farms.

And in the mid-1890s–when the nation suffered a four-year economic collapse known contemporaneously as the “Great Depression,” with unemployment estimated to have peaked around 20 percent–the political movement for replacing high tariffs with a progressive income tax began.

The Republican Party was born in the 1850s to stop the spread of slavery. But after the Civil War was won, the party, heavily influenced by northern business interests, became largely defined by its support for tariffs that protected those interests.

In 1890, during the presidency of Benjamin Harrison, a Republican-controlled Washington enacted the McKinley Tariff (named for William McKinley, who was not yet president). The law jacked up already-high tariffs to near 50 percent on many imported goods.

At the same time, the Republicans also jacked up spending. Trump’s comment, “We had so much money … we had no idea how to spend it,” appears to reference the fact that Harrison entered office with a tariff-fueled surplus, and successfully convinced Republicans to spend it on infrastructure, veterans pensions, and naval expansion. They spent so much, the budget cleared $1 billion for the first time in peacetime.

But the so-called “Billion Dollar Congress”–spending freely while imposing high prices on consumers–proved wildly unpopular. Republicans lost more than half of their House seats in the 1890 midterms and Democrats seized control. In 1892 Democrats took the White House and Senate.

Then came the “Great Depression” in 1893, prompting a congressional rethink of the entire revenue system the following year.

As described in the book The Great Tax Wars by Steven R. Weisman, Democrats on the House Ways and Means Committee showed their colleagues with Census data how high tariffs were worsening inequality:

A tiny handful of persons owned over one-half of the wealth in the United States, while one-sixtieth owned over two-thirds of the wealth. On the lower end of the scale, the tables showed that three-quarters of American families were not worth more than $600 for all members. The tariff was seen in this context for what it was—a tax that exaggerated the basic economic inequalities among Americans. The Ways and Means Committee’s breakdown thus demonstrated that poor families paid taxes in the form of higher prices due to tariffs on dishes, cups, forks, clothing– indeed, “everything except water and air.”

Tariff reform passed the House, but was thoroughly watered down by a business-friendly Senate. A new income tax was included in the final bill, but that was deemed unconstitutional by the Supreme Court.

When McKinley became president after the 1896 election, facing budget deficits, he increased tariffs again. But a populist tide against high prices was rising among agrarian Republicans in the Midwest and West, causing intra-party strains with wealthy Republicans in the northeast.

When Theodore Roosevelt became president after McKinley’s assassination, he saw tariff reform as a political quagmire and steered clear of it. But William Howard Taft dove in, produced a balky tariff reform compromise that everyone hated and contributed to his 1912 defeat for reelection.

Thankfully, part of that compromise was support for a constitutional amendment empowering Congress to enact an income tax, which was ratified during the Woodrow Wilson administration and ended the era of regressive tariff-funded government. (If you’re curious to learn more, please read my 2017 Politico article about the history of the Taft tariff bill.)

Trump describes the Gilded Age period as a time when “the country was relatively the richest it ever was” whereas now “we have income taxes and we have people that are dying.” This is precisely backwards. It was a time when the rich didn’t pay taxes on their wealth and the far more numerous poor effectively paid taxes on their basic necessities.

To revert back to a tariff-based revenue system is akin to replacing the income tax with a national sales tax. And a national sales tax rate would have to be extremely high, possibly as high as 89 percent, to make up for the lost revenue. Then you’ll really see some inflation.

Trump can shock in many ways–from the racist to the sexist to the prurient and profane.

But don’t sleep on the shocking nature of his deepest held economic views.

Trump openly hates progressive taxation where the wealthy pay their fair share, and pines for a regressive system that would inflate prices on working-class Americans. By design.

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Best,

Bill Scher, Washington Monthly politics editor

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