Trump’s Tariff Proposals Would Raise Tariff Rates to Great Depression-Era Levels

Former President DonaldTrump's proposals to impose a universal tariff of 20 percent and an additional tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for US businesses and consumers. on Chinese imports of at least 60 percent would spike the average tariff rate on all imports to highs not seen since the Great Depression.

As a review, tariffs are a type of excise tax (a narrowly targeted consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. ) applied to domestic consumption of foreign-produced goods. Since the depths of the Great Depression and the collapse in global trade after the 1930 Hawley-Smoot tariffs, US policy shifted away from restrictive tariffs in favor of multilateral cooperation to reduce tariffs (as economist Douglas Irwin explains in his book Clashing Over Commerce).

That shift in policy sent the average tariff rate on a downward path, from highs of 59.1 percent on tariffed goods and 19.8 percent on all imported goods during the Great Depression to an average of 4.7 percent on tariffed goods and 1.4 percent on all imported goods in 2017.

Another shift, though not as dramatic, occurred during Trump's first term in office, as he imposed new tariffs on washing machines, solar panels, steel, aluminum, and Chinese goods in 2018 and 2019. By 2020, the tariff rate on all imports had doubled to 2.8 percent while the rate on tariffed goods reached 8.9 percent. The Biden administration retained most of Trump's higher tariffs, leaving average tariff rates in the same range.

We estimate the average tariff rate on all imports could spike seven times higher in 2025-reaching 17.7 percent-under Trump's proposed tariff hikes. The United States has not seen an average tariff rate that high since 1934, amidst the Great Depression and the Hawley-Smoot tariffs.

Trump often cites President William McKinley as an inspiration for his personal affinity for tariffs. During the late 19^th century, McKinley was responsible for two protectionist tariff laws, the McKinley and Dingley tariffs.

As Chairman of the House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. , McKinley shepherded the Tariff Act of 1890 into law. At the time, the federal government was running a budget surplus of nearly 50 percent, and tariff revenues substantially outpaced government spending. The McKinley tariff was designed to fix that problem, moving sugar (which accounted for a large share of revenues) to the "duty free" list, providing direct subsidies to sugar producers (to replace the benefit of tariffs and increase spending), and raising tariffs on a variety of other imports.

The McKinley tariff and higher government spending brought a swift backlash, earning the Republican-controlled Congress the nickname of "Billion Dollar Congress," and leading to Republican defeats in the 1890 midterm elections (McKinley himself lost his reelection). In 1892, while monetary and banking policies were larger issues, Democrats ran heavily against the protectionist tariffs and the "Billion Dollar Congress," and won unified control of government.

Democrats did not get to make good on their promises to address protectionist tariffs immediately, because the nation fell into a deep recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. (caused by monetary policies). In late 1893 and early 1894, Democrats took up the tariff issue, but as the bill worked its way through Congress, it strayed from its original goals: a House amendment added an income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. , Senate amendments added back many protectionist tariffs, and ultimately, President Cleveland allowed the law to take effect without his signature.

Dissatisfaction with the broader state of the economy, still in a monetary-policy-related downturn, led to a Republican sweep in the 1894 midterm elections and the election of Republican President McKinley in 1896. Just four months after convening, Republicans sent a new tariff bill, the Dingley Act of 1897, to McKinley, raising protective tariffs even higher than the Tariff Act of 1890.

Many at the time credited tariffs for the economic recovery that soon took shape. Likewise, Trump often credits these high tariffs with the industrial growth of the US during the period.

But as economist Doug Irwin explains, around the same time as the new tariffs were enacted, the global supply of gold began to increase, easing the monetary conditions responsible for the economic downturn and bringing about a recovery.

Further, many economic historians have cautioned that impressive growth in the late 1800s and early 1900s cannot be explained by high tariffs. Instead, labor force growth and capital accumulation-neither of which have strong links to tariffs-are responsible for America's fast growth during this period. If anything, it is possible that the high protective tariffs of the late 19^th century somewhat hindered America's economic growth.

While Trump proclaims, "trade wars are good, and easy to win," some of McKinley's final words on tariffs were less enthusiastic. McKinley declared in a 1901 speech, "isolation is no longer possible or desirable . . . The period of exclusiveness is past. The expansion of our trade and commerce is the pressing problem. Commercial trade wars are unprofitable," (emphasis added). According to Irwin, McKinley himself had proposed a "fundamental shift in US trade policy" away from protection and toward reciprocity.

Trump's proposed tariffs would raise taxes on US imports, burdening consumers and unprotected industries with higher taxes and lower incomes and redistributing some of those losses to protected firms. Using tariff policy to reallocate investment and jobs is a costly mistake-that's a history lesson we should not forget.

Modeling Notes

Table 1 illustrates the steps to estimate how much revenue a universal 20 percent tariff (modeled as a new tariff on top of existing tariffs) and an additional 50.6 percent tariff (the approximate rate required to bring current tariffs on China up to 60 percent) would generate. Note the total rate applied to imports from China is 70.6 percent, reflecting the 20 percent universal tariff plus the additional 50.6 percent tariff on imports from China. Trump has entertained tariffs as high as 100 percent on imports from China.

The estimates begin with an import demand elasticity of -0.997 to estimate the reduction in imports after the tariff is imposed. We estimate the revenue raised by the tariffs using the inclusive tax rate (which is calculated by taking the tax exclusive rate divided by 1 plus the tax exclusive rate) and a 15 percent noncompliance rate, based on the average tax gapThe tax gap is the difference between taxes legally owed and taxes collected. The gross tax gap in the U.S. accounts for at least 1 billion in lost revenue each year, according to the latest estimate by the IRS (2011 to 2013), suggesting a voluntary taxpayer compliance rate of 83.6 percent. The net tax gap is calculated by subtracting late tax collections from the gross tax gap: from 2011 to 2013, the average net gap was around 1 billion. . The new average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. (tariff revenue as a share of total goods imports) is added to the current average tariff rate of 2.4 percent, to arrive at the new estimated average tariff rate of 17.7 percent.

The total amount of revenue raised by the tariffs would be lower than the revenue raised by the tariffs in isolation, reflecting how income and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. collections will decrease when tariffs increase. Revenue would fall further on a dynamic basis, incorporating the negative macroeconomic impact of the higher tariffs.

Table 1. Estimating Tariff Revenue for 2025, Dollar Amounts in Billions

2025 Projection	Tariff Rate	Import Levels After Tariffs	New Tariff Revenue	Total Revenue After Payroll and Income Tax Offsets
Total Goods Imports Less China	$2,835.1	20%	$2,269.8	$321.55	$234.7
China Goods Imports	$443.6	20% + 50.6% to separately reach 60% on imports from China	$131.4	$46.21	$33.7
2025 Total	$3,278.7	$2,401.1	$367.76	$268.5

Note: 2025 projected goods imports values assume goods imports and Chinese imports as a share of total imports remain at 2023 ratios and applies those ratios to Congressional Budget Office import projections for 2025. Change in imports assumes an elasticity of -0.997. Tariff revenue estimate uses the tax-inclusive rate and noncompliance rate of 15%. Total revenue estimate applies an offset of 27% for income and payroll taxes.Share

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