Tariffs are lousy revenue generators

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President-elect Donald Trump has proposed cutting income taxes and raising tariffs to replace some of the revenue. Economists of all political stripes have been nearly unanimous in saying that wouldn't work.

One of the reasons why hasn't gotten nearly enough attention: most of the extra money consumers pay for tariffed goods never reaches government coffers. It instead directly subsidizes private businesses.

Take the steel industry. In his first term, Trump imposed a 25 percent steel tariff on most imported steel. As a result, steel prices in America also went up by 25 percent.

It wasn't just imported steel prices that went up. Domestic steel prices went up, too, even though the US government collects no tariff revenue on American-made steel.

This is by design. The point of tariffs is to reduce competition. They let domestic producers charge higher prices for the same product-so they do.

Since about two-thirds of American steel consumption is US-made, government only collects tariff revenue on about a third of steel used in the US. Consumers, therefore, still pay the full amount of the tariff on domestic steel. The money goes instead to US Steel, Cleveland Cliffs, and other private businesses.

Tariffs are a major reason why Americans pay higher steel prices than anywhere else in the world. Tariffs are also a major reason why US manufacturing output has yet to regain the all-time peak it reached in 2018, the year the steel tariffs were announced.

To put it another way, in order for government to raise $1 million from steel tariffs, consumers have to pay about $3 million more for cars, housing, and other steel-using goods, and most of that money is corporate welfare. Tariffs are incredibly inefficient, even by Washington standards.

For comparison, in 2023, the IRS used a $16.1 billion budget to collect $2.2 trillion in income tax revenue. Instead of spending $3 to raise $1 of tariff revenue, the IRS spends $1 to raise $136.65 in income tax.

Most of what consumers pay in tariffs is essentially a subsidy to protected businesses and their lobbyists, and it does nothing to reduce the federal deficit. This is not a wise political strategy when people are still smarting from pandemic-era inflation.

Some very smart people are looking for ways to rationalize Trump's proposed tariff hikes. Boosting government revenues is not one of those rationalizations.