Could a Higher Import Tariff Pay for Medicare and Get the US Out of Debt?

BY Paul Solman  January 5, 2012 at 3:38 PM EST

Cargo Ship in Port of New Orleans
Cargo containers sit stacked on a ship at the Port of New Orleans in Louisiana. Photo by Paul Taggart/Bloomberg via Getty Images.

Paul Solman answers questions from NewsHour viewers and web users on business and economic news here on his Making Sen$e page. Here’s Thursday’s query:

Name: Joel Socwell

Question: I have been listening to the debate about taxing income versus cutting spending. I also recently visited the old U.S. customs house in New York City, now a Native American Museum. In that museum it said that at one time the U.S. government paid for all its debt from a war by tariffs on imported goods. In fact, it only took ONE YEAR to pay off the whole U.S. debt. If we put a 15 percent tariff on all imported goods, how much money would that tax generate each year? How long to pay off the national debt if spending was halted at current levels? Could it make Social Security solid for the next 50 years?

For some time it has occurred to me that we the people have more to lose from free trade than we have to gain. Manufacturing based inside the U.S. is the key to employment and future growth. A tariff on all imported goods would go a long way to stimulate domestic manufacturing growth without the need for the government to spend money. And if the tariff would instead put money into the national government without increasing the tax on income of any “class” other than making it harder for large corporations to get supper cheap goods to market…so be it, I say.

Paul Solman: Yes, Joel, import duties, aka “tariffs,” were originally the Federal government’s sole means of support. Of course, that was for a pretty slim government. There wasn’t even a permanent income tax until 1913, and no Social Security, FDIC or SEC until the 1930s, no serious national highway system until the ’50s, no space program, no Medicare, etc., etc. In 1913, tariffs were half of federal revenues.
By today, they’re more like one twentieth. And even at their peak in 1946, as a percentage of the total economy, tariffs were barely more than one quarter of federal taxes.

But hey, that was right after World War II. Tariffs, as we once reported in a story on trade, averaged around 40 percent added to the price of an import. Today, they’re below 2 percent.

So let me get this straight: you’d like to hike tariffs back up to 15 percent. Let’s see…that’s roughly 8 times the current rate. Right now, the government raises something like $30 billion a year from tariffs, basically. So multiply by 8 and you’d get an additional $240 billion or so, assuming that imports didn’t decline drastically if they went up in price by 15 percent, a cheeky assumption. But let’s not bother with it. Because right now, we’re borrowing well over a trillion a year to cover our annual deficit. To start paying down our cumulative national debt, we’d have to at least eliminate the deficit, right? With tariffs? Hmmm, back of the envelope, that would work out to an import tax averaging something like 100 percent — again, assuming no decrease in import purchases. Want to throw in Medicare and Social Security? Depends on how large you project the unfunded liabilities of the two, but we’re surely talking tariffs that would be many multiples of the price.

In a word, a non-starter.

This entry is cross-posted on the Rundown- NewsHour’s blog of news and insight. Follow Paul on Twitter.