Tariffs in United States History - History and Background

History and Background

Responding to an urgent need for revenue following the American Revolutionary War, after passage of the U.S. Constitution the First United States Congress passed, and President George Washington, signed the Tariff Act of July 4, 1789, which authorized the collection of duties on imported goods. Customs duties as set by tariff rates up to 1860 were usually about 80–95% of all federal revenue. Having just fought a war over taxation (among other things) the U.S. Congress wanted a reliable source of income that was relatively unobtrusive and easy to collect. Tariffs and excise taxes were authorized by the United States Constitution and recommended by the first United States Secretary of the Treasury, Alexander Hamilton in 1789 to tax foreign imports and set up low excise taxes on whiskey and a few other products to provide the Federal Government with enough money to pay its operating expenses and to redeem at full value U.S. Federal debts and the debts the states had accumulated during the Revolutionary War. Hamilton thought it was important to start the U.S. Federal government out on a sound financial basis with good credit. The first Federal budget was about $4.6 million dollars and the population in the 1790 U.S. Census was about four million. Hence the average federal tax was about $1/person per year. Then tradesmen earned about $0.25 a day for a 10–12 hour day so federal taxes could be paid with about four days work. Paying even this was usually optional as taxed imports listed on the tariff lists could usually be avoided if desired.

The Congress set low excise taxes on only a few goods, such as, whiskey, rum, tobacco, snuff and refined sugar. Tariff rates from 1792 to 1860 were usually about 80–95% of all federal revenue. The excise tax on whiskey was so despised it led to the Whiskey Rebellion, which had to be quelled by Washington calling up the militia and repressing the rebellious farmers—all were later pardoned. The whiskey excise tax collected so little and was so despised it was abolished by President Thomas Jefferson in 1802.

All tariffs were on a long list of goods (dutiable goods) with different customs rates and some goods on a "free" list. Congress spent enormous amounts of time figuring out these tariff import tax schedules.

Tariffs for many years were primarily to collect Federal revenue and only secondarily to protect start-up industries. Since the government largely restricted its activities to maintaining order and protecting property via the army, navy and courts tariffs raised enough revenues to finance the government. The U.S. Mail was largely self-supporting. During wars or to meet other needs additional income was secured by raising the tariff and excise tax rates. Short term and unanticipated capital needs (budget deficits) were usually covered by borrowing. The first unexpected cost was the Northwest Indian Wars in the Northwest Territory in the 1790s, which required rebuilding the U.S. Army (the poorly trained militia were initially slaughtered), which had largely been disbanded after the Revolutionary War. Tariffs were adjusted up to cover these costs.

A protective Tariff is often used by governments to attempt to control trade between nations to protect and encourage their noncompetitive or undeveloped local industries, businesses, unions etc. giving them time to become competitive. In addition it was thought under the theory of mercantilism generally believed by many countries in this era that exclusive trade with the colonies should be nearly all on ships of the parent country and all advanced industries etc. should be restricted to the mother country. Raw materials should be exported to the parent country and finished goods exported to the colonies. The United States starting out as a colony had these and other handicaps. The advantages they had were a free and innovative and lightly taxed populace with no dead hands of monarchy or aristocracy.

The reasons for an industry or business being noncompetitive are basically four:

• they do not have the innovations or inventions that their competitors have,
• they do not have the skill sets or organization their competitors have and
• their average wages may be higher than is typical in the competitor's country.
• lack of raw materials

In the U.S. all these conditions applied except for the lack of raw materials. The new textile producing machines (the start of the Industrial Revolution) developed by Britain were prohibited to be imported to what would become the United States (and elsewhere), skilled mechanics and engineers knowledgeable about these machines were prohibited from emigration and the U.S. had significantly higher wages due to the lack of people—one of the main reasons people immigrated to the U.S. A protective tariff was proposed by Secretary of Treasury Alexander Hamilton to help overcome these handicaps while knowledge and organization skills were accumulated to build competitive industries and to allow higher wages to be paid in these industries. These protectionist ideas were essentially ignored for many years as Federal tariff revenue was the main goal of tariffs. More imported goods could easily be paid for by exporting more raw products.

Major problems occurred in this state of affairs starting in the Napoleonic Wars when both France and Britain tried to interfere with each other's trade by blockading U.S. (and other) shipping. In 1807 imports dropped by more than half and some products became much more expensive or unobtainable. Congress passed the Embargo Act of 1807 and the Non-Intercourse Act (1809) to punish British and French governments for their actions; unfortunately their main effect was to reduce imports even more. The War of 1812 brought a similar set of problems as U.S. trade was again restricted by British naval blockades and Congress needed additional funds to expand the U.S. Army and rebuild the U.S. Navy, which had largely been disbanded after the Revolutionary War. Tariffs were adjusted and the excise tax on whiskey reinstated to cover most of these costs.

The lack of imported goods relatively quickly gave very strong incentives to start building several U.S. industries. Slowly but surely many of the initial handicaps were overcome as knowledge about the machinery and/or the organization of industries were released by Britain or "emigrated from" the British isles, Holland or wherever they were more developed. Many new industries were set up and run profitably during the wars and about half of them failed after hostilities ceased and normal imports resumed. Industry in the U.S. was advancing up the skill set, innovation knowledge and organization curve.

Tariffs soon became a major political issue as the Whigs and later the Republicans wanted to protect their mostly northern industries and constituents by voting for higher tariffs and the Southern Democrats, which had very little industry but imported many goods voted for lower tariffs. Each party as it came into power voted to raise or lower tariffs under the constraints that the Federal Government always needed a certain level of revenues. The United States public debt was paid off in 1834 and President Andrew Jackson, a strong Southern Democrat, oversaw the cutting of the tariff rates roughly in half and eliminating nearly all federal excise taxes in about 1835.

The American Civil War (1860–65) with its tremendous costs built up an even stronger case for higher tariffs and the opposing Southern Democrats had nearly all left office so tariffs zoomed. The Morrill Tariff significantly raising tariff rates was signed by Democratic President James Buchanan in early March 1861 shortly before President Abraham Lincoln took office. The Civil War began in April 1861. To help pay for the war, tariff rates were increased, excise taxes were reintroduced and the income tax (a new revenue "invention" later declared unconstitutional) introduced.

By about 1900 it had became clear that the U.S. industries were competitive (or more) in nearly all areas and as the need for protection tariffs to pay for the Civil War receded tariffs were gradually reduced. The next peak in tariffs was in about 1918 when World War I expenditures had to be paid for. The next peak in tariffs was due to the Smoot–Hawley Tariff Act of 1930 at the start of the Great Depression. It is generally believed this act with its high tariff rates prolonged the Great Depression of 1929–1939.

Tariff rates are set up many times to "punish" trade tariffs, etc., on U.S. goods passed by other countries who are trying to protect their uncompetitive industries and/or businesses. It is unclear whether this policy works very well because the lack of competition often encourages companies (and governments) to keep inefficient and out dated equipment or business practices. These protected industries are often uncompetitive on the non-domestic market. Without the tariffs the customers can buy imported products cheaper and force the local companies to become more competitive. Tariffs are nearly always imposed on imported foreign goods and very seldom on exported goods and nearly always cost the consumer extra money. Historically U.S. tariffs on imported goods and products till 1913 ranged from 8% to 45% (averaging about 22%) and supported nearly all the Federal Governments expenses until the Sixteenth Amendment to the United States Constitution allowing Federal Income Taxes was passed in 1913.

In the 18th and 19th centuries, many countries primary source of income was import tariffs. Tariffs tended to be lowered as other sources of tax income such as income taxes, payroll taxes, value-added taxes (VAT), property taxes, sales tax, etc. have been enacted. In the United States property taxes and sales tax have nearly always been reserved for state and local government income sources. Various Income Tax rates and schedules are also common in many states but tariffs are not. Tariffs in the U.S. can only be imposed only by the Federal government at a uniform rate and not by state or local governments.

Tariffs up to the Smoot–Hawley Tariff Act of 1930, were set by Congress with many hours of bickering and testimony. In 1934, the U.S. Congress, in a rare delegation of authority, passed the Reciprocal Tariff Act of 1934, which authorized the executive branch to negotiate bilateral tariff reduction agreements with other countries. The prevailing view then was that trade liberalization may help stimulate economic growth. However, no one country was willing to liberalize unilaterally. Between 1934 and 1945, the executive branch negotiated over 32 bilateral trade liberalization agreements with other countries. The belief that low tariffs led to a more prosperous country are now the predominant belief with some exceptions. Multilateralism is embodied in the seven tariff reduction rounds that occurred between 1948 and 1994. In each of these "rounds", all General Agreement on Tariffs and Trade (GATT) members came together to negotiate mutually agreeable trade liberalization packages and reciprocal tariff rates. In the Uruguay round in 1994, the World Trade Organization (WTO) was established to help establish uniform tariff rates.

Presently only about 30% of all import goods are subject to tariffs in the United States, the rest are on the free list. The "average" tariffs now charged by the United States are at a historic low. The list of negotiated tariffs are listed on the Harmonized Tariff Schedule as put out by the United States International Trade Commission.

Historically, high tariffs have led to high rates of smuggling. The United States Revenue Cutter Service, the oldest naval unit in the United States, was established by Secretary of the Treasury Alexander Hamilton in 1790 as an armed maritime law and custom enforcement service. In 1915 the Service merged with the United States Life-Saving Service to form the United States Coast Guard. In 1939 the U.S. Coast Guard merged with the United States Lighthouse Service and is today the primary maritime law enforcement force in the United States.

The U.S. Customs and Border Protection (CBP) is a federal law enforcement agency of the United States Department of Homeland Security charged with regulating and facilitating international trade, collecting customs (import duties or tariffs approved by the U.S. Congress), and enforcing U.S. regulations, including trade, customs and immigration. They man most border crossing stations and ports. When shipments of goods arrive at a border crossing or port, customs officers inspect the contents and charge a tax according to the tariff formula for that product. Usually the goods cannot continue on their way until the custom duty is paid. Custom duties are one the easiest taxes to collect, and the cost of collection is small. Traders seeking to evade tariffs are known as smugglers and can be fined or sent to prison if caught.