Within a decade, however, both elements of the tax-swap bargain collapsed. Congress quickly discovered that income taxes yielded far more revenue than the old tariff system they replaced. To pay for U.S. entry into World War I, they jacked the top marginal rate up to 77 percent in 1918. Attempts to bring the income tax under control succeeded briefly in the 1920s, but President Hoover raised the top rate to 63 percent and Franklin Roosevelt raised it to 79 percent. Under FDR, Congress also reduced the exemption threshold for lower-income earners. What started as a low “class tax”—a tax on only very high-income earners in 1913—became, by 1942, a “mass tax,” a broad-based tax on most American families.
When Congress flipped back to the protectionist-dominated Republican Party in 1920, it restored the average tariff rate to 38 percent. In 1930, Congress again opened its doors to industries seeking government protection from the stock market crash. Its intended “stimulus” became the notorious Smoot-Hawley Tariff, which jacked average rates up to 59 percent and instigated a global trade war.
The damages from the collapse of this original tax swap took decades to disentangle. Congress recognized its error and ceded its trade policy oversight to the State Department in 1934 as an emergency measure to bypass the tariff system. The liberalization of the global economy since World War II came about through treaties and trade agreements. These measures remain fragile, and they depend on an executive branch that continues to honor international agreements. If Trump abandons our free trade obligations with other countries, the Smoot-Hawley schedule still remains on the books.
This is from David R. Henderson and Phillip W. Magness, “Don’t Substitute Tariffs for Income Taxes: You’ll Get Both,” National Review, January 28, 2025.
Read the whole thing, which is not long.
