Recently, the president of the United States praised tariffs as a “great revenue producer.” This remark has sparked heated debates in academic and policy-making circles. Many of which are reminiscent of “the Great Tariff Debate of 1888.”
On the academic side, most arguments against revenue-raising trade taxes are based on stylized observations. Most notably, that tariffs have not been a major source of revenue for the U.S. since 1914, and that they currently account for only 2% of federal revenues.1 All these arguments have strong merits. But they do not adequately answer some of the most important “what if” questions facing policy-makers today. Namely, (a) given the current state of the global economy, can trade taxes serve as a potentially major source of government revenue? and (b) what is the efficiency loss associated with revenue-maximizing trade taxes?
To answer these questions, I develop a new sufficient statistics methodology that builds on recent advances in quantitative trade theory. Applying my methodology to contemporary trade data, I find that trade taxes are both an ineffective and inefficient source of government revenue. For the average country in my analysis, revenue-maximizing trade taxes can replace only 30% of current government revenues and will erase 4.8% of the real GDP in this process.TARIFF_REVENUE_Lashkaripour
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