Tariffs Redux

Nothing like some light weekend reading!

SCOTUS is set to rule on tariffs in the very near future. With that in mind, just a quick reminder that tariffs are a tax and how they work.

I get it - BORING! But I believe it’s important for everyone to know and understand the mechanics and magnitude of tariffs so we can put them in context.

Try not to let your eyes glaze over - this is important stuff.

Simply put, tariffs are a tax collected on imported goods and services (mostly goods). Tariffs are collected at the border - primarily ports of entry - by U.S. Customs and Border Protection (CPB), a division of the Department of Homeland Security. Yep, the same folks currently working with ICE to rid our country of Trump/Miller “undesirables”. Contrary to Trump’s claims (what do you expect from a pathological liar), tariffs are not paid by the country exporting the goods to the U.S. The importer (generally, the company bringing the goods into the U.S.) is responsible for paying this tax to CPB.

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There are only 3 ways for the extra costs of tariff taxes to be absorbed:

1. By the Exporting entity (very rare). The exporting entity (say, a Chinese steel manufacturer) can lower the price they charge the importing company in the U.S. (in the example above, the importer would be paying $100/ton without tariffs. In order to keep that price/ton with a 20% tariff, the exporter in China would have to reduce their wholesale price to $83.333/ton. When the importing company in the U.S. pays the 20% tariff of $16.67/ton, the total cost to the importer is… $100/ton).

2. By the Importing entity (not necessarily rare but generally not sustainable). The importing company in the U.S. can pay the tariff and not mark up the final product sold to consumers, thereby increasing its Cost of Goods Sold and reducing its profits. To put it mildly, capitalist corporations do not like this option.

3. By Consumers (over time, generally the case). The importing company can pass the increased costs of the tariffs on to consumers by increasing the price of its final product sold to consumers. Higher prices means higher inflation and makes life less affordable.

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Here are the only references to tariffs in the U.S. Constitution (at the time of the Constitution, they were referred to as “Duties” and “Imposts”.

• Article I, Section 8, Clause 1 (Taxing Authority): “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”  This clause establishes that Congress, not the President, holds the taxing power.

• Article I, Section 8, Clause 3 (known as the Commerce Clause): “The Congress shall have Power To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” This clause gives Congress regulatory authority over trade, including tariffs used as trade policy.

• Article I, Section 9, Clause 5: “No Tax or Duty shall be laid on Articles exported from any State.” This clause ensure tariffs can only be levied on imports, not exports.

• Article I, Section 9, Clause 6: “No Preference shall be given by any Regulation of Commerce or Revenue to the Ports of one State over those of another; nor shall Vessels bound to, or from, one State, be obliged to enter, clear, or pay Duties in another.” This clause prevents discriminatory tariffs between states.

• Article I, Section 10, Clause 2: “No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws…”. This clause prohibits states from imposing their own tariffs.

Notice something? All clauses relating to tariffs are under Article I - the Article that applies to the legislative branch, i.e., Congress. There is no mention of “Duties” or “Imposts” in Article 2 - the Article that applies to the Executive Branch, i.e., the President. To wit, there is no explicit tariff-setting authority given to the President in the U.S. Constitution.

Now, IANAL, but IMHO, 1) the President has absolutely no constitutional authority to levy taxes for any reason, and 2) Congress has no constitutional authority to pass laws that delegate its authority under Article II to the President/Executive Branch (even though courts have upheld congressional delegation to the Executive Branch in the past). There are reasons these powers were specifically put in Article I and not Article II. In essence, the Founding Fathers placed tariff authority in Article I (Congress) rather than Article II (the Executive) because tariffs were understood to be taxes, rules of commerce, and potential tools of favoritism or coercion—all areas the framers deliberately insulated from unilateral executive control. THEY DID NOT WANT A KING WITH THIS TYPE OF POWER! Their reasoning reflects core constitutional principles: no taxation without representation, checks against abuse, federal unity, and legislative supremacy over revenue.

It seems to me that upholding “delegation” of this authority defeats the entire original purpose of the Founding Fathers. I’m sure all the originalists on SCOTUS will agree. Don’t you?

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How material are tariffs to U.S. Government revenue?

In fiscal year 2024 (October 1, 2023 - September 30, 2024), the breakdown of tax revenue to the federal government is roughly as follows:

• ~49% from individual income taxes

• ~35% from payroll taxes (Social Security and Medicare)

• ~11% from corporate income taxes

• ~3% from excise, estate, other taxes

• ~2% from tariffs

As you can see, tariffs are an incredibly small part of the federal government’s revenue.

While this will change if Trump’s tariffs are upheld, the basic math says that tariffs cannot bring in enough revenue to replace other forms of tax revenue (primarily income taxes). In Fiscal Year 2025, the U.S. imported about $3.3 trillion worth of goods. A 20% across-the-board tariff (much higher than recent historical rates) would bring in about $660 billion. Sounds like a lot, right? Well, the U.S. took in approximately $5.2 trillion in tax revenue in FY2025. A 20% tariff would replace only a bit over 12% of total tax revenue (and that’s not accounting for likely reduction in imports - and, therefore, reduced tariff revenue - due to the tariffs themselves moving purchasing to domestic producers or non-tariffed areas of the world).

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Finally, the U.S. has imposed tariffs to raise revenue throughout our history. Targeted tariffs to protect specific important industries and national security have their place. However, extremely broad, non-targeted high tariff regimes have usually resulted in negative long-term economic effects. The Smoot-Hawley tariffs instituted in 1930 that preceded the Great Depression are a great example. Broad tariff regimes are basically regressive taxes that hit lower income consumers harder, reduce living standards, misallocate market resources, and invite economic retaliation from foreign countries.

Ok everyone - you’ve earned a nap now…