Trump's Bold Economic Plans

Donald Trump cemented an historic comeback last week with an election victory in which voters handed Republicans a clear mandate. Republicans won the presidency, the popular vote, the Senate, and likely the House.

Trump swept all 7 swing states and improved his fortunes among nearly all groups. His share of the black male vote increased from 12% to 20%, he carried Hispanic men by a margin of 54% to 45%, and increased his share of young voters from 35% to 42%.

On the economy, Trump desires to strengthen tariffs and reduce taxes. Economists have derided these plans, noting that producers often pass tariffs to consumers in the form of higher prices and that tax cuts without budget cuts increase deficits. Many economists expect higher inflation during a Trump presidency.

But these complaints misunderstand Trump’s platform that was approved by voters: a fundamental remaking of how the Federal government works, including both a dramatic shrinking and realignment of its priorities.

It is worth revisiting the role that tariffs and income taxes have played in the nation’s history, and what they might mean for Trump’s economic policy.

Brief History of Tax Policy

The Federal government has used tariffs to shape economic policy since 1792, when Treasury Secretary Alexander Hamilton’s submitted to the US Congress his Report on the Subject of Manufactures.

Written in response to Congress’s desire to increase US independence for “military and other essential supplies,” Hamilton argued for government promotion of manufacturing, including both bounties (i.e., subsidies) and tariffs. This proposal came in spite of his general wariness against tariffs argued in Federalist Paper #35.

Throughout the pre-Civil War period, the Federal government earned ~85% of its revenue from customs duties. It earned another 14% from land sales.

Excise taxes, introduced during the Civil War as the US sought new revenue sources, came to later comprise close to 40% of total revenue.

By comparison, income taxes are a relatively new phenomenon, only cemented when Congress passed the 16th Amendment in 1913.¹ The turn to income taxes came as the government needed new sources of revenue to compensate for declining trade during World War I. Since then, income taxes have become a critical component of funding the Federal government’s annual budget.

The Income Tax Era

The introduction of income taxes in 1914 has enabled a massive increase in the size and scope of the Federal government.

During the pre-Civil War period, tax revenue as a percentage of GDP averaged around 1.8%. Today it is close to 20%.

At the time of the passage of 16th Amendment, there were roughly 388,000 civilian federal employees; today, less than 100 years later, there are around 2.3 million. The Federal government budget of $6.75 trillion means it annually spends over $20,000 per citizen, up from $637 per citizen when income taxes were first introduced. The Federal Register of rules and regulations is now over 90,000 pages long.

Trump’s Economic Policy

Trump’s economic policy is aimed at several objectives: to use tariffs to incentive multinationals to build in the US, to boost domestic manufacturing to create jobs and strengthen national security; to reduce taxes to spur growth; and to fundamentally reduce the size of the Federal bureaucracy.

Reducing the size of the Federal bureaucracy is a daunting affair. Elon Musk wants to remove $2 trillion in spending. Much of the current focus is on eliminating waste and inefficiency, trimming regulations, and closing the deficit.

But achieving cost cutting on this scale would necessarily also entail a dramatic reshaping of the scope and purpose of the Federal government, and would return the US to an era of vastly more limited government.

Nine of the 15 cabinet level departments were created following the introduction of income taxes.² Take just the Department of Education, which Trump and Musk have indicated they wish to eliminate: in FY24 its funding was $238 billion, with ~75% earmarked for student loans.

Ultimately, the question remains: what is the purpose of the federal government? Is it to protect individual rights or to promote economic welfare?

Should the US Federal government be in the business of funding kids attending college, to the tune of over $120 billion per year?

These are legitimate questions to ask, and reasonable people will have differing perspectives. That is what elections are for.

But solving these questions will help direct limited government finances. The biggest long-term strain on the US’s fiscal health is growing entitlement programs; politicians know that reducing these would be electorally costly.

President-elect Trump earned a mandate from voters and deserves a chance to pursue his economic plans.

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1. There were prior attempts to instate income taxes. During the Civil War President Lincoln sought new revenue sources to fund the war; he created a new tax agency (called the Bureau of Internal Revenue) and initiated an income tax, that was abolished in 1872. Following an effort to reinstate it in 1894, it was declared unconstitutional by the Supreme Court in 1895. Income tax only became permanent following passage of the 16th Amendment.

2. Excludes Department of Defense which was established in 1947 and merged the previously existing War and Navy departments.