Individual income taxes have been the U.S. government’s leading source of federal revenue for the last decade and have composed 51% of the federal government’s total revenue in the current fiscal year (FY) 2025.^[1] The prevalence of the federal income tax as a share of total federal revenue greatly differentiates the U.S. from the 170+ countries that impose consumption taxes as a leading source of revenue.^[2] However, the U.S. tax base may shift more toward this consumption-forward approach if President Trump’s sweeping tariffs take full effect.

The federal government’s revenue stream is set to undergo major changes following (1) President Trump’s new and heightened import tariffs and (2) the One Big Beautiful Bill Act’s (OBBBA) tax cuts. Although the OBBBA is projected to increase long-run GDP by 1.2%, it is expected that the newly implemented tariffs will reduce this figure by 0.8%, while offsetting only half of the OBBBA’s total cost.^[3] President Trump’s approach toward solidifying tariffs as a greater source of federal revenue has raised concern because the tariffs will operate as taxes levied by the U.S. on goods imported from other countries, which the importers (U.S. businesses) will have to pay.^[4] The costs of tariffs are often passed onto U.S. consumers through higher priced goods, so it is crucial to consider the types of consumers who are most impacted by these rising costs.

Tariffs are usually regressive, meaning that they place greater financial burdens on lower-income households than wealthier households. Heightened tariffs on imported goods reduce domestic business revenue and force businesses to either raise their prices or lower their previous wages and capital income.^[5] Since businesses are more likely to raise their prices than reduce wages and capital income, lower-income consumers are forced to spend a greater percentage of their income on goods. The Peterson Institute for International Economics found that if tariffs were maximized, the bottom quintile would lose 8.5% of their after-tax income, while the top 1% would receive an 11.6% increase in after-tax income.^[6]

Regressive taxation is not new to the U.S., but it usually appears in the form of state-level sales, excise, and property taxes. These are “flat taxes” because all taxpayers pay the same rate, as opposed to “graduated taxes,” like the federal individual income tax, that gradually increase tax rates based on income.^[7] Regressive, flat taxes raise concerns about further income inequality in the U.S., where income and wealth inequality is already higher than most developed countries and surpasses other rich nations, like Canada, France, and Germany.^[8] The risks of income inequality are illustrated by economist Joseph Stiglitz’s statement, “When those at the bottom of the income distribution are at great risk of not living up to their potential, the economy pays a price not only with weaker demand today, but also with lower growth in the future.”^[9]

History of the U.S. Federal Income Tax

In 1913, the U.S. federal income tax was formally established with the ratification of the 16th Amendment, and it has played a significant role in the federal revenue stream ever since.^[10] The 16th Amendment gave Congress the ability to levy an income tax “without regard to any census or enumeration.”^[11] Before the ratification of this amendment, the federal government received most of its income through tariffs on goods. Proponents of the federal income tax argued that the tax would collect more federal income from the wealthy than tariffs, which mostly extracted income from lower- and middle-income households.^[12]

The federal tax system faced repeated changes throughout the 20th century following varying military engagements and economic downturns. In 1944, during World War II (WWII), the top federal income tax rate reached 94% for taxable income over $200,000.^[13] The highest federal income tax rate remained at least 70% until 1981 when it decreased to 50%.

Tax reform was not a major political challenge following WWII. The Tax Reform Act of 1986 created considerable changes from the previous tax code and drastically reduced the number of federal tax brackets––from 16 to two. The highest federal income tax rate decreased from 50% to 28% and the lowest rate increased from 11% to 15%.^[14] This Act aimed to simplify the tax code and reduce loopholes after a long period of minimal tax reform, but it ultimately opened the door for many changes to follow.^[15] In the 1990s, the top rate increased to 39.6%. From 2003 to 2012 the top federal income tax rate fluctuated from 35% to 43.4% and eventually stagnated at today’s top rate of 37%.^[16]

U.S. Federal Taxes in 2025

Since taking office for his second term on January 20, 2025, President Trump has lauded Gilded Age policies with statements such as, “We were at our richest from 1870 to 1913. That’s when we were a tariff country.”^[17] He also stated that the shift toward an income-tax system was “fine,” but it would have been better if the U.S. maintained a greater dependence on tariffs.^[18] Trump’s admiration for the Gilded Age and his desire to replicate its economy would not benefit the majority of today’s U.S. households. It is essential to recognize the millions of immigrants who bolstered the U.S. workforce between 1870 and 1920 when analyzing the Gilded Age’s economic growth.^[19] Tariffs were not the only economic stimulant during this period, and it is unlikely that the majority of today’s U.S. households are in favor of replicating policies that primarily benefited the wealthy.^[20]

Trump’s new and heightened tariffs are a type of protectionist policy that functions by shielding domestic industry from foreign competition. Tariffs (1) inhibit international free trade and (2) have an adverse effect on output and productivity when they are implemented during economic expansions in advanced economies.^[21] Is this protectionist policy advantageous for today’s economy? And, does President Trump possess a legitimate power to impose these tariffs?

Judicial Responses to Trump’s Tariffs

Multiple cases have entered U.S. courts in response to these tariffs. One suit asserted, “trade deficits, which have persisted for decades without causing economic harm, are not an emergency… [or] an ‘unusual and extraordinary threat.’”^[22] President Trump’s Liberation Day Executive Order claimed that the U.S. bilateral trade deficit in goods substantiated a national emergency that allowed him to implement tariffs under the International Economic Powers Act (IEEPA).^[23] Although the IEEPA is designed to be used in times of peacetime crisis, the U.S. District Court for the District of Columbia asserted that the IEEPA does not give the President the ability to “unilaterally impose, revoke, pause, reinstate, and adjust tariffs to reorder the global economy.”^[24] In Learning Resources v. DJT, the Court of International Trade (CIT) ruled that the national emergencies used to qualify Trump’s tariffs under the IEEPA did not bear “rational connections” to the remedy sought.^[25]

However, in VOS Selections, the U.S. Court of Appeals for the Federal Circuit issued an administrative stay of the CIT’s more uniform approach toward relief, ruling that the IEEPA does not authorize the imposition of tariffs. The Department of Justice (DOJ) requested a stay of this ruling to avoid “irreparable harm” to foreign affairs and national security.

Courts have been unable to effect broad, uniform relief in the wake of these tariffs, but their opinions do outline recurring concerns about the President’s use of delineated economic powers to impose tariffs. Youngstown Sheet & Tube Co. v. Sawyer established that the President does not have unilateral discretion to levy or change tariffs, and Trump is the only president that has attempted to implement tariffs under IEEPA.^[26] Further rulings will determine whether the tariffs imposed under the IEEPA were beyond the President’s legal authority, and it is most likely that the Supreme Court will issue a final ruling on the matter. Despite these legal concerns and lack of active judicial intervention, U.S. importers must continue paying tariffs.^[27]

Conclusion

President Trump’s attempts to impose tariffs are critical to any analysis of federal revenue because these tariffs are ultimately “taxes paid by Americans.”^[28] New and heightened import tariffs raise major concerns for U.S. businesses and consumers who will have to adjust to increased prices. This also presents a major shift in the U.S. tax system because it essentially turns a largely graduated-federal system into a more flat-tax forward system. Although there are benefits to each form of taxation, the U.S. has focused on generating federal revenue through individual income taxes since 1913. Future judicial and legislative action will be critical in determining the legitimacy of these tariffs and their future as a component of the U.S. tax system.

 

 

^[1]  https://fiscaldata.treasury.gov/americas-finance-guide/government-revenue/

^[2] https://www.oecd.org/en/topics/policy-issues/consumption-taxes.html

^[3] Id.

^[4] https://taxfoundation.org/taxedu/glossary/tariffs/

^[5] Id.

^[6] Id.

^[7] https://itep.org/the-pitfalls-of-flat-income-taxes/

^[8] https://www.cfr.org/backgrounder/us-inequality-debate

^[9] Id.

^[10] https://bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rates.aspx

^[11]https://www.reaganlibrary.gov/constitutional-amendments-amendment-16-income-taxes#:~:text=Amendment%20Sixteen%20to%20the%20Constitution,determine%20it%20based%20on%20population.

^[12]https://www.reaganlibrary.gov/constitutional-amendments-amendment-16-income-taxes#:~:text=Amendment%20Sixteen%20to%20the%20Constitution,determine%20it%20based%20on%20population.

^[13] https://bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rates.aspx

^[14] https://www.ebsco.com/research-starters/law/tax-reform-act-1986

^[15] https://www.ebsco.com/research-starters/law/tax-reform-act-1986

^[16]  https://www.congress.gov/crs-product/IF11820

^[17]https://www.pbs.org/newshour/politics/trump-has-touted-gilded-age-tariffs-an-era-which-saw-industrial-growth-together-with-poverty

^[18] Id.

^[19]https://www.pbs.org/newshour/politics/trump-has-touted-gilded-age-tariffs-an-era-which-saw-industrial-growth-together-with-poverty

^[20] Id.

^[21] IMF Working Paper

^[22] VOS Selections v. USA

^[23] Learning Hand Resources

^[24] Id.

^[25] https://www.thomsonreuters.com/en-us/posts/corporates/tariff-litigation/

^[26] Youngstown and Learning Resources

^[27]  https://www.thomsonreuters.com/en-us/posts/corporates/tariff-litigation/

^[28] Learning Resources (See, Law Professors Amicus Brief)