What Is a Revenue Tariff? Definition and Purpose

Tariffs are a long-standing component of international trade policy. These financial tools represent taxes imposed by a government on goods and services brought into the country from abroad. They effectively add an extra cost to foreign products as they enter the domestic market. Governments implement tariffs for various reasons, impacting both the flow of goods and national finances.

Defining Revenue Tariffs

A revenue tariff is a specific type of import tax primarily designed to generate income for the government. Unlike other tariffs, its main objective is not to restrict trade or protect domestic industries, but to collect funds for the national treasury. These tariffs are typically applied to goods not produced domestically or in insufficient quantities to meet consumer demand. This ensures imports continue to flow, providing a consistent stream of taxable transactions.

The Purpose of Revenue Tariffs

The primary purpose of revenue tariffs is to increase fiscal income for the government. The collected funds contribute directly to the national budget. This additional revenue can then be allocated to support various public services, such as infrastructure development, healthcare, or education, or to help reduce national debt. Historically, before the establishment of the federal income tax in 1913, tariffs were a primary source of federal revenue in the United States.

Characteristics of Revenue Tariffs

Revenue tariffs possess distinct features. They typically have low rates, often around 5% or less, intentionally kept low to avoid significantly deterring imports. The goal is to collect tax on the volume of goods, not to restrict their entry. Furthermore, these tariffs are commonly applied to goods not produced domestically or in quantities that do not satisfy internal demand. This ensures a steady flow of imports, providing a reliable base for taxation.

Protective Tariffs and Their Aims

In contrast to revenue tariffs, protective tariffs are taxes on imported goods aimed at shielding domestic industries from foreign competition. These tariffs typically involve higher rates, making imported goods more expensive than similar domestically produced alternatives. The intent is to encourage consumers to purchase goods made within the country, supporting local businesses and employment. Protective tariffs are generally applied to goods produced domestically that face notable competition from foreign imports. While their primary goal is protection, protective tariffs can also incidentally generate some government revenue.