Cross-section and time-series data show that nations substitute income taxes for tariffs as they develop. This paper confronts this observation within the context of a two-country open-economy endogenous growth model in which public expenditure is financed by an optimal tariff and income tax the second of which is subject to an administrative cost. The model is calibrated and its transition is shown to yield time paths for the shares of total government revenue derived from the tariff and the income tax that are consistent with the data.