Thursday, May 13th, 2010
In Federalist 12, Hamilton seeks to convince skeptical states that forming a union will increase and regularize a revenue stream. His main argument centers on the assumption that the best source of revenue is the taxation of consumption, particularly consumption from abroad. He takes great effort to dispel any possible advantages to a federal tax on land (since doing so would be “too precarious” and would put America’s agrarian livelihood at risk). Any sort of direct (i.e. income) tax would also be “impracticable” because collection is difficult, hard currency is scarce, and such tax has never generated enough revenue in other places they had already been tried.
So duties was the way to go—and especially “duties on imported articles.” But the problem remained, as Hamilton saw it, that, if each state levied its own duties at varying rates on different products, the likelihood of fraud would go way up. After all, he reasoned, the states were all adjacent to several others, shared a language, enjoyed a long history of interaction already, and were connected by myriad modes of transportation, including rivers and bays. Therefore, “all these are circumstances that would conspire to render an illicit trade between them a matter of little difficulty, and would insure frequent evasions of the commercial regulations of each other.”
But a unified system of duties across all states, collected and enforced by the federal government via “a few armed vessels,” would not create such incentives to cheat and would greatly improve the efficient collection of revenue.
But why do we even need revenues? Well, as Hamilton asserts in Federalist 12, “a nation cannot long exist without revenues. Destitute of this essential support, it must resign its independence, and sink into the degraded condition of a province.” That is, to Hamilton, an independent and consistent revenue stream is necessary for political independence.
To increase the universe of revenue, Hamilton saw only one acceptable path: increase commerce. After all, he argued, “the prosperity of commerce is now perceived and acknowledged by all enlightened statesmen to be the most useful as well as the most productive source of national wealth.” It also increases the quantity of currency in circulation and thus makes the payment of taxes much easier (thereby increasing the “supplies” to the treasury). Plus, and not insignificantly, a growing and varied commerce contributes to the individual—and thus the national—happiness.
So let’s follow the Hamiltonian logic here. To maintain political independence, a nation must have a consistent and increasing revenue stream. A consistent revenue stream best comes from a federal government levying duties on commerce—particularly commerce with foreign nations. An increasing revenue stream comes from expanding commerce. And expanding commerce “multipl[ies] the means of gratification”—or happiness.
Hamilton might find it fascinating that, 223 years after he wrote Federalist 12, some of the themes he addressed in it form the basis of some of today’s most furious debates. For example:
- Should the federal government receive an ever-increasing revenue stream? While many Americans regard any increase in revenue to the federal government as a positive development, other Americans regard increasing federal revenues as a guarantor of increasing federal spending on matters less and less constitutional. After all, for example, how could we expect a grossly overweight man to gorge less when more and more food is put in front of him?
- Should the federal government levy taxes on commerce with foreign nations? This question is of course at the center of the ongoing debate between free trade and so-called “fair” trade. One would be hard-pressed to find any modern evidence of tariffs and other such duties being a net benefit for either levier or levee.
- Should the federal government encourage the expansion of commerce? Here, Hamilton is spot-on. Robust commerce benefits man and nation alike and thus should be positively promoted. Hamilton would be horrified, however, at today’s practice of the government participating in commerce—not just facilitating it.
Regardless of how you feel about these three questions and other issues addressed in Federalist 12, we all can likely agree that Hamilton could never have conceived of the levels of revenues that pour into the federal government today. Over the last forty years, tax revenue has averaged 18% of the Gross Domestic Product, and is projected to increase significantly under a variety of scenarios.
Paul S. Teller, Ph.D. is the Executive Director of the RSC the caucus of House Conservatives
17 Responses to “May 13, 2010 – Federalist No. 12 – The Utility of the Union In Respect to Revenue, from the New YorkPacket (Hamilton) – Guest Blogger: Paul S. Teller, Ph.D., Executive Director of the RSC”
Shannon Castleman says:
It seems that Hamilton would be a Fair Taqx supporter today, and here is where I base my hypothesis:
1. He writes, “the prosperity of commerce is now perceived and acknowledged by all enlightened statesmen to be the most useful as well as the most productive source of national wealth.” . The Fair Tax would increase commerce and one reason would be that large corporations would move to our shores as they would pay 0% corporate taxes.
2. He mentions the best form of taxing is that which taxes consumptions, not income. He notes that wherever a tax on income had been tried, it had failed. He also points out that efficient collection is difficult, which we all know to be true.
3. He takes great effort to dispel any possible advantages to a federal tax on land (since doing so would be “too precarious” and would put America’s agrarian livelihood at risk). Part of the system we have today is the death tax. This keeps beneficiaries from growing their family wealth.
4. But the problem remained, as Hamilton saw it, that, if each state levied its own duties at varying rates on different products, the likelihood of fraud would go way up. Do we not see this today with all the loopholes in the tax code? People try to wiggle in a “dubious” tax deduction to get a little more back. A one time sales tax paid at the cash register will knock out the fraud 90%.
Susan Craig says:
If the counter intuitive circumstance could be understood by the general populace that the less you tax and activity there is opportunity for more of that activity to occur yielding more tax revenue. Hamilton seems to have grasped this very well.
Ron Meier says:
Federalist 12 can take us down many rabbit trails. Obviously, the transition from an agraian society to a commercial and industrial society, overlayed with the increased velocity and quantity of information delivery, has made some assumptions about taxation extinct. Direct taxation is pretty efficient in our country and tariffs are frequently roadblocks to efficient and productive international trade. Commercial regulation was yet to begin, as the Congress was not yet formed.
In 2010, most of us might observe that complex and repressive personal and corporate taxation as well as strangling regulation is making commerce difficult to expand as anticipated by our founders and as necessary today to provide sufficient revenue for all the government redistribution programs. If anything, the Congress seems to be more focused on limiting the ability of commerce to expand as rapidly as required today because they want to shield and protect the public, not from the government, but from risk and uncertainty. Our founders were very willing to accept both risk and uncertainty, as well as unequal outcomes, in exchange for protection from the government’s encroachment on individual liberty. “Security FROM government,” not “security OF government,” was the objective in the late 18th century America.
Paul S. Gillespie says:
The argument of inefficient collection of direct taxes is as valid today as in the late 18th century. While a very large percentage of American citizens voluntarily submit to paying their direct taxes in a lawful manner, a not insignificant number of people skirt or avoid these taxes altogether. This places a burden on the law abiding citizen as he must not only pay his share, but necessarily shoulder the shortfall of the uncollected taxes of those that enjoy the benefits of our free society but do not contribute to its expense. I think this is a very real cause of discontent and resentment among tax payers.
The “Fair Tax”, much discussed today, would have many advantages over the present system. Primarily it is infinitely fair to all and would bring millions of people into the tax system who pay no taxes today. On the Federal side the cost of tax collection would be significantly reduced and the efficiency of tax collection would improve dramatically. On the commerce side there would be a resulting drop in the cost of goods and services, artificially high because of the added expense companies incur in order to comply with Federal tax law. The chief danger to this system is the temptation to congress to grant exceptions to interest groups in order to “promote the general welfare”.
Would Hamilton agree?
Roger Jett says:
Ron Meier, I very much liked a lot of what you said in your post concerning “Federal Paper #12″. I especially appreciated your closing remarks, “Our Founders were very willing to accept both risks and uncertainty, as well as unequal outcomes, in exchange for protection from the government’s encroachment on individual liberty”. However, I do have to disagree with one statement which was, “Direct taxation is pretty efficient in our country”. Coming from an accounting background and having had extensive exposure to it, I have to contend that taxation in this country is anything but efficient. I’m retired now and my perspective comes from having worked in the private sector. Nothing is simple about our federal tax code and the system is inefficient beyond all comprehension. Blame the Congress for this. By their smoke and mirror tactics, they have constructed a tax system that is a complete monstrosity. I have nogreat love for the IRS, but I recognize that there are many good people working there under extreme conditions . They are left with the difficult job of carrying out the unseemly tax laws enacted by Congress …. they’re left holding that bag. We the people are encumbered not only by the direct tax burden, but also the substantial cost for compliance.
@ Roger….I couldn’t agree more with our tax code being anything but simple. Even those in charge of overseeing tax law can’t seem to figure it out and pay their taxes. A consumption tax ensures that EVERYONE pays based upon what they use or consume. What does it matter how much money you make if you are not spending it? It is ultimately when you spend it that you impact the economy. It is at this end that it should be taxed….not before. Consume more…pay more. Consume less…pay less. It leaves the end results for each individual in their own hands.
Susan Craig says:
Roger, just think of what we’d do to the unemployment numbers if we put all the tax lawyer out of business by virtue of a consumption tax? ooo I shudder to think. No longer wending my way through that impenetrable maze in order to see if I can find another way to lessen the burden just a wee bit.
Shannon Castleman says:
I think the Fair Tax would be closest taxation method to what our founders would agree with; or mayb a few large excise taxes on certain items.
1. It would increase the tax base -illegals, toursists, underground income, etc. An increased tax base would mean the economy would be less jolted by a small segment of the population going through economic harship. Today, if there are 100 million income earners, one person out of work is 1/100 millionth of the tax based lost; if 300 million people are paying a sales tax, then one person out of work is only 1/300 millionth of the tax base lost.
2. Definitely fair. We all pay the same % at the register.
3. Harder for the government to pay off their cronies. Today, a tax give away is sent in the form of a line you check off in your 1040 form. That is how segments of society get a tax break. When I get a $10,000 mortgage interest deduction, and I am in the 25% tx bracket, tat is the same thing as the government mailing me a welfare check for $2,500. If it is in the form of a check, I am looked down upon as a leech. If it done through my 1040, I am called a productive member of society. Under the Fair Tax, in order for a politician to decide to raise the sales tax to spend more money on his cronies, we ALL would have our taxes raised at the cash register. This way, the people would be better educated and more informed on the true cost of government.
“Revenue . . . must be had at all events.” “[T]he necessities of the State . . . must be satisfied[.]” So the question remains who will bear the public burdens of our constitutional federal republic. As previous generations of children at play knew instinctively, everyone could not ride in the wagon at the same time–everyone, with few exceptions, had to pull their fair share. Again, kids knew what was fair–”you pull for five minutes then I’ll pull for five minutes.” Recently, The Tax Policy Center estimated that 47% of households pay no federal income tax. How come they get to ride in the wagon all the time and never get out and pull?
In No. 12, Hamilton makes a good case for ratification based on the States’ and individuals’ economic self-interest. With a federal tax system, much less revenue would “escape the eye and the hand of the tax-gatherer.” And there would be no need to bear the costs of administering 13 redundant state tax systems.
Okay, so I’m sold on the idea that the new federal government will have a sufficient source of revenue to accomplish its constitutional objects. But I have other concerns: How fairly, equally, or justly does any source of revenue spread the burden over all Americans who benefit from the federal system being advocated? And, what restraints will be in place to keep the general government from spending any and all money it collects, instead of collecting only that amount it needs to accomplish its constitutional responsibilities?
I think the founders and their successors were wrong to concentrate on tariffs. Indirect taxes are stealth taxes and you never really know who’s paying them. “In the 1850′s, the federal government obtained 92% of its revenues from customs duties imposed on goods imported from abroad.” (Weisman, The Great Tax Wars) And the reliance on tariffs led to, in my mind, at least questionable results–a farmer enjoying sugar-sweetened coffee at his local early-american Starbucks would pay more in taxes than someone buying $1,000,000 in bonds. The regressivity or progressivity of any proposed tax system should be transparent and is of course debatable. The amount and sources ofrevenue coming into the federal government has changed dramatically over the last hundred years or so–I just want to know why and has it been to our benefit. “In 1913, nearly half of federal revenues came from customs duties, and almost all the rest came from tobacco and liquor taxes.” (Weisman) Hamilton was way ahead of his time advocating “sin” taxes and luxury (“extravagance”) taxes on “ardent spirits.”
Thank you to everyone at Constituting America for creating this wonderful project. How impressive and awe-inspiring!–To encourage ordinary Americans to study our founding documents. Thanks also to all the contributors. I enjoy reading what you think is important about our great country and where you think we’ve gone wrong and what we can do to get us back on the right track.
Ron Meier says:
Although all rational human beings would prefer a “fair tax” or “flat tax,” the probability of getting one is zero. The tax laws long ago ceased being a method for generating the revenue required to run the affairs of the federal government. Instead, the tax law has been the means for Congress to raise revenue to achieve the social and economic outcomes it desires at a particular point of time. It has also been used by the Congress to modify behavior of its citizens and corporations.
There are two types of economic triggers available to the federal government, monetary policy and fiscal policy. Monetary policy is solely under the control of the Federal Reserve; fiscal policy is under the control of the legislative and the executive branches. The legislative branch initiates and passes fiscal policy laws and the President approves or disapproves. Fiscal policy has three elements: (1) government spending management, (2) federal debt management, and (3) taxation. We know that the Congress will not really control government spending; therefore, it needs to have a means by which it can adjust the cash flow required to fund the programs it wants to fund. There are two primary ways it can fund the programs. It can borrow money, thereby increasing the federal debt; there are limits to how much additional federal debt can be sold to investors. This leaves only one remaining way to raise the necessary funds – TAXATION.
If a flat tax or fair tax were to be inititated, Congress would have it’s only real method of modifying behavior and raising money for social engineering taken away from it. Although you and I would love to see this happen, it won’t happen because Congress critters know that the game is over if their only toy is taken away.
By the way, if you’ve been paying attention, Congress knows that it may be reaching the end of its rope with respectto its ability to keep increasing taxes, so it has used the current economic crisis to attempt to extend the reach of its powers to control monetary policy by making the Federal Reserve subject to its review. That sounds pretty benign, and like a good idea on the surface, but it is nothing but a first baby step to get its fingers in the monetary policy pie; once it gets a pinky in, the hand will follow. It’s important that we don’t let them get any control over the Federal Reserve’s Monetary Policy toolbox. Most people don’t understand any of this, so they ignore it. Keep your eyes and ears open for more in this arena.
Lynne Newcomer says:
Great stuff…. The fair tax seems the way to go,here are two reservations /unexpected consequences (not without solution) 1) Would this create a black market? 2) would this hit the very poor right between the eyes,.If the margin they live on is close and they are not paying taxes would that throw them under the bus? Oh yeah… what about Social Security tax how would that be managed,,how would we assertain if someone has woked their required number of quaters to be elegible…. I don’t like the monsterous tax code we have today,but beleieve we could do this taking many cautous steps.
Shannon Castleman says:
Good points nDave. That is why nI like the Fair Tax. Every taxpayer pays 23% sales tax on the purchase of final goods. Every tax payer gets a monthly prebate deposit into their checking account to cover spending to the poverty level-a one time tax deduction. This ensures the poorest of the poor will not pay sales tax.
If it were up to me, government would be cut 66%, and we would have a sales tax of 10% or so, with no prebate checks.
Carolyn Merritt says:
We are running under the assumption that if the powers that be decided to go with the fair tax system, they would do away with the federal income tax. There are states that have a sales tax and also collect a state income tax and all collect real property taxes. Therefore, depending on what state a person lived in, with the fair tax and the state taxes, some would still be paying more than others. True, the underprivileged would pay their fair share.
The next question would be: What would be taxed and what would not be taxed? Food? Medicine?
Carolyn Attaway says:
I didn’t get to participate in the discussion today, but I enjoyed reading everyones comments, especially on a day when our Governor just eliminated 2 of our state taxes: the Senior Citizens Retirement Income Tax and the States portion of the homeowners property tax!
Constituting America says:
As I read each day one of the Federalist Papers, my goal is to see the true intention of our Constitutional forefathers and also to see how it is relevant today.
Their wisdom and foresight continue to astound me.
“A prosperous commerce is now perceived and acknowledged, by all enlightened statesmen, to be the most useful, as well as, the most productive, source of national wealth and has accordingly become a primary object of their political cares.”
A prosperous commerce is the most productive source of national wealth. How is this relevant today? Is America’s prosperous commerce being compromised? When the Federal government becomes a source of income, care and resources, when they seize control of her commerce, American enterprise and inspiration are stigmatized. This stigmatization stifles the prosperity of commerce because citizens lose their motivation and one of their most precious American traits – ingenuity.
“The genius of the people will illy brook the inquisitive and peremptory spirit of excise laws.”
This is very relevant today in regard to businesses being heavily taxed.
And lastly, “A nation cannot long exist without revenue. Destitute of this essential support, it must resign its independence, and sink into the degraded condition of a province.”
Our debt is surpassing our ability to recover. How long will we be able to survive economically, politically? How will we be able to protect ourselves? When destitute of support will we then resign our independence and sink into the degraded position of, yet again, a province?
These are serious times. Our forefather’s words serve as warnings. They documented it for us in our United States Constitution and the Federalist Papers. They provided the answers. Will we heed their wisdom? To do so we must know about it. We must understand it. Knowledge is power. Spread the word.
P.S. I thank our fantastic scholar today, Paul S. Teller, and yesterday’s scholar Dr. Joe Postell. How lucky we are to have their insights and educated opinions! I also thank each and every one of you who have blogged! Fantastic.
Roger Jett says:
I found Ron Meier’s post today very helpful in getting a bigger picture of our nation’s current predicament. His depiction of the “fiscal policy” as it should be compared and contrasted to the “monetary policy” was insightful and he points out clearly the importance of both tools being used wisely and by the right people. I think the call for more accountability from the Federal Reserve with it’s management of monetary policy is prudent. I see great danger however in allowing those who through political motivation (Congress), have wrecked and misused the fiscal policy so badly, now gain undue influence over the management of monetary policy also. Thank you again Ron Meier in helping us get the bigger picture.
Constituting America says:
Federalist Number 12
Thank you to Dr. Paul Teller for your insightful post today, and to Dr. Joe Postell for your enlightening post yesterday! We are blessed to have Constitutional scholars such as yourselves helping us on our journey through theFederalist Papers! And thank you to everyone who continues to comment, and share your thoughts! I am learning so much from each of you.
“The assiduous merchant, the laborious husbandman, the active mechanic, and the industrious manufacturer,–all orders of men, look forward with eager expectation and growing alacrity to this pleasing reward of their toils.”
Taxes. No one like them. Since biblical times the tax collector has been seen as one of the most despised members of society.
Taxes sparked the American Revolution. It is in our heritage to resent taxes, especially when we feel we have little orno say in how the money is being spent!
Yet, Alexander Hamilton, in Federalist No. 12 makes an argument we may not like to hear – taxes are necessary. We must find ways to fund the government :
“A nation cannot long exist without revenues. Destitute of this essential support, it must resign its independence, and sink into the degraded condition of a province. This is an extremity to which no government will of choice accede.Revenue, therefore, must be had at all events.”
The question is how.
It is fascinating to observe the progression of taxation in our country. From Article I, Section 8 of the United States Constitution:
The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;
To a federal tax code that is over 7,000,000 words long (thank you to my friend Steve Moore for this fact, cited in a great piece he did for National Review http://article.nationalreview.com/268573/our-income-tax-monstrosity/stephen-moore)
In federalist No. 12 Hamilton advocates consumption taxes because they are more fair, people will tolerate them better, and they are easier to collect. There were no assured means of assessing personal property ownership or personal income during this period in our country, and as Hamilton wrote, “because personal assets are difficult to trace, large tax contributions can only be achieved through consumption taxes.”
In three years we will “celebrate” the 100th anniversary of the income tax, the ratification of the 16th Amendment to the United States Constitution. It is hard to believe that this complicated, lengthy tax code has been in existence for less than 100 years. The explosion of this code in such a short time shows the tendency of government to grow and intrude into our life and liberty, unless we vigilantly keep it at bay, guarding the boundaries of our freedom.
It was eye opening to read Federalist No. 12, and see that in the early days of the Republic, an income tax was the furthest thing from the founders’ minds. These were men of great vision, and this is one more area where their foresight shines.
If only we had listened to them more closely!
Good night and God Bless!