American Taxation


The financial demands of the American Revolution simply could not he met by the primitive colonial tax system in place, and all manner of expedients were required to prosecute the war successfully. The result was that in 1783 the United States was free but a fiscal basket case.

The Articles of Confederation, the first American constitution, did not help matters. The states, jealous of their new sovereignty, resisted transferring meaningful power to the central government. Most important, the Articles of Confederation did not grant the new federal government the power to tax. Instead the federal government had to assess the states for the money it needed to operate—but had no means to force the states to pay up. Many were late or simply didn’t pay at all.

The fiscal chaos continued until it finally forced the drafting of a whole new constitution, which gave Congress the power “to lay and collect Taxes, Duties, Imposts and Excises”—a very broad mandate. But it required that these be uniform throughout the United States, in order to prevent several states from ganging up on one or two rich ones, the same reason it forbade duties on the exports of any state.

To protect the interests of the less wealthy, the Constitution required that all revenue measures originate in the House of Representatives, elected by the people, rather than in the Senate, whose members were then elected by state legislators, who were in turn overwhelmingly men from the top of society. But to protect those men of wealth, it required that “no Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census. . . .” At the Constitutional Convention Rufus King of Massachusetts wanted to know the precise definition of “direct taxation.” James Madison reported in his notes that “No one answered.” It was a silence that would have no small consequences a hundred years later.

Congress immediately set about devising a federal tax system. On July 4, 1789, it passed the first Tariff Act, and import duties ,would usually provide the bulk of the federal government’s revenues until the First World War (although the proceeds from the sale of public land in the West, not a tax at all, increasingly contributed to the government’s revenues as the frontier pushed westward). But at first tariffs were not enough. To gain more revenue, Congress passed excise taxes on carriages, distilled spirits, sugar, salt, and other items. The tax on carriages was clearly a soak-the-rich measure (only the rich, after all, could afford carriages), but a very modest one.

Liquor, sugar, and salt were taxed simply because they were three of the relatively few commodities then manufactured on an industrial scale and thus amenable to efficient tax collection.

The federal government quickly ran into a serious problem with the so-called whiskey tax. In most areas of the country, liquor distillers were too few in number to protest the new tax effectively, and in any event they could easily pass it along to their customers in higher prices. But the small farmers in Western areas were blocked from Eastern markets by the Appalachian Mountains. They had to convert their grain to whiskey to make it valuable enough to bear the cost of transportation across the mountains. A 25 percent excise tax was economically disastrous for them, and they flared into rebellion, the first direct challenge to the authority of the new federal government. The rebellion was quickly and easily suppressed, and the two rebels who were convicted of treason were pardoned by President Washington. But the point was made that the new federal government could, and would, enforce its writ.

IN THE LATE 179Os THE RULING FEDERALIST PARTY PILED on still more taxes, including a direct tax on the value of houses, land, and slaves between the ages of twelve and fifty. It even passed a stamp act similar to the one that had led to the Revolution. But as John Kenneth Galbraith once famously remarked, while eighteenth-century Americans objected to taxation without representation, they objected equally to taxation with representation. And the Federalist taxes played a considerable part in the triumph of the Jeffersonians in the election of 1800. In 1802 the Democrats repealed all excise and direct taxes except the one on salt (which was removed in 1807) and relied for revenue on the tariff, land sales, and the postal service, then running, believe it or not, a significant surplus.

A number of these taxes were reimposed during the War of 1812, but they were again repealed soon after the war ended. Until the Civil War the federal government would, in most years, run a large surplus, thanks to steeply increased tariffs.