Mises Daily Articles
The Rocky Road of American Taxation
No modern revolution was deeper rooted in taxation than the revolt of the Thirteen Colonies in British North America. British taxation not only caused the revolution, but perhaps most important, it acted as a unifying force in the colonies. The once disorganized and squabbling colonies rallied around the cause of taxation without consent, took up arms against the British, and finally formed the United States of America. The American independence movement was not deep-rooted; it began in 1766 when colonial leaders met to protest British taxes under the Stamp Act. The Stamp Act Congress, as it was called, was the real birthplace of the United States.
The rallying cause against taxation by the Crown was at first a confused concept in the minds of most Americans. The colonists first argued that internal taxes, like stamp taxes, were bad, but external taxes, like import taxes, would be acceptable. The British Chancellor of the Exchequer, Charles Townshend, quite properly called this position by the Americans as "perfect nonsense." This nonsensical reasoning made it difficult for the Crown to know what to do. In the end the Americans revolted when Parliament adopted the kind of taxation the colonists said they were willing to pay. You could justifiably say that the American Revolution occurred, not because we objected to taxes without representation, but because we objected to taxes, period.
And the American attitude didn't change much after the war. What were the people doing in 1765? They were tarring and feathering British tax agents. What were they doing in 1794? They were tarring and feathering American tax agents.
Once the War of Independence had been won, there was little thought of creating a national government with taxing power….
From the fullest conviction, I disclaim every idea both of policy and the right internally to tax America. I disavow the whole system. It is commenced in iniquity; it is pursued with resentment; and it can terminate in nothing but blood.
— Marquis of Grandby, Speech in House of Commons, 5 April 1775
It is not difficult to argue that the founding fathers of America revolted over taxes that were neither unfair nor oppressive. The Americans were among the most blessed and fortunate people on earth; they had the protection of the British nation and their land was rich and choice. Business was good and there were jobs for everyone. Europe's social castes did not enchain them and their sons were not conscripted to fight wars in far away places. If revolution is the consequence of oppression then the American Revolution should never have occurred.
The taxes the British tried to collect were modest; the money was to be spent entirely in the colonies for their benefit and protection. It was not going to be sent back to the mother country. Why all the ruckus and cry of "tyranny"? Did the mother country have a bunch of spoiled brats who did not realize just how well off they were? Why shouldn't they pay their share of the costs of maintaining the military forces that secured their borders? The Americans were the beneficiaries of recent military victories that removed the threat of French imperialism and opened up the western frontier. Did not the Americans have a moral obligation to pay for some of the costs incurred in securing these benefits?
The American Revolution had its roots in the attitudes of the first settlers who came to the New World in the seventeenth century. Most of them were embroiled in the English Civil War and carried with them the ideals of Lord Coke and the Petition of Rights. Their colonial charters from Parliament guaranteed them "all the rights, privileges, and immunities of Englishmen." This meant that they would have the right to trial by jury; they would be governed by the Common Law; they could not be arbitrarily imprisoned; and they could not be taxed without their consent.
In theory the Crown was just as restricted in dealing with them as with Englishmen at home. Their attitude is illustrated in a letter written home by one British civil servant who said that if you approached a colonist about providing funds for British armies fighting in America, he responded by giving a "lengthy lecture on his rights." -->The chances are this lecture was not very logical.
An Englishman living in the colonies had no member of Parliament to represent him. Under those circumstances it was not possible for him to "consent" to laws and taxation. His rights as an Englishman were illusory, especially when he found himself in the clutches of arrogant bureaucrats sent out from the mother country to interfere in his way of life.
This unfortunate situation was no one's fault. Political forms and practices that guaranteed his rights had not been invented. Local courts helped somewhat; jury trials were provided and the Common Law governed — but much was missing, especially some means by which he could debate and consent to taxation. Local assemblies could be overruled by the Crown. It may be that the real cause of the American Revolution was this lack of political machinery to protect the colonists' rights. The British Parliament was not designed to work for Englishmen living in faraway places. As events turned out, the American Revolution was a radical solution to that problem. In the years that followed, other colonial areas such as Canada, Australia, and even twentieth-century Commonwealth countries, were to find more moderate solutions. The basic problem in eighteenth-century North America was that British colonial practices were incompatible with the "rights of Englishmen," and the American Revolution was an expression of that incompatibility.
|"The American Revolution occurred, not because we objected to taxes without representation, but because we objected to taxes, period."|
British colonialism in the eighteenth century was based on mercantilism, an economic practice which tied colonies to their mother country. Colonies shipped raw materials to Britain where they were either consumed or used for manufacturing and trade. Most important, the colonies had to buy their imports from the mother country. Mercantilism gave British merchants a monopoly on colonial trade. Smuggling hurt them more than it injured the revenue, since trade regulations and high customs were designed to prevent foreign competition, not to collect taxes. One mercantile law, the Molasses Act of 1733, placed a high tax on molasses from the French West Indies. The law was never effective because of the ease with which cheap French molasses could be smuggled into the colonies. British sugar merchants complained bitterly.
"The American," they said, "derived his right of cheating the Revenue, and of perjuring himself, from the example of his fathers and the rights of nature"; and would continue to "complain and smuggle, and smuggle and complain, till all Restraints are removed, and till he can both buy and sell, whenever, and wheresoever, he pleases. Any thing short of this, is still a Grievance, a Badge of Slavery." Actually, British merchants had no right to accuse Yankee traders of smuggling — which was much more extensive along the coasts of England than in North America.
During Cromwell's era, customs officers were authorized to search for smuggled goods in Britain by a Writ of Assistance issued by the Exchequer Court. To obtain this unique writ, the customs officer would swear under oath before a judge that smuggled property was in a particular place; if probable cause was shown, the writ would be signed and the customs officer would conduct the search with the assistance of a local peace officer.
This writ came to the colonies in 1755 in a novel form which attracted no attention at first. But in 1761, in Boston, James Otis resigned as attorney general to represent the merchants of Boston in a law suit to prevent the renewal of the writ (the king had died and a new authorization was required by the courts). Otis charged nothing for his services:
"In such a case, I despise all fees." A young lawyer named John Adams (later to become president) sat in the courtroom and took notes of the proceeding. Otis argued for five hours and charged that the writ
was the worst instrument of arbitrary power, the most destructive of English Liberty and the fundamental principles of law that ever was found in an English law-book…. Not more than one instance can be found of it in all our law-books and that was in the zenith of arbitrary power, namely, the reign of Charles I, when the Star Chamber powers were pushed to extremity.
|"To many Britons, America was a land of milk and honey, lace and linen, silver and silk, paid for by British taxpayers."|
Otis didn't object to the use of the writ for the search of a specific place when authorized by a court upon an oath and affidavit of the customs officer; what he did object to was the power this peculiar writ gave to any officer to search without a court order. Not even Parliament could authorize such a monstrosity. Said Otis: "An act against the Constitution is void." The judges of the court ruled against Otis and issued the writ to the customs officers in Boston. But, even though Otis lost, the case attracted attention and thereafter judges and lawyers worked together to frustrate customs officers trying to obtain the writ. Contrary to popular belief the colonists were never oppressed with the use of the Writ of Assistance. It was on the books and it irritated the Americans, but thanks to the guts and ingenuity of a courageous bar and bench, most writs gathered dust waiting to be signed in the chambers of colonial judges.
The Writ of Assistance is important in American history because the threat of its use caused the founding fathers to place the Fourth Amendment in the Bill of Rights. While that great amendment is not now used to restrain revenue agents, it was initially adopted to do just that. The amendment prohibits "unreasonable searches and seizures," which meant, most of all, that tax agents cannot snoop without a court order based on an affidavit establishing probable cause.
For more than fifty years before the American Revolution the British government considered taxing the colonies. Sir Robert Walpole was told by the retiring governor of Virginia that colonial taxation was feasible. Years later, in 1732, when the excise crisis developed over wine and tobacco, one minister suggested extending the new excise to the colonies. "No," said Walpole, "I have old England against me, do you think I will have New England do likewise?"
By mid-century the peace of Walpole's era ended. Britain was at war with France. The revenue demands of the war became increasingly severe. By 1764, British armies had pushed the French out of North America and it was not unfair for the American to shoulder some of the financial burdens that benefited them. If they did, the land tax in Britain could be reduced to peacetime levels and some of the excises could be withdrawn. Furthermore, stories abounded in Britain about the profiteering of American merchants from free-spending British soldiers, war contracts, and smuggling. To many Britons, America was a land of milk and honey, lace and linen, silver and silk, paid for by British taxpayers.
|"The Sugar Act trapped the innocent more than the guilty."|
Parliament responded in 1764 with the Sugar Act, which was the Crown's first and only successful tax law in the colonies. Yankee traders in New England protested vehemently, but the rest of the colonies showed little interest in their plight. Smuggling was open in New England and most colonists believed the New Englanders were probably getting what they deserved. Years later, after the revolution, President John Adams of Massachusetts fame said the Sugar Act imposed "enormous taxes, burdensome taxes, oppressive, ruinous, intolerable taxes." But at the time, outside of New England, no one felt that way. Taxes under the Sugar Act covered a wide range of non-British goods. The rates were really quite modest.
Protests against the Sugar Act were really directed against administrative provisions designed to check evasion. The act was a typical sledgehammer revenue measure which treated every trader as a cheat. A maze of regulations entangled all importers, even little coastal vessels, and any breach justified seizure of the vessel as well as the entire cargo.
Even the personal chests of ordinary seamen were seized if the contents were not listed on customs declarations. The Sugar Act trapped the innocent more than the guilty.
Besides the presumption of guilt which the law made, tax litigation was moved from local courts and juries to Halifax, Nova Scotia, for trial before pro-government Admiralty Courts. Acquittals were common in trials in New England because under the Common Law, unlike today, a jury would acquit if the members believed the law or the punishment was unjust. An acquittal paved the way for a civil action for damages against the Crown's tax agents and informers for false charges. Under the Sugar Act such civil actions were prohibited. Informers were encouraged by rewards of a third of any confiscated property.
Revenue from the Sugar Act did not bring much relief to British taxpayers at home. In 1765 there were serious riots in Britain. After excise tax collectors were mobbed, cider excises were repealed. In the search for new revenue, the rich and undertaxed colonies attracted the attention of the British government. The prime minister asked Parliament if any members questioned the right of the Crown to tax the colonists. There were no dissenters. He then asked if the colonies would refuse "to contribute their mite to relieve us from the heavy burdens which we lie under?" (Approximately ten thousand British troops were stationed in America for its defense.) He even suggested that the colonists could use any form of taxation they desired — but for the present, the government would introduce stamp taxes.
The Stamp Act was no mere mite to the colonist. Colonial legislatures held emergency sessions. There were town meetings, speeches, and pamphlets condemning the tax. Mob violence erupted; property was destroyed. Governors wrote home to Britain advising the government that the rebellion could not be curbed. Even the strongest opponents of the tax spent their time trying to coot the mobs and restore order. Most important, the Stamp Act united the colonies — something that had been impossible up to 1765. Massachusetts called for a congress of the colonies, and delegates appeared from almost all colonial governments.
Stamp taxes were popular throughout Europe at this time. By 1750 they were in use in the colonies by colonial governments. The British Act of 1765 followed the established practice of taxing newspapers, legal documents, business licenses, diplomas, and a few other items. The funds from these taxes were to be used exclusively to pay for British troops stationed in North America. To make the tax more tolerable, local citizens were granted the exclusive right to sell or issue the stamps. No arrogant bureaucrats would be sent out from the mother country, as had been the case with customs. Even Ben Franklin applied for the job of stamp salesman.
|"Under the Common Law, unlike today, a jury would acquit if the members believed the law or the punishment was unjust."|
The Stamp Act Congress petitioned Parliament for repeal, arguing that taxes were internal and thus required the consent of the colonists. Parliament could not speak for them, as it lacked a natural bond to the colonists. When the congress adjourned a few prominent citizens were sent to London to lobby for repeal.
Benjamin Franklin was one of those sent to argue for repeal. He was the agent for New Jersey, Georgia, and above all, Massachusetts — the seedbed of the rebels. He was invited to speak to the House of Commons.
Here are some of the questions put to him by the Commons, with his answers:
Question: "What was the temper of America towards Great Britain before the year 1763?"
Answer: "The best in the world. They submitted willingly to the government of the Crown and paid, in their courts, obedience to acts of Parliament
Question: "And what is their temper now?"
Answer: "O, very much altered."
Question: "Did you ever hear the authority of Parliament to make laws for America questioned till lately?"
Answer: "The authority of Parliament was allowed to be valid in all laws, except such as should lay internal taxes. It was never disputed in laying duties to regulate commerce."
At the time of this testimony (January 1766) Franklin spoke with the moderates. When he spoke of internal taxes he was talking about the Stamp Act. He certainly made it clear that customs (external taxes) were not objectionable.
The Stamp Act was repealed and there was jubilation throughout the colonies. British merchants in England opposed the Stamp Act as much as the colonists. Repeal meant victory for everyone but the Exchequer and the cabinet.
|"The Stamp Act united the colonies — something that had been impossible up to 1765."|
There was an addendum to the repeal act that was to irritate the colonists in the years to come. In effect, the addendum said Parliament had the power to tax if it wanted to. Parliament wanted to make it clear they were not abdicating their power over the colonies in any way, especially the power to tax. At the time, Franklin said this provision would not have any adverse consequences as long as Parliament did not try to assert it. Years later, on the eve of the revolution, Franklin felt otherwise, saying with bitter derision:
But remember to make your arbitrary tax more grievous to your provinces, by public declarations importing that your power of taxing them without their consent has no limits; so that when you take from them without their consent one shilling in a pound, you have a clear right to the other 19.
When the furor over the Stamp Act subsided, Parliament followed Franklin's suggestion and adopted a number of new customs duties on goods imported from Britain. If the Americans foolishly believed there was a difference between external and internal taxation, the Crown was willing to give the Americans the kind of taxation they asked for, how-ever absurd and ridiculous their thinking might be. These new duties, said a member of the British Cabinet, were "perfectly consistent with Doctor Franklin's own arguments, while he was soliciting the repeal of the Stamp Act."
These new customs, called the Townshend duties, ran into some opposition in the Commons (the vote was 180 to 98). Edmund Burke, an extraordinary thinker in his day, argued that the Townshend duties did not differ from the Stamp Act and he predicted that the Americans would see the folly of their own thinking. The Crown would not receive a shilling from the Americans, regardless of whether the taxes were internal or external. Burke knew the Americans better than they knew themselves, and certainly better than Franklin knew his own people.
Under the Townshend Act, customs were charged on a few items from Britain — paper, dyes, glass, and tea. There was a quartering provision requiring the colonists to support British troops in America, which would indirectly accomplish what the Stamp Act had failed to do.
Rebellion to this act came from the colonial merchants, who boycotted British goods. In Britain business slumped, many shipping firms went broke, and there was unemployment. The Crown had no alternative but to repeal the duties, except for a small tax on tea, reduced from 12 pence to 3 pence for a pound of tea.
|“They are a race of convicts and ought to be thankful for anything we allow them short of a hanging.”|
The Quartering Act, which was a disguised tax, was tolerated except in New York, which had the largest number of British soldiers. The act was decidedly unfair and placed an undue burden on New Yorkers, who refused to provide for the full needs of the troops. An enraged Parliament suspended the New York legislature and annulled its future acts. A hawkish mood developed. Dr. Samuel Johnson, a leading scholar of letters, said: "They are a race of convicts and ought to be thankful for anything we allow them short of a hanging."
The worst aspect of the Townshend Act was the establishment of a new Board of Commissioners of Customs. Writs of Assistance were given to the board and the arrogance of three leading agents in Boston played no small part in the eventual revolution. Said a prominent American historian:
Had it not been for the unfortunate personalities of Robinson, Paxton, and Hulton there might have been no revolution. From 1768 to 1772 almost open warfare existed between the agents of the commissioners and (the colonists).
Canada may have stayed out of the conflict because of its superb governor who refused to tolerate any corruption and misconduct by customs agents in that region. As things finally turned out, the revolution was probably more the consequence of the oppressive administration of taxes than the taxes themselves, despite all the talk about taxation and consent.
The best record we have of the tyranny of British tax agents is in a small article written by Benjamin Franklin in 1773, which has no resemblance to his remarks to Parliament in 1766. His later article was called, "Rules by which a Great Empire may be Reduced to a Small One." He did not name Great Britain specifically, but he listed 20 grievances the colonies had against the British. This document is probably the best summary of the sins of the mother country toward her colonies. It deals with human, rather than legal issues, and it was written at a time when Franklin still had considerable rank and prestige among the British. Regarding British revenue agents, he said:
XI. To make your taxes more odious, and more likely to procure resistance, send from the capital a board of officers to superintend the collection, composed of the most indiscreet, ill-bred, and insolent you can find…. If any revenue officers are suspected of the least tenderness for the people, discard them. If others are justly complained of, protect and reward them. If any of the under officers behave so as to provoke the people to drub them, promote those to better office.
Franklin said about the navy:
V. Convert the brave, honest officers of your navy into pimping tide-waiters and colony officers of the customs…. Let them learn to be corrupted by great and real smugglers; (to show their diligence) scour with armed boats every bay, harbour, river, creek, cove, and nook throughout the coast of your colonies; stop and detain every coaster, every wood-boat, every fisherman, tumble their cargoes and even ballast inside out and upside down; and if a penny worth of pins is found un-entered, let the whole be seized and confiscated.
Franklin's complaints about the British navy were true. British naval personnel received a handsome share of the cargo and proceeds from the sale of confiscated ships they seized. British warships along the American coasts were in effect given a license for piracy. Improper documentation was all that was needed to permit seizure; smuggling was not required.
|The American Tradition: $79|
The Townshend duties helped the colonists clarify their thinking about taxation and consent. The Americans were not to leave the door open again. Distinctions between external and internal taxes were abandoned. Any tax required consent. American thought began moving toward a political arrangement that gave limited sovereignty to Parliament. Unfortunately, war broke out and this novel political idea did not take root. To the very end, Parliament demanded the right of absolute power over the colonies. It is doubtful if they ever would have surrendered their supreme authority. Into modern times the British Parliament held supreme constitutional power over the Canadian people, though it did not dare to interfere with their wishes for many years. Not until 1981 did Canadian politicians agree on the terms for the repatriation of Canada's Constitution, enacted by Parliament as the British North America Act in 1867.
Many British leaders agreed with the colonies. The former Prime Minister, Pitt the Elder, opposed taxing the colonies. But the best thinking came from Edmund Burke, who opposed military action when war clouds started to appear, saying: "People must be governed in a manner agreeable to their temper and dispositions."
The Americans finally realized that any taxation without their consent was against their disposition. Perhaps if they had taken that view in 1766 when they opposed the Stamp Act, an acceptable solution may have been discovered, short of war. Unfortunately, the issue was resolved by following the example of the sixteenth-century Dutch — war against a mother country that insisted on taxing them in a manner they did not like.
The Boston Tea Party was a turning point in colonial reaction to British rule. By 1773 the tax issue was becoming obscure. Both parties were moving toward war.
Recently American postage stamps have depicted the Boston Tea Party as a glorious act of defying British colonialism. Most people believe it was a protest against British taxes on tea, but this is not true. American tea merchants had been boycotting British tea for five years. Smuggled Dutch tea was used throughout the colonies. In response, the British government decided to remove the duties on East Indies tea when it arrived in Britain so it could be sold in America at a price cheaper than smuggled Dutch tea. In addition, a monopoly on this cheap tea was given to loyal British merchants in the colonies. American tea smugglers would be put out of business. The Crown's plan was based on the assumption that American consumers would not boycott low-priced English tea, but would purchase it rather than the higher-priced, smuggled Dutch product.
The implication of this to American merchants was frightening. If a monopoly could be granted for tea, it could be granted for other products as well. Economic sanctions of this kind could destroy American merchants. In protest, Bostonian merchants disguised themselves as Indians, boarded merchant ships loaded with tea, and threw the tea into the harbor. This was a wanton destruction of private property in an age when private property was held in great esteem. The first obligation of any government is to protect the lives and property of its citizens.
The Boston Tea Party is a sobering event that raises difficult legal and moral issues. It is anything but the cause célèbre American historians have made of it. This wanton destruction of property was not well received in the colonies. Massachusetts was a known seedbed of hotheads and warmongers. Franklin was shocked and acknowledged that full restitution should be paid at once to the owners of the tea. Most Americans believed this way, but unfortunately the majority of Americans were to feel the heel of the British boot. A number of "Intolerable Acts" were adopted by the Crown and started the Revolutionary War. British warships and troops literally invaded the colonies. Oppressive revenue agents, no matter how bad, were to look kindly compared to fleets of warships and battalions of redcoats in battle array. Cannon, muskets, and bayonets replaced Writs of Assistance, seizures, and tax levies.
|"The Americans won the war not only for themselves but for the whole British Empire…"|
The Americans won the war after six years because the British found the logistics of supporting troops three thousand miles away in a hostile country too burdensome. The American army was ill-fed and seldom paid. This ragged bunch returned home to bankrupt farms and state governments. The burdens of taxation under the British were a pittance compared to the financial obligations they now faced. The war had to be paid for and taxes, even with representation, were going to be enormous.
Loyalists suffered most. Their property was seized, and tarring and feathering was common. A long stream of refugees moved north to Canada. Benjamin Franklin made a personal visit to Canada to persuade loyalists to join the United States, but the scars of war were deep and would not heal. Franklin had spent the war in Europe. If he had been home and witnessed the suffering of the loyalists he would have known that the last thing these people wanted was further association with the Americans. There was bitterness on both sides, but no atrocities. The loyalists, for all their suffering, were fortunate. In other times and places they would have been slaughtered.
The Americans conducted the war through the Continental Congress, which had become a joke by the end of the war, especially in the press.
It could not even pay the back-pay of combat veterans or interest on the war debt, yet it went forward and adopted a number of costly programs to rebuild the nation. Naturally, nothing was accomplished without money, but money required taxes, which was one of the powers the Congress did not have.
The British learned from the war. In 1778, two years after the Revolution began, Parliament enacted a law, approved by King George III, which declared "that the King and Parliament of Great Britain will not impose any duty, tax, or assessment for the purpose of raising a revenue in any of the colonies, provinces or plantations." This wise enactment, unfortunately, came too late. In the next 150 years Parliament continued to assert absolute sovereignty over its colonies, but when taxation was to be levied, local assemblies, in one form or another, had to give their consent.
Even in Canada, where colonial governments were weak and dominated by British governors and civil servants, taxation was submitted to assemblies. The Americans won the war not only for themselves but for the whole British Empire until its final demise after World War II.
|A federal whiskey tax collector, tarred and feathered, being driven out of town by Pennsylvanians protesting against the whiskey tax enacted under the recommendations of Alexander Hamilton.|
In June 1776, one month before the signing of the Declaration of Independence, the Continental Congress appointed a committee to draft Articles of Confederation for the colonies. The first draft permitted the federal government to do just about anything but levy "any Taxes or Duties." This broad endowment of political power without taxing power was understandable because the revolution was against taxation by an external political agency above and beyond the states. All taxation must be at the state level. This thinking followed the practice of the United Provinces of the Netherlands, which produced the first modern republic with an Estates-General (congress) that could not tax.
The final draft of Articles was ratified by the states in 1781. The national government, called the "United States in Congress assembled," was limited. Many of its powers required a three-fourths vote, especially on matters of finance and war. As expected, the Congress could not tax — everyone agreed to that — but when money was needed, a requisition was made upon the states based on the value of privately owned real property. Requisitions based on population or personal property were ruled out because of difficulties with slaves. Slaves were "property" to Southerners, but "population" to Northerners. Revenue based on real estate avoided that difficult issue.
The Confederation gave America a number of things: First, its name, the United States of America; second, its currency, the Spanish dollar; but most important, its experience in self-government at the federal level.
The requisition system of finance was copied from the Dutch Republic along with a number of federal-state relations, but what worked in the Netherlands would not work in North America. Most of the new states were in desperate financial shape and simply did not have the money required of them by the Congress. Without money, the Congress became the laughing stock of the new nation.
Within two years the Congress was debating the tax issue all over again. Every known method of taxation was discussed: poll taxes, excise taxes, hearth taxes, salt monopolies, and import duties. Import duties had long been a favorite revenue device of British people, in the colonies as well as at home, and as much as everyone disliked the idea, resort to import taxation by the federal government appeared imperative. But there were opponents, especially the fire-eaters from Massachusetts represented by Sam Adams, who led the revolt against British customs in the War for Independence. He argued that if the Congress had the power to levy a tax on imports, every seaport, from Maine to Georgia, would be filled with an army of overpaid excisemen, tide-waiters, and cellar rats. And what would happen to the funds raised from the sweat of the people? Would Congress guard it with utmost vigilance? Would they dole it out with a frugal hand? No. They would squander it with a reckless profusion, he said. With heated emotional appeals of this temper by some of the leading American patriots, it is no surprise that the Confederation could not agree to tax. An amendment to the Articles would require unanimous consent; a Massachusetts veto was a certainty. For the next four years the Congress accomplished absolutely nothing. Robert Morris, the chief financial officer of the Congress, summed up the situation in these words: "The Congress had the privilege of asking for everything," but the states were given "the prerogative of granting nothing." What money the states would grant and when they would do so was "known only to Him who knoweth all things."
Eventually the Congress called for a convention in Philadelphia to revise the Articles. Initially only a few states appointed delegates and it looked as if the convention would fold from inadequate attendance, but fortunately for the struggling nation a rebellion erupted in Massachusetts, the hotbed of resistance to national taxing power. This so-called Shays's Rebellion was not much more than a riot, but it frightened the people of Massachusetts and emphasized to the rest of the country the need for a stronger national government.
Shays's Rebellion was the first of three tax revolts to plague the new nation in the first fifteen years of its existence. The rebels were havenots, overburdened with taxes and debts from the war. They demanded a state constitutional amendment (like Proposition 13 in California in 1978) to curb the spending and taxing powers of Massachusetts. Old war veterans formed a number of regiments and there was talk of rebellion. When one of these regiments tried to seize a federal arsenal, two volleys of cannon were fired, the rebels dispersed, and the rebellion was over. Newspapers exaggerated the story and this acted as a spur to the states to form a stronger national government. One newspaper said the city of Genoa could defeat the military forces of the United States. In haste, delegates were sent to Philadelphia. Like the Stamp Act of 1765, Shays's Rebellion brought the squabbling states together again, this time to form "a more perfect Union."
The delegates in Philadelphia in 1787 quickly abandoned the idea of revising the Articles. Life under the Confederation had been intolerable. With no money the government could do nothing but talk. By 1787 there were no voices clamoring for a continuation of the tax anemia of the Confederation; everyone now agreed the federal government must be able to tax, but what limitations should there be on that power? The Congress must not be a Parliament; there must be definite limitations and controls on its taxing power. Everyone agreed to that as well.
Constitutional restrictions on taxing power were not new. Taxation by consent through tax representatives was common throughout Europe, but in addition, many European peoples enjoyed protection from certain kinds of taxation as well. Many medieval charters provided that tailles and poll taxes could not be collected. The Framers of the Constitution decided to define and control the taxing powers of the Congress. Controls were needed besides the "consent" of the taxpayers through their representatives. It would be easy for one class of citizen to gain control of the tax-making machinery and adopt taxes that oppressed some minority group. Whatever taxes were adopted, they should fall equally upon the majority and the minority. In other words, if farmers should control tax-making, they must not be able to burden urban people with taxes that they themselves did not actually bear. The need for standards to assure fairness was too obvious to need much discussion. The men at the Constitutional Convention were not blind to the evils inherent in democratic tax-making without constitutional standards to prevent injustices.
|"The men at the Constitutional Convention were not blind to the evils inherent in democratic tax-making…"|
In 1787 no citizen could vote who was not a taxpayer; consequently, the delegates decided to have a legislative body of taxpayers' representatives where all taxation would originate. The requirement that all voters be taxpayers was not in the new constitution; it was a matter of custom not only in the colonies but in Europe as well. The primary economic function of a legislature is to tax and raise money for the executive branch of government to spend. It follows that no one should have a voice in how the government's money is spent who is not a contributor. Conversely, if a taxpayer is not a voter, the process of "consent" is undermined. Voters, therefore, must be taxpayers.
The very first power granted to the new Congress was "to lay and collect Taxes" which are "uniform throughout the United States." The most significant word is "uniform." It evolved in the convention from the words "common to all," which was proposed on July 23, 1787. Later in the draft approved on September 12, 1787, the words were "uniform and equal." This draft went to the Committee on Style which, for some reason, dropped the clause completely. Madison penciled in the clause as it now reads, omitting the word "equal." Were either of these omissions intentional? Is that significant? Probably not. Constitutional law in the early days of the American republic considered the terms "uniform and equal" to be redundant verbiage. Thomas Cooley, the leading authority on constitutional law in the nineteenth century, explains the principle in 1868 in his treatise on Constitutional Limitations:
State constitutions have been very specific, but in providing for equality and uniformity they have done little more than to state in concise language a principle of constitutional law which is inherent in the power to tax.
Since "uniform" was to be the standard for all taxation throughout the United States, to understand what they meant, the writings of this period clarify what really doesn't need clarification. The word "uniform" is basic English with a common meaning. When the Constitution was up for ratification in the states, the strongest proponents — the federalists as they were called — all proclaimed that taxing powers were limited and restrained. No one then wanted Congress to be able to tax at will. Noah Webster, one of the strongest federalists, wrote a pamphlet on October 10, 1787 (shortly after the Convention), addressed "To his Excellency, Benjamin Franklin, President of the Commonwealth of Pennsylvania," in which he emphasized, "But the idea that congress can levy taxes at pleasure is false, and the suggestion wholly unsupported."
In the debates before the New York legislature for ratification, Alexander Hamilton (also a strong federalist) said: "It is infinitely more eligible to lay a tax originally which will have uniform effects throughout the Union, which will operate equally and silently." Again we see the word equality applied to uniformity.
A remarkable book published in 1832 by Benjamin Oliver, a man in love with his country and anxious to tell the world about its virtues, had this to say about Congress's power to tax:
This right [property] is not infringed by equal taxes for public purposes, imposed by adequate legitimate authority. A misapplication or misappropriation of funds in the public treasury, however, must be considered as a violation of this right [property] …. As it would be unconstitutional, therefore, to lay an unequal tax, as well as an act of oppression upon those who were compelled to pay the larger proportion of it.
In The Federalist, No. 36, Hamilton concluded a series of seven essays discussing taxing powers and the controls to prevent "partiality and oppression." The possible abuse of the power of taxation had been adequately guarded against, with the final protection that taxes "shall be UNIFORM throughout the United States." Hamilton capitalized the word UNIFORM, which is the same as the modern style of italicizing, i.e. emphasizing to imply the full and the most basic meaning of the term. And what did the word "uniform" mean?
The nineteenth-century Oxford English Dictionary is a multi-volume work that took decades to complete. It traces the meaning and usages of words back to the late Middle Ages. It defined uniform as: "that is or remains the same in different places, at different times, or under varying circumstances; exhibiting no difference, diversity, or variation (emphasis added)."
In the mid-nineteenth century the Supreme Court seemed to have no trouble with the meaning when they reviewed a tax on distilleries:
The law is not in our judgment subject to any constitutional objection. The tax imposed upon the distiller is in the nature of an excise, and the only limitation upon the power of Congress in the imposition of taxes of this character is that they shall be "uniform" throughout the United States. The tax here is uniform in its operation; that is it is assessed equally upon all manufacturers of spirits, wherever they are. The law does not establish one rule for one distiller and a different rule for another, but the same rule for all alike.
This view was also found in the state courts, which had constitutions that required uniformity. But as we noted, even without a constitutional command, uniform and equal were essential requirements for any "tax" in a democratic society, even if not expressed. An early Ohio Supreme Court ruled that one rule cannot apply to one owner, and a different rule to another owner. One could not be assessed 10%, another 5%, another 3, and another left altogether unassessed.
Professor Cooley's monumental work on Constitutional Law, summarized the rule as having both social and geographical application: The rule of uniformity was designed to provide equality of burdens by preventing the legislature from taxing some region or class of citizens different from or in excess of some other region or class of citizens. In effect, no "loopholes" in taxation.
As we shall see, the rule of uniformity passed away in the twentieth century. You could tax one person's income at 90%, another at 70%, another at 20%, and another left altogether unassessed. The Supreme Court re-interpreted the rule of uniformity to only be a "uniformity clause," which might as well have been deleted from the Constitution. Noah Webster was wrong, Congress can tax at its pleasure.
In Britain, in 1871, the question of uniformity came up in the House of Commons, not as a constitutional question, but as a matter of policy and graduated income tax rates. The Chancellor of the Exchequer opposed graduated income tax rates with these words, "if an Income Tax must be maintained, it must be a uniform tax. That is, the same tax rates for all — what uniform means."
After demanding uniformity for all taxes, the Framers wanted to further restrict Congress's taxing powers with respect to direct taxation. Such taxes, said Madison, would only be adopted in an extraordinary emergency, like Cicero said almost two thousand years before. They would have to be apportioned among the states by population. In The Federalist, No. 10, Madison gave this astute explanation:
Yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number is a shilling saved to their own pockets.
Madison went at length to emphasize the point that in a democratic society tax laws favor those in control of the government and overburden those on the outside. This was all too common in Europe at that time and over the past hundreds of years. Protestants taxed Catholics and Jews at double rates and even quadruple rates. Governments dominated by aristocratic classes, as in France, usually taxed themselves at low or even no rates. Direct taxes were, as always, looked upon with disfavor.
|"Tax laws favor those in control of the government and overburden those on the outside."|
In the debates, Rufus King of Massachusetts asked, "What was the precise meaning of direct taxation?" Madison comments in his notes, "No one answered." This was not a dumb question. These classifications were historical, not legal, and precise meanings were unknown. In 1798 the question came before the Supreme Court on the legality of a carriage tax. The Court concluded that direct taxes were po11 and land taxes. A hundred years later the question was raised in the famous income tax case of 1894, and as we shall see the court struggled for over a year and reached a very confusing definition.
The distinction between direct and indirect taxation was picked up by the Canadians in their constitution, the British North America Act, which restricts the taxing powers of Canada's provinces. In the late l970s, a special oil tax in Saskatchewan was declared illegal because the tax offended the Canadian constitution's classifications and restrictions. Incidentally, the Canadian and British define "direct taxes" quite differently than do the American courts. Income taxes are direct taxes and are frequently referred to as such. Most American legal authorities consider them to be excises on the receipt of income and hence indirect.
The primary control over runaway taxation was to be in the restrictions on the Congress's spending power. There is no question but that bad taxes are the product of too much spending. Control spending and taxes will automatically be controlled. The recent Balanced Budget Amendment to the Constitution is designed to do what the Framers tried to do with Article I, Section 8: Congress had the power to levy taxes "to pay the Debts and provide for the common Defence and general Welfare of the United States." The key words are Debts, Defence, and general Welfare. Once again, in the debates for ratification and in The Federalist, these terms were held up to be the final cap or restriction on the federal government. Expenditures outside of those terms would be illegal and unconstitutional. Thus by controlling expenditures you control taxes and prevent the federal government from becoming an all-powerful national government. Of course, that's all history. Like the rule of uniformity, the expenditure restrictions have no meaning whatsoever. But let us take a moment to see what the Framers had in mind.
Did the term "common Defence" mean that military expenditures could only be made for defense? That is, no funds for aggressive wars?
|Did the term common Defence mean that military expenditures could only be made for defense? That is, no funds for aggressive wars?|
That is exactly what the Framers were talking about.
That is exactly what the Framers were talking about. In The Federalist, No. 34, Hamilton said they were embarking on a "novel experiment in politics, of tying up the hands of government from offensive war, founded on reasons of state; yet certainly we ought not to disable it from guarding the community against the ambition or enmity of other nations."
The reason for limiting Congress's power to spend for the military was because of the high costs and taxes that are required. As Hamilton said, the costs of nonmilitary expenses of government "are insignificant in comparison with those which relate to national defence."
As we noted, the concept of limiting tax moneys for defense found strong support in England and the Spanish provinces. It also came to the New World and found expression in the early American constitutions. In The Laws and Liberties of Massachusetts (1648), conscription for military service (which is a tax in the form of labor) was limited to defensive wars, within the Commonwealth. Looking back over the past two hundred years of American history it is obvious there were a number of wars that were not defensive, but were in Hamilton's category of "offensive war, founded on reasons of state."
The "general Welfare" clause was also held up to be a restriction on government spending. It did not mean anything in general, quite to the contrary. It meant benefiting the whole nation. General meant no expenditures for some "special Welfare." You couldn't build a project to just benefit New Yorkers; the project must benefit the nation as a whole. That's history too. "Pork barrelling" is simply a political science term for expenditures that are for a politician who was able to lobby a "special Welfare" spending bill through Congress. Enforce the "general Welfare" provision of the Constitution and most corruption by misappropriating taxpayers' money would disappear.
|Enforce the general Welfare provision of the Constitution and most corruption by misappropriating taxpayers' money would disappear.|
The Framers of the Constitution were all realists about government, with no illusions about the dangers of political power, even in the best of hands with the wisest of men. Government had to be kept under control, and in keeping with the spirit of the Enlightenment, government must be limited and this could only be accomplished by tough controls on taxing and spending powers. They all believed that the Constitution they had produced would do just that; and in the beginning — it did. Nevertheless, when they finally finished their work and the time came to sign the document, there was no euphoria over their work product. The philosophic Dr. Franklin signed the instrument "with tears, and apologized for doing it at all, from the doubts and apprehensions he felt." He then observed and predicted, "that its complexion was doubtful; that it might last for ages, involve one-quarter of the globe, and probably terminate in despotism." The fear of despotism appears again and again in speeches and writings, even among strong supporters like Franklin. This negative view subsided with the Bill of Rights and with the strong arguments put forth at the ratification debates pointing out that taxing and spending powers were greatly restricted. So long as these controls were in place said the supporters, despotism would be curtailed. But, we may ask, if the controls fail, will Franklin's prophecy come to pass?
Wherever the ends of government are perverted, and public liberty manifestly endangered, and all other means of redress are ineffectual, the doctrine of nonresistance against arbitrary power, and oppression, is absurd, slavish, and destructive of the good and happiness of mankind.
Alexander Hamilton became Washington's secretary of the treasury. His appointment has been called "the right man, at the right time, in the right place," but it's doubtful that farmers on the western frontier in 1794 agreed. Hamilton, following Adam Smith's Wealth of Nations, persuaded Congress to adopt an excise tax on whiskey to supplement revenues from customs, which were inadequate to pay the war debts of the states. The whiskey tax was, in Hamilton's words, a luxury tax. Furthermore, the nation drank too much of it, so the tax would be a health measure as well. Also, there had been taxes on whiskey before the war, and those experiences had not been bad. Congress eventually followed Hamilton's request and placed a tax on whiskey, some luxury items, auction sales, and negotiable instruments.
The tax on whiskey was an excise. Rumors soon spread that the government was about to tax food and clothing and introduce the hated European excise in America. The excise may have ranked first among grievances that drove immigrants to America. An eighteenth-century English dictionary defines an excise as: "a hateful tax levied upon commodities, and adjudged not by common judges of property, but by wretches hired by those to whom the excise is paid." This fascinating definition, obviously prejudiced against the excise, expresses English sentiments about the tax. To many in America, Hamilton's excise was a betrayal of the revolution.
The whiskey excise ran into trouble immediately. On the western frontier, whiskey was not a luxury item, but rather the basic medium of exchange. Money was almost nonexistent. Farmers would grow rye, distill it into whiskey, and transport the whiskey across the mountains to Philadelphia where it could be sold or used as barter for trade. Grain was too bulky to be transported, so the tax hit the western farmer hard. The 25% excise in hard cash was outrageous; it was in reality a tax on money. By 1794 the entire region was in open revolt.
Excisemen were tarred and feathered, their houses were burned, and it was fortunate they were not lynched. Even those who were willing to pay the tax could not do so. As one moderate of the Whiskey Rebellion expressed it: "A breath in favor of the tax was sufficient to ruin any man."
The forerunner of the Internal Revenue Service was created to enforce the tax. The country was divided into fourteen districts with as many district directors. Each director received 1% of the taxes collected in his district; each agent received 4% of the taxes he collected. This left 95% for the Treasury. The commission system turned the excise into a type of tax-farming — it pitted the revenue agent against the taxpayer. The more tax collected, the more personal profit for the tax man.
In 1792, when the tax was adopted, the frontier region protested peacefully. There were speeches, meetings, and petitions. At a meeting in Pittsburgh, Albert Gallatin, who became a famous senator and Secretary of the Treasury under Jefferson, said that the tax was unjust and outrageous. Excises were the scourge of the earth. Said Gallatin: "All taxes upon the articles of consumption, because of the power that must necessarily be vested in the officers who collect them, will in the end destroy the liberty of any people that permits them to be introduced."
Gallatin's reasoning was supported by the long-standing hatred of excises by British subjects, plus three hundred years of European experience. When the government did not take any steps to repeal the tax, reasoned arguments soon turned into demands for secession. Liberty polls were erected as they had been in Boston to protest the Stamp Act.
"To many in America, Hamilton's excise was a betrayal of the revolution."
Revenue agents were called "outlaws" and an oath was administered among the rebels, who called themselves the Whiskey Boys, to give no comfort or aid to excisemen. Sheriffs who accompanied excise collectors were seized, stripped naked, shaved bald, and covered with tar and feathers. The whiskey stills of farmers who paid their excises were shot full of holes by a kind of Robin Hood who called himself "Tommy Tinker."
The hostility of the Whiskey Boys is illustrated in the story of a local village idiot who playfully pretended to be gathering information for the excisemen. Rational men would have ignored this unfortunate soul, but angry taxpayers are not rational. The idiot was snatched from his bed, taken to a blacksmith shop, stripped naked, seared with a hot iron, and tarred and feathered.
When civil order collapsed by 1794, a judge of the Supreme Court certified the existence of a state of insurrection in Western Pennsylvania. Hamilton persuaded Congress to authorize President Washington to call out the militia from four adjacent states to make a show of force. Washington led these troops. This was the first and only time a U.S. president has assumed his position as commander-in-chief and led troops in the field, in full dress uniform. Fortunately, military confrontation was averted; the rebels surrendered and accepted an agreement of amnesty offered by the federal government. No rebel ever went to jail.
The final outcome of the rebellion favored the rebels. Jefferson repealed the entire excise tax law, which these farmers considered to be unconstitutional. This excise was not uniform. Southern planters paid no excise on their basic farm production (cotton and tobacco); the produce of New England farmers was not taxed; other farmers, merchants, and artisans throughout the nation were not taxed. In order for taxation to be uniform to all, under varying circumstances, should not these other people have borne a similar burden? This argument was never answered.
Textbooks have always praised the strong military action against the whiskey rebels as an important victory for the new federation. But just recently, historians have discovered they were wrong. Justice was on the side of the rebels, and the whole military operation was a political charade instigated by Hamilton to show to the nation the muscle of the federal government. The rebels had already capitulated before the army took to the field. Of the twenty rebels who were brought back to Philadelphia to face treason charges, only two were convicted, and they were pardoned by Washington. Not only are the rebels now vindicated, the revolt is looked upon as having an important political message for our times. Said one recent scholar: "In 1991, as in 1791, tax resistance sends signals of popular beliefs about how democracy should work, signals that deserve reasoned attention."
In addition, the Whiskey Rebellion has an important historical message as well. Here on the frontier of America a courageous group of citizens stood up for their rights against what was clearly an unjust tax under their peculiar circumstances. They capitulated in the face of a prospective invincible military force, but in the end when Jefferson became president, the tax was repealed, and they accomplished through democratic means what they were first unable to achieve by violence. The question remains, however, without the violence would the tax have been repealed? And, was the revolt therefore "necessary medicine" for the sound health of government as Jefferson believed?
Soon after the Whiskey Rebellion was crushed, another tax revolt erupted on the eastern seaboard, this one by German settlers. In 1798 Congress levied its first direct tax of two million dollars on land, houses, and slaves. The tax was allocated among the states as the Constitution required. Pennsylvania's quota was $237,000, which fell largely on land and houses. Houses presented a valuation problem. Assessments were determined by the number and size of windows on each dwelling.
When assessors arrived to count and measure windows, the German settlers thought the government was about to levy the hated European hearth tax. They organized into small bands, armed themselves, and scoured the countryside for assessors, who were then seized, assaulted, and driven from these counties. When some of the rebels were arrested, an auctioneer named John Fries marched on the courthouse and freed them. President John Adams called out the militia. Fries was arrested, tried, and convicted of treason and sentenced to death. Soon thereafter he was pardoned by President Adams, against the advice of his entire cabinet.
President Adams, like Hamilton, was a federalist. His direct federal land tax, like Hamilton's excise, was hated throughout the country.
|The book from which this piece is excerpted: $30|
|Mao periculosam libertatem|
quam quietam servitutem.
When Jefferson ran for president in 1800, his anti-federalist tax platform endeared him to the hearts of the people and assured his victory. Discontent against the tax policy of the federalists was everywhere. Thereafter the Federalist party faded from national leadership and, with its policies, soon disappeared from history. Historians emphasize the sound money policies of the federalists and their beneficial effect on the new nation, but they fail to point out that the tax laws supporting these fiscal policies were loathed by the people. Many Americans openly questioned the wisdom of the revolution. Because of the federalists, taxation with representation had turned out to be much worse than taxation without representation. Hamilton, as secretary of the treasury, may have been the right man in the right job at the right time, but his taxes were the wrong kind for his cause. And while these taxes may have benefited the new federal government, they destroyed the Federalist party in the process.
We can now put in historical context Jefferson's comment that it was good medicine for government to have a rebellion every twenty years or so. In the course of his lifetime there had been almost a dozen rebellions he was acutely aware of. Six were in the United States, starting with the Stamp Act Rebellion and ending with the Fries Rebellion. All of these rebellions, including the American Revolution, were tax revolts of varying degrees of intensity. In Europe, there were a number of tax revolts in the seventeenth century, from the excise revolts in Britain, to the tax-farmer revolts in the Netherlands, to the innumerable revolts and the revolution in France. Again, all were tax revolts. So when Jefferson tells us rebellions are good tonic for government, in his frame of reference he was talking about tax rebellions. For a nation that believes in checks and balances in government, no doubt the most effective check on a bad tax system is what Jefferson had in mind. He even felt governments should not discourage rebellions or be too punitive against unsuccessful rebels:
An observation of this truth should render honest republican governors so mild in their punishments as not to discourage them too much. It is a medicine necessary for the sound health of government.
Jefferson justified tolerance for civic disorder and rebellion by referring to a Latin maxim, no longer espoused much today: Mao periculosam libertatem quam quietam servitutem ("Rather a dangerous liberty than a peaceful servitude").
Charles Adams, tax historian, is the author of three books on the topic of taxation, including For Good and Evil: The Impact of Taxes on the Course of Civilization, from which this essay was adapted. His research has highlighted the role that the state's relentless drive for more revenue has inspired wars, revolutions, and every manner of political upheaval. See his Mises Media archive. Send him mail. Comment on the blog.