Mises Daily Articles
This may sound odd. Conservatives don't love taxes. They want lower taxes. Right? They want lower taxes and smaller government.
I wish that were true. It isn't.
Alexander Hamilton was a crusader for higher taxes and a larger national government in the 1790s. He wanted higher taxes in order to raise money for a higher federal debt. He wanted higher federal debt because he wanted investors in government IOUs to commit to the survival of the United States. Free-market economist Thomas DiLorenzo has summarized Hamilton's position, which he accurately identifies as crony capitalism:
In a lengthy "report" to Congress on the topic of the public debt Hamilton said that "a national debt, if it is not excessive, will be to us a public blessing." He would spend the rest of his life politicking for excessive government spending — and debt. The reason Hamilton gave for favoring a large public debt was not to finance any particular project, or to stabilize financial markets, but to combine the interests of the affluent people of the country — particularly business people — to the government. As the owners of government bonds, he reasoned, they would forever support his agenda of higher taxes and bigger government. (He condemned Jefferson's first inaugural address and its minimal government message as "the symptom of a pygmy mind.") No wonder one historian entitled his book on Hamilton American Machiavelli.
In 1791, Hamilton persuaded George Washington and then Congress to transfer to a group of private investors the right to set up a central bank that was not answerable to Congress or anyone else in government. The Bank of the United States had the right to create fiat money out of nothing, lend it to the government, and keep the interest paid by the government. This was the supreme institution of crony capitalism in America from 1791 to its expiration in 1811.
He was also a big supporter of tariffs. Tariffs raised the money the government needed to pay interest to the Bank of the United States, which was independent of the government of the United States. Tariffs were taxes favored by big-government conservatives. They still are.
Sales Taxes on Imports
The Constitution authorizes tariffs. Why? Because the central government in 1787 was not allowed to tax states or individuals directly. So the framers gave it the power to tax imports. As a way to keep the US government out of most citizens' lives and pocketbooks, tariffs made sense. They were a way to limit the central government.
But Hamilton did not view tariffs as a way to keep the federal government small. He wanted it big.
He also wanted high tariffs against imported goods as tools to subsidize his political allies: crony capitalists.
Tariffs are sales taxes on imported goods. He saw that higher sales taxes on imported goods would subsidize American firms. How? By restricting foreigners from using lower prices to compete against domestic manufacturers.
He wanted to reduce the degree of choices available to American customers. He wanted to subsidize American manufacturers by letting them charge higher prices than foreign producers would have charged had there been no sales tax on imports.
Hamilton was the early Republic's supreme philosopher of crony capitalism. His intellectual heirs are defenders of this strategy. This is why Hamilton is a favorite of both the Right and the Left. Biographies of Hamilton sell very well. He articulated our era's version of capitalism: the bastard child of the Keynesian interventionist state. (Hamilton was the most influential bastard in American history.) Keynesianism is a philosophy of creative government spending and endless government debt. So is Hamiltonianism.
Making a nation richer by taxing customers more than before is a strange idea: "Tax and grow rich." It sounds like Keynesianism because it is Keynesianism.
Passing a law against people who want to get together to make a voluntary exchange of assets is a restraint on trade. Why does a nation get richer by restricting trade? How is it that sending a man with a badge and a gun to keep people from doing what they want to do to improve themselves increases a nation's wealth? Isn't the idea of greater wealth the idea of greater opportunities to buy more things than before? Then how are people made richer by deliberately restricting the number of things they are allowed to buy?
Hamilton's intellectual heirs deny that greater wealth for Americans is based on greater freedom of trade. They argue the opposite: Reduced opportunities are the basis of wealth. The fewer opportunities you have to trade, the richer you are.
If this sounds crazy, that's because it's crazy. But it is widely believed, especially by conservatives who swear they are anti-Keynesian defenders of limited government.
They also argue that the more sales taxes that the federal government collects, the richer America is.
Again, you may think that sounds like Keynesianism. It is Keynesianism. It is crony Keynesianism.
"Logic Doesn't Count"
The amazing thing about Hamiltonians is that they are impervious to economic logic. They argue that raising taxes is bad, unless it's the sales taxes called tariffs. Then they switch sides. They join the ranks of the tax collectors, the bureaucrats, and the people with badges and guns who say that higher taxes and reduced choices make America rich.
They love badges and guns. They are convinced that badges and guns are the basis of economic growth and wealth for all. They really believe that if the government sends out enough people with badges and guns, extracting sales taxes from buyers of foreign goods, the nation will be stronger, richer, and freer.
Of course, they want only "good" taxes. They want taxes of a special kind. They don't promote increased taxation in general. No one supports increased taxes in general.
The Left wants taxes on the rich for the sake of the poor. Hamiltonians want taxes on customers for the sake of crony capitalists and their employees.
The Left wants taxes on the rich in the name of fairness. Hamiltonians want taxes on the middle class in the name of national prosperity.
Both groups are committed to badges and guns.
Fighting Tyranny with Tyranny
Recently, I received an email from a committed Hamiltonian. He took exception to my assertion that reduced sales taxes would increase most people's wealth. He argued as follows:
It seems to me that you do not take account of "nationalism," or nationhood. It is not that our manufacturers are less efficient than foreign manufacturers because of anything they, themselves, do. The reality is that our government imposes the causes of their "inefficiency" upon them. Therefore, to make things equal, our government ought to remove those artificial burdens, … either that or impose a tariff equal to those burdens in order to offset them.
Let me summarize this argument:
American manufacturers are not inefficient.
They are hampered by our government.
Therefore, we need a larger, more intrusive government to get our government off the backs of manufacturers.
He is a Hamiltonian. As with all Hamiltonians, he cannot think straight. He has adopted the idea that, by making the federal government stronger, voters can overcome the effects of a much-too-strong federal government. He defends this in the name of nationalism or nationhood.
I will now give you a test. See if you are a Hamiltonian. If you cannot follow this argument, you are a Hamiltonian.
This Side and That Side
You live on one side of the street. Across the street is Jones. Jones wants to sell you an item that you want to buy.
Smith, your next door neighbor, also sells an item like the one Jones sells. But his item is priced 20 percent higher.
He comes to you and tells you that, for the sake of This Side-ism, or This Sidehood, we must impose a sales tax of 25 percent on Jones's item. After all, we don't want to lose the wealth on This Side of the street. Without a sales tax, That Side will extend its grasping hand into This Side.
You reject his suggestion as nonsense. You like Jones' product. It's sleek. It's cheap. It's a deal. "Butt out, Smith." (Every time you buy anything, you are telling every other seller to butt out.)
Smith, seeing that you are hopeless, approaches Brown, your other next-door neighbor, and warns him about the terrible threat posed by That Side to the way of life Over Here. He does not mention you, of course. He is only defending This Side in the name of truth, justice, and the This Side way.
He also goes two houses down and makes the same pitch to Green. He suggests that Green and Brown join him in passing a law imposing a 25 percent sales tax on Jones's product. If this law is passed, he promises, This Side will be richer. This Side will be stronger. This Side will be able to defend liberty.
They do it. Then they deputize a guy named Morton to enforce the new law. Morton now has a badge. He now has a gun. He comes to you and warns you that if you buy Jones's item without paying a 25 percent sales tax to This Side, he will fine you a lot more than 25 percent. He defends This Side with great enthusiasm, since the alternative to this job is the private sector. He has never done well in the private sector — a trait he shares with Smith.
Brown will now buy from Smith. Green will now buy from Smith. And Morton, who has not had full-time employment in years, is happy to buy from Smith.
How is This Side richer?
Why do the words "This Side-ism" make you richer? How do the words "This Sidehood" make you richer?
What does the invisible line separating This Side from That Side have to do with anything, economically speaking?
It has a lot to do with economics if you are a Hamiltonian. It is an opportunity to subsidize crony capitalism.
"See here," the Hamiltonian says. "You are trying to ridicule me with all this talk about This Side and That Side."
To which I say, "I am ridiculing the logic of your position. You think that an invisible line down the middle of the street is economically relevant. I don't."
He responds, "I am not saying that the line down the middle of the street is economically relevant."
I respond, "You are saying that the invisible line down the middle of the Rio Grande River is economically relevant."
He says, "But that line is economically relevant."
I ask, "Why?"
He answers, "Because the people on the other side of that line are supposed to stay on their side of the line."
"OK," I reply. "What if I hire a middleman — called UPS — and he goes across the river and brings some item back to me that I pay for? The guy on the other side of the invisible line stays on his side of the line."
"No, no, no," says the Hamiltonian. "That invisible line is different. It defends Nationhood."
I ask, "What is Nationhood?"
He responds, "This Side — big time."
So, we are arguing about the length of the line and the latitude of the line. But what does the length of the line or the latitude of the line have to do with whether I should pay a sales tax?
The Hamiltonian says, "I don't understand what you're getting at. You offer a lot of incomprehensible theory, when I am trying to defend Nationhood."
Hamiltonians capitalize a word and think that they have offered a logical economic argument: "Nationhood." But when I capitalize two words — This Sidehood — the Hamiltonian thinks I am trying to confuse him.
Hamiltonians are easily confused.
Making Us Poor
My correspondent was not content to invoke nationhood. He went in for the kill. He invoked the ancient Hamiltonian argument: Free choice impoverishes us; sales taxes make us wealthy. Of course, they never use the term "free choice." That would reveal their real target to stamp out. So, they use the term "free trade." He wrote,
"Free trade" has the long term effect of lowering our standard of living until it is eventually equal to everyone else's. Wouldn't it be a worthwhile national goal to maintain a high standard of living for our own people for as long as we can?
He is Smith. He looks across the street and sees Jones. He shudders. He goes to Brown and says this:
"Free trade" has the long term effect of lowering our standard of living until it is eventually equal to everyone else's. Wouldn't it be a worthwhile this-side-of-the-street goal to maintain a high standard of living for our own people for as long as we can?
Brown is not sure. He looks at Jones and thinks, "I don't care whether Jones is rich or poor. I sure would like one of those items. The price is right." So, Smith presses the point.
Jones exploits the poor. Workers on That Side are slaves. They cannot find work at decent wages. That's why Jones sells his goods so cheaply. You don't want to wind up like all those exploited workers, do you?
Brown thinks about this line of reasoning. He comes up with an idea.
We ought to give all those enslaved workers a chance at a better life. Jones needs some competition. Why don't we invest some money in one of Jones's competitors? That way, the competitor can offer better wages.
Smith is horrified at this prospect. He has enough problems just dealing with Jones.
No, no, no. That would let all those workers get a faint glimpse of a better life. That would make their lives even worse: the disappointment. They are not ready for wage increases. They need more time. The best thing that we can do is not to become like them. We need to close the border to all goods produced by slaves. Our job is not to reduce slavery on That Side. It's to preserve liberty on This Side.
Brown thinks about this. "How do you define liberty?"
Liberty is the right of every man on This Side to join with his fellow man and vote to increase sales taxes on goods produced on That Side. That is the only way we can continue to be prosperous.
Brown thinks about this. "Then the best way to preserve our wealth is to limit our choices." Smith says that it is.
Brown pursues this line of thought. "Then the path to liberty is reduced choice." Smith assures him that it is.
"So," Brown says, "the best way not to become slaves with few choices is to legislate fewer choices."
Smith has serious problems with following logical arguments, but he senses where this is headed, although he can't quite put his finger on it. He senses that he does not want to go there. So he switches his line of reasoning. "You must defend your income as a worker."
Brown says, "By restricting my choice as a customer."
Smith says, "That's it, exactly. And you must also limit everyone else's choice as a customer."
Brown says, "Then the best way to maintain my income as a producer is to reduce the number of sales that people on That Side can make to me, and also to reduce the number of sales that I can make to people on That Side."
Smith replies, "Don't worry about lost sales on That Side. They're all a bunch of slaves."
Brown asks, "Why is that?"
Smith has the right answer: "Because they spend their lives being told what to do by people with badges and guns."
Did you follow my argument? If so, you are probably not a Hamiltonian.
Do you believe my argument? If so, then you definitely are not a Hamiltonian.
Hamiltonians do not like economic arguments that are clear. They regard clear arguments as tricks. They think that any argument that progresses step by step to a conclusion is inherently untrustworthy.
They prefer to capitalize words, and then call for higher sales taxes in the name of defending the newly capitalized words. The words all boil down to these: "This Side-ism," "This Sidehood," and "That Side." They fear that trading with people on That Side will impoverish us.
A Hamiltonian believes that if someone in China discovered a cure for cancer, the only way to protect America from unfair competition and inevitable poverty would be to impose at least a 50 percent sales tax on it. "We need to give Americans a fighting chance," he says. Not buyers of cancer cures, of course. Sellers.
If you think this sounds silly, you are not a Hamiltonian. You do not think that badges and guns and sales taxes on imports make most people richer on either This Side or That Side of the invisible line. But they do make some people richer:
- inefficient producers who can now sell at higher prices and not go bankrupt because buyers depart; and
- people who wear badges and carry guns for a living.
If you think of these two groups as "crony capitalists" and "salaried extortioners," you will have the categories right.
If you want a visual image, think of Don Corleone's words: "I made him an offer he couldn't refuse."
Think also of the man who woke up with a severed horse's head in his bed.