Location: United States

Friday, July 08, 2005

Federalist Views on Taxation

The Federalists were actually the first group to truly pick a name for political action. It would be improper to actually call them a political party - they would be more akin to modern 501 groups than anything else. They were ideologically driven towards a strong federal government and goal-oriented towards the adoption of the Constitution.

The Federalists favored a strong federal government because it was the only way to make the states work together. Basically, the states had to give up enough power to the federal government to make federal law mandatory (hence, the Civil War as a result of states leaving the Union). Primary among powers necessary to do this was the power of the purse-strings. As long as states could determine how to send and when to send taxes to the federal government, the federal government was effectively at the mercy of the most obstructionist state in the union - whatever that happened to be this month. Thus, the federal government had to have a basic power of taxation, and it had to have the power necessary to enforce that taxation just to ensure its survival.

This is not to say that the Federalists were blaise about taxation. Chief Justice John Marshall thought it was the most dangerous power of government, implying a power to destroy. If it was an evil power, it was a necessary evil. A greater evil was not exercising the power to tax and allowing everyone's freedoms to be destroyed.

As to WHAT to tax, the answers are found in the Federalist Papers:

From #21
"Imposts, excises, and, in general, all duties on articles of consumption may be compared to a fluid that will, in time, find its level with the means of paying them."

It seems simple enough, but let's be clear about what the sentence means.

An "impost" is a general term, but in context it refers to goods being exported.

An "excise" is 1) an internal tax levied on the manufacture, sale, or consumption of a commodity; or 2) any of various taxes on privileges often assessed in the form of a license or fee.

In other words, an excise is an internal tax on manufactured goods or on privileges.

The only other thing is to understand the 18th century usage of "consumption". Today, economists consider all goods to be consumed if they are used up and must be bought again. Thus, food is an article of consumption. In the 18th century, it was used to denote excessive usage or luxuries.

A "duty" is: a tax on imports.

That's fairly self-explanatory.

So, the author of Federalist #21 sees the ability to tax trade as being entirely sufficient to supporting the government - trade leaving the country, entering the country, or taking place entirely within the country. Is there any other kind?

In modern terms, the Federalists wanted to fund the government by imposing a tax on businesses. This, according to Republicans, would totally destroy the economy by applying a horrible brake on commerce. This is taken from the theory "if you tax something, you decrease the amount of times that thing occurs". Of course, this has an ounce of truth, as even the Federalists recognized.

Federalist #21 addresses it this way:

"It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, "in political arithmetic, two and two do not always make four .'' If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them."

Taxing business transactions contains an inherent limit in that if you tax an item too much, the price will rise so high as to be actually decrease tax revenues from it. High business taxes (primarily sales taxes) also make black market economies more likely to occur. This is yet another reason often given by Republicans for cutting taxes.

Any form of taxation increases the chance someone will use an illegal means to avoid paying it. It is not a legitimate argument any more than saying that making murder illegal will make it more likely for murderers to cover up their crime.

And, as Federalist # 36 points out:

"The quantity of taxes to be paid by the community must be the same in either case; with this advantage, if the provision is to be made by the Union that the capital resource of commercial imposts, which is the most convenient branch of revenue, can be prudently improved to a much greater extent under federal than under State regulation, and of course will render it less necessary to recur to more inconvenient methods; and with this further advantage, that as far as there may be any real difficulty in the exercise of the power of internal taxation, it will impose a disposition to greater care in the choice and arrangement of the means; and must naturally tend to make it a fixed point of policy in the national administration to go as far as may be practicable in making the luxury of the rich tributary to the public treasury, in order to diminish the necessity of those impositions which might create dissatisfaction in the poorer and most numerous classes of the society. Happy it is when the interest which the government has in the preservation of its own power, coincides with a proper distribution of the public burdens, and tends to guard the least wealthy part of the community from oppression!"

Of course, the writer was talking about whether state or federal government should tax, not what kind of tax to use, but the logic remains solid. The amount of taxes needed to support the government remain the same no matter what form of taxation is used. Thus, the only real concern is that the tax is collected in such a way as to make it the most inconvenient manner (such as automatically with-holding it) and in the manner that makes the collections the fairest among all people (not favoring small businesses or big businesses, or incomes).

It is vital to understand that the last clause was a true heartfelt sentiment. The Federalists obviously favored a progressive taxation scheme. Isn't it wonderful when doing the right thing also helps solve everyone's problems?

It can easily be seen that the current state of taxation in America is far from this idea. Businesses are paying less and less taxes, inport and export taxes are being abolished, and income taxes for people are becoming less progressive. Oddly enough, it is usually the party that claims to want to defend the letter of the Constitution that pushes the agenda to make it even more so.


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