Location: United States

Thursday, July 07, 2005

Funding a Confederation - or why voluntary taxes don't work

I know everyone likes to think that the United States has been in existence since the moment the the Declaration of Independence was written. We haven't. We had a little war of independence and in 1871 we first joined as a single political unit under the name of the United States of America. The government under which we were joined was created by the Articles of Confederation, and it would be very short-lived.

Article 8 of the Articles deals with taxation powers. It reads:

"All charges of war, and all other expenses that shall be incurred for the common defense or general welfare, and allowed by the United States in Congress assembled, shall be defrayed out of a common treasury, which shall be supplied by the several States in proportion to the value of all land within each State, granted or surveyed for any person, as such land and the buildings and improvements thereon shall be estimated according to such mode as the United States in Congress assembled, shall from time to time direct and appoint.

The taxes for paying that proportion shall be laid and levied by the authority and direction of the legislatures of the several States within the time agreed upon by the United States in Congress assembled."

So, taxation in the Confederation worked something like this. Congress would decide how much money was needed in the common treasury. It would then assess each state a portion of that amount based on the total value of all land (and improvements to the land) within that state. This assessment would be sent to the individual State Legislatures, who would then obtain the money from its citizens however it decided would be best.

If you consider the difference in land mass between, say, Rhode Island and Pennsylvania, you can see that this puts large states at a severe disadvantage. This is especially true as many of the middle states - Virginia, Pennsylvania, the Carolinas - didn't have a fixed western border. It would then be somewhat disadvantageous to be in a large and sparsely settled state as your share of taxes would necessarily be much higher than if you had the same property in a small, densely settled state.

The Confederation also had the problem that it had no means of directly collecting revenues. It was totally dependent on the individual states to act through their legislature to appropriate funds for its use. Imagine if Washington, D.C. could not send our military into action because it was waiting for Iowa, Wyoming, Texas, and Hawaii to enact legislation to send this year's taxes to the federal government!

The Articles gave one more power necessary to government - "The United States in Congress assembled shall also have the sole and exclusive right and power of regulating the alloy and value of coin struck by their own authority, or by that of the respective States"

This was not to facilitate trade - trade was already thriving between the states and even with overseas powers. Giving Congress the power to regulate the value of coinage ensured Congress that the revenues they received through the tax procedure would be of some worth by the time they got to the federal treasury. Otherwise, Georgia could have simply printed up a ton of worthless money and sent it to the feds. The United States of America granted itself power to regulate currency as a means of ensuring its existence. In return for this power, it assumed the responsibility for public debts and claims against their currency and coinage.

It took less than three years for this arrangement to prove unworkable. State legislatures proved to be rather stingy with their funds and they constantly challenged the assessment of their land values. Since the Articles mentioned only coinage, some began to print paper money, or to license banks to do so. They would then send this "private money" to the federal government, which ensured that the money had to be spent back in the state from which it originated.

The group that arose to throw out the Articles in write a new Constitution - the side that eventually won - was called the Federalists. Their spokesmen were primarily John Jay and Alexander Hamilton and they wrote the eighteenth century equivalent of blogs - pamplets - that came to be called "The Federalist Papers". In a stroke of political genius, they invented political spin on this continent by calling their opponents "Anti-Federalists" - which hinted that they were not really FOR anything, they only want to be OBSTRUCTIONISTS (which should sound a bit familiar).

It was largely the efforts of the Federalists that was responsible for making the most significant change to government in the new Constitution:

"To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof."

They did this, they argued, so that the government would have maximum flexibility to meet changing demands without having to constantly try to amend and update the Constitution. This "necessary and proper" clause is the single best argument against the theory that the Constitution was meant to be enforced strictly to the letter of which it was written. However, that argument will lead me way off of the topic of taxation and money.

In my next post, I'll deal a bit stronger with the Federalist views on taxation. After that, I'll look at their opposition's view of taxation, and why they feared the power-hungry Federalists and especially the power of taxation.


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