Federalist 30
The two most consequential powers of modern governments are the power to conscript individuals into military service and to dip its hands into people’s pockets. The federal government had no authority to tax individual income until the ratification in 1913 of the 16th Amendment, but how and how much revenue the government could raise provoked intense debate around ratification of the Constitution. As Hamilton acknowledged in Federalist 30: Money is the life blood of government. Without it, it can do nothing. Limit its money supply and you limit government.
In one telling passage in this essay, Hamilton noted that “the happiness of the people” resulted from their ability “to provide the revenues which the necessities of the public might require.” Hamilton recognized a basic truth of political life: government possesses no resources of its own. In order to function it must skim wealth off the transactions or from the property of private citizens. Skim too much, and it diminishes the private sector’s capacity to create wealth; skim too little and government atrophies. As Chief Justice Marshall would observe some thirty years later in McCulloch v. Maryland: the power to tax is the power to destroy. Hamilton assumed that the friction of private interest against public needs would produce the proper equilibrium. “The necessities of a nation,” he wrote in all caps, “in every stage of its existence will be found at least equal to its resources.”
The rub occurred when critics considered the “necessities” to which Hamilton might have referred, particularly given that prior essays argued for a standing army, and also when they meditated on that menacing little qualifier “at least.” In this as in another essays, Hamilton assumed that the power given the federal government had to be both expansive and flexible enough that it could cover all possible contingencies, even while conceding that such expansion and flexibility required limiting by a representative system of government, which alone could keep the people from being the objects of “continual plunder” while also “supplying the public wants.” Hamilton’s tendency to argue from the extreme case – if we don’t change the system of taxation the government will perish – shouldn’t distract us from the fact that governments do in fact need money to operate and people need government to survive.
Article 8 of The Articles of Confederation had rendered the federal government’s revenues dependent not on citizens, nor even on commercial transactions, but on the largesse of the states. They, in turn, generated revenues “in proportion to the value of all land within each state” and on “such land and the buildings and improvements thereon shall be estimated.” The states, in charge of attending to the daily concerns of citizen’s lives, were hesitant to share their meager funds with the federal government, particularly if they feared the system of representation would be too skewed to provide proper limits. The defenders of the Constitution saw this fiscal dependency as a fatal flaw in the Articles, particularly in light of America’s debt crisis. The states, in control of the purse, could effectively cut off the federal government's oxygen supply.
The debt crisis was largely a result of colonists borrowing money to fight the war that overthrew the British crown, and in particular the federal government had difficulty discharging its obligations to soldiers who had left their fields, and thus their source of income, to fight in the war. Without a reliable source of income the country would perpetually find itself in arrears, a particular problem for Hamilton who believed that debt could act as a useful fiscal tool. Sometimes the necessities of a nation might exceed it available resources, and in those circumstances debt would provide relief.
Hamilton pointed out that, under the Articles, requests from the federal government upon the states concerning revenues were obligatory, but that the states were failing in their legal requirement to comply, thus leaving the federal government permanently enfeebled. The main defect of the Articles, he claimed, resulted from making the federal government dependent on the states as intermediaries rather than being able to draw its resources directly from the people. This shift in taxation policy would obviously have enormous consequences for the states, who still regarded themselves as the parties proper to the union even under the Constitution. Instead, "the power of creating, by its own authority, new funds from new objects of taxation would enable the national government to borrow, as far as its necessities might require." As regards necessity, however, the devil was very much in the details.
Hamilton consistently argued that the main necessity involved government's war-making power, and that governments could not exercise such power without being able to take on debt. No political community had sufficient resources to fight modern wars without recourse to borrowing from other nations. The taxation power was always intimately connected to warmaking powers. Hamilton's constant refrain concerning the inevitability of war rang harshly in anti-federalist ears. They accused him of fear-mongering and thus disrupting the peace of public life. A peaceful people had no need for an overweaning government. But Hamilton believed such thoughts were those of "trifling" men who "hope to see the halcyon scenes of the poetic or fabulous age realized in America." Realists like Hamilton believed the country would not escape its "portion of the vicissitudes and calamities which have fallen to the lot of other nations." Where Hamilton saw opportunities for greatness, critics saw entanglement, a loss of sovereignty, and a disruption of the peaceful life of hearth and kin they craved.
Rather than waiting for the states to turn over funds, Hamilton claimed that the federal government had to have the power to raise its own revenues by its own devices. This may seem obvious to us now, but the reader might want to consider as an analogy the relationship between member states and any security alliance, such as NATO. Currently, NATO countries have an obligation to spend 2% of their GDP on defense spending and then use a cost-share algorithm to figure out their individual contributions. But a number of countries – Canada for example – fall far short of the 2% threshold and others do not pay what the algorithm dictates. There is little NATO can do to force compliance, and in the interim some member states have to pay more than their fair share, or begin to pull out of the alliance. Since Hamilton had seen the Constitutional system in part as a system of collective security, he worried that states would pull out if the federal government were not able to raise revenues independent of them.
The problem of taxation, then, became intimately tied to the question of sovereignty. Hamilton seemed to be arguing that so long as the states retained their sovereignty any kind of federal union would be impossible. This was, after all, the argument he made at the Constitutional Convention (according to Madison’s notes). Of course, such an outright affront on state sovereignty would have insured the failure of ratification because the states were the ones ratifying the document. After his proposal at the Convention failed, Hamilton focused more on the idea of dual sovereignty – a concept many antifederalists regarded as a solecism.
In this essay and the next, Hamilton attempted to extend the principle of dual sovereignty into the details of governing by arguing that the power to tax was a concurrent power – one that could be exercised simultaneously by both state and federal governments. But how would the federal government’s power of taxation not end up usurping state power, and ultimately shifting the authority to govern the details of people’s lives from the states to the central government? Could not the federal government cause the state governments to atrophy from lack of resources? How, in detail, would concurrent powers work without a third power that could coordinate them?
Most anti-federalists agreed with Hamilton that the federal government needed a less restrictive power to tax than that granted under the Articles, and believed that the Constitution’s grant of authority to tax imports and exports made sense. They worried about the federal government having a power of direct taxation – a concomitant of Hamilton’s repeated claim that the key to the whole plan was the ability of the federal government to exercise its powers directly upon individual citizens without the states acting as intermediaries.
That Hamilton arranged the argument for taxation authority to occur after he had already spent so much effort defending the idea of a standing army only deepened the worries of the anti-federalists. The ability to avoid pickpockets decreases significantly if the thiefs are armed. Furthermore, anti-federalists worried about what would happen to the exchanges and property holding of private life should taxes be levied twice – once by state and once by the federal government.
The power to tax is the power to destroy. By drastically expanding the federal government’s power of taxation and combining it with the power of a standing army, the Constitution not only put the sovereignty of the states at risk, but the very freedoms that marked the daily lives of citizens. What actions might escape such a power? Would there be any refuge from government’s long and greedy hand? The anti-federalists saw the taxation power as the key to centralization of all politics. They may not have wanted to cut off the oxygen supply completely, but they wanted to keep the flow limited enough so the emergent life-form wouldn’t become an all-consuming blob.
Taxation power requires some justification if government is to retain its legitimacy. Currently, Americans only have the vaguest idea of how their tax dollars are used by the federal government. In the absence of direct correlations between payments and programs, politicians resort to vagueries as justifications. Hamilton didn't disappoint, arguing that increasing the authority would insure that "the ends of public happiness will be promoted," and that a richer government could "advance the prosperity" and "support the reputation of the commonwealth." But would the prosperity of the whole come at the expense of the well-being of the parts? What price had to be paid for "respectability abroad?" And what, exactly, did Hamilton refer to when he suggested that an increased taxation power would enable the federal government to "undertake or execute any liberal or enlarged plans of public good?"
Essays 30-36 all deal with the taxation power of the federal government. From 32-34 Hamilton responds directly to anti-federalist arguments against the taxation power, which I will review in more detail in the coming weeks.
Director of the Ford Leadership Forum, Gerald R. Ford Presidential Foundation
Related Essays
