Summary and Analysis
Section V: Powers of Taxation:
Federalists No. 30-36 (Hamilton)
Summary
This section of seven chapters analyzes the many problems involved in setting up a just and equitable system of taxation, and in reconciling the conflicting claims of various taxing authorities at all levels of government — federal, state, and local.
In Chapter 30, the national government under the Articles of Confederation lacked the revenues necessary for carrying out its purposes because a faulty fiscal system made it dependent on quotas and requisitions from the thirteen individual states. A national, government, properly constituted, should have the power to raise its own revenues by the methods of taxation ordinarily used in every well-ordered "civil government."
Adequate national revenues, as some argued, could not be raised by external" taxes alone, that is, by customs duties on foreign imports. The central government should be empowered to levy "internal" taxes also, as necessity required.
In Chapter 31, opening this essay with a disquisition on the eternal verities of geometry and other sciences, Hamilton observed that politics was not an exact science because it dealt with the "unruly passions of the human heart," and therefore tended to be rather irrational. Among the more irrational, Hamilton added, were those who opposed the proposed constitution from fear that the national government by its "unlimited" taxing measures might deprive the states of the means of providing for their own needs.
It would be the other way around if this point came into contest, said Hamilton. It was probable that the states, being closer to the people, would encroach more on the revenue-raising plans of the central government than otherwise.
In Chapter 32, states should retain their "independent and uncontrollable authority" to levy taxes for their own purposes, with the exception of laying customs duties on foreign imports and exports, or tariffs on any articles in interstate commerce. There was to be absolutely free trade among the states, which would stimulate the national economy.
In Chapter 33, opponents of ratification were raising objections to several clauses in the proposed constitution. The first of these clauses empowered the national government to "make all laws" deemed necessary and proper for executing the powers vested in the national government under the Constitution. The second clause declared that all laws passed and all treaties signed by the national government were to be "the supreme law of the land; any thing in the constitution or laws of any State to the contrary notwithstanding." Anti-ratificationists cited these clauses as "pernicious engines by which their local governments were to be destroyed and their liberties exterminated."
Hamilton dismissed such views as gross "misrepresentation." Power was the ability or faculty of doing a thing, and the ability to do a thing rested on the power to employ means necessary for its execution. This was true in the matter of laying and collecting taxes: though a law laying a tax for the use of the United States would be a supreme law that could not legally be opposed or controlled, yet a law preventing the states from collecting a tax would not be supreme law because it would be unconstitutional.
Chapter 34 takes up the subject of "CONCURRENT JURISDICTION" in the matter of taxes. Under the proposed constitution, the right of the national government to raise necessary revenues would be "altogether unlimited," while the revenue-raising power of individual states would be only moderately circumscribed under the plan of concurrent jurisdiction. Each would have its field, and there would not be any "sacrifice of the great INTERESTS of the Union to the POWER of the individual States."
In Chapter 35, Hamilton posed a question here: What if the national government, as some proposed, should be empowered to raise revenue only through customs duties on foreign imports and exports? In want of any other source of revenue, such duties would undoubtedly have to be raised higher and higher. This would encourage smuggling to the detriment of law-abiding merchants and other businessmen. Higher tariffs would bring higher prices on many essentials and would adversely affect consumers. Protected by a high tariff wall, domestic manufacturers would enjoy an improper and "premature monopoly of the markets," which would unbalance the economy at the expense of other interests.
The idea of actual representation of all classes and interests in the legislature was "altogether visionary," said Hamilton. It was impossible to have members of each different trade and occupation seated in the legislature. Nor did mechanics and others wish to be seated. In general, such people were inclined to cast their votes for merchants, knowing "that the merchant is their natural patron and friend. . . . We must therefore consider merchants as the natural representatives of all these classes of the community."
All landowners, "from the wealthiest landlord to the poorest tenant," had one bond between them — to keep taxes on land as low as possible. So what did it matter whom they chose to represent them, whether "men of large fortunes or of moderate property or of no property at all"? From all of the above Hamilton concluded that the spirit of government would be best served if legislatures were composed, as most were, "of land-holders, merchants, and men of the learned professions," by which he meant lawyers in particular.
In Chapter 36, the author continued to develop his thesis that, in the political nature of things, the national legislatures, like the state legislatures, would consist almost entirely of landowners, merchants, and members of the learned professions, who would "truly represent" the desires and interests of all the different classes and groups in the community.
It had been objected, Hamilton noted, that the national government's power of internal taxation could not be exercised with advantage from lack of sufficient knowledge of local circumstances. That supposition was "entirely destitute of foundation." All that was required of "inquisitive and enlightened Statesmen" was a general acquaintance with the resources and the different kinds of wealth, property, and industry in various parts of the country.
Also, in collecting internal taxes, the national government could make use of the tax apparatus already operating in the individual states. This would avoid the need for double sets of revenue officers and "duplication of their burthens by double taxations," which the people might resent. State revenue officers could be attached closely to the union by having the national government supplement their salaries.
As to poll taxes, which were in force in many states, Hamilton confessed his "disappointments" in them, adding that he would "lament to see them introduced into practice under the national government." On the other hand, the national government should have the power to impose poll taxes in case of need, for such taxes could become an "inestimable resource" of revenue for the nation as a whole.
Analysis
Hamilton's ideas about a proper national tax structure are interesting, especially in view of the fact that he soon began putting them in effect when President Washington appointed him our first secretary of the treasury.
In this section of essays, Hamilton was ingenious, if not always convincing, in arguing his main thesis that the national government, as proposed under the new constitution, should have "altogether unlimited" authority to levy taxes on all things, and in whatever ways it thought best. But the government should use prudence and caution in exercising that authority.
Anti-Federalists objected that such blanket authority would place the states and the general public at the mercy of the national government. Hamilton denied this, saying that the authority would be exercised by the people's representatives in the Congress who could be trusted to act with discretion. If one set of representatives did not, the people could elect another set. But this, as Hamilton failed to mention, was easier said than done.
Few disagreed with Hamilton's view that, in the beginning at least, national revenues should come largely from "external" taxes (customs duties) and "internal" taxes in the form of excises on specified articles. Hamilton suggested that an excise on the making of "ardent spirits" would be not only profitable but socially desirable, for it would tend to curb the drinking of hard liquor, notoriously a "national extravagance." In one of his first acts at the Treasury, Hamilton proposed and Congress approved an excise tax on makers of "ardent spirits," which soon led to the Whiskey Rebellion by small distillers in western Pennsylvania and neighboring areas, a rebellion that Hamilton, as a major general, helped to put down.
Hamilton did rather well in explaining (Chapter 34) that no conflict could arise between the national government and the state governments about taxation because of "concurrent jurisdiction," a rather complicated concept. The national government's tax laws were to be the supreme law of the land, and not to be contravened in any way. At the same time the states would retain, with two minor exceptions, "independent and uncontrolled" authority to levy taxes as they saw fit for their own purposes. The somewhat complex plan of "concurrent jurisdiction," it must be said, has worked rather well, with relatively little conflict or confusion.
Hamilton took a patrician view about the proper management of public affairs when he declared (Chapter 35) that the national legislature not only would but should be composed predominantly of merchants, landowners, and men of the learned professions. These groups were experienced in large affairs and would "truly represent" all classes and interests in the country, said Hamilton, who went on to ask several rhetorical questions: would not the landholder know best how to promote the interests of all landed property, large and small? Would not the merchant be disposed to cultivate, "as far as may be proper," the interests of the mechanic and manufacturing groups with whom he did business? Would not the man of the learned professions, being neutral between contending economic groups, be ready to promote the general interests of society? Thus, everybody's interests and problems would be taken care of. This was the British concept of "virtual representation."
All of this may seem politically naive, but it was not. Hamilton believed in rule by a propertied elite and, throughout his career, worked to keep it that way.