Mini-Federalist #12 – The Utility of the Union in Respect to Revenue

This is a continuation of a series of posts that are intended to be shorter, more understandable versions of the Federalist Papers. This post deals with Federalist #12, the original text of which can be read here: http://thomas.loc.gov/home/histdox/fed_12.html

Originally published November 27, 1787 by “Publius” – who was in this case, Alexander Hamilton.

We’ve talked about trade. How about the Union’s effect on government revenue?

Obviously, trade generates a lot of money. Because of this, it is a chief concern of the government – everyone wants our commerce to continue to do well and even increase. You might think that there would be tension between the producers of goods and the exporters, but they’ve come to see that they need each other. Increased trade has other advantages, too – like higher property values. Workers, manufacturing firms, everyone benefits from better trade.

A country needs to have good-quality money, and you can only achieve that through trade. Look at Germany: they have good land for farming, and the most impressive precious metal mines in Europe, yet their economy is floundering because they have very little trade.

The best thing the Union would do for revenue would be providing a broader tax base. It is very difficult to raise a large sum of money by directly taxing the people – for one thing, they won’t allow it (and without sufficient revenue themselves, just plain don’t have the money to give), so the states end up with very little money as a result. This is no surprise to anyone who knows how other countries deal with these issues. Britain has a much richer population than we have, and even they have trouble raising money through direct taxes. They get most of their funding through indirect means: tariffs, imposts, and duties on trade. Shouldn’t we do the same thing here?

As it stands, we already have taxes on imports and these are going to be what we need to get us by in the future. This is because taxes on some goods and services produced within each state (we call them “excises”) aren’t very popular, and don’t generate much revenue anyway. Taxing personal property is too difficult, as it is easily hidden. There aren’t a lot of options.

Any system that would make tax collection easier and better must be a good thing. The Union accomplishes this goal.

Remaining as separate States, we’d have a hard time collecting taxes on imports from the other States. Since we are very well interconnected with rivers and we share a common language and culture, smuggling and black market trading would not only pop up quickly, it would be almost impossible to prevent. We’d be forced to implement elaborate border security patrols (France has these and they are huge – more than 20,000 men in all – and do we really want that many armed men wandering around?). Failing that, to compete with smugglers, the States would need to keep their import taxes low, and thus wouldn’t collect enough revenue. Since the other kinds of taxes are unworkable (as discussed above), this would leave the States in an impossible financial place.

On the other hand – think what the Union could accomplish. We’d have one border to worry about: the Atlantic coast. All foreign trade would need to come through that avenue, and there are only so many ports. A small navy could ensure that no unloading happens before coming in to dock and pay the taxes. It would be much harder to sneak through that border than it would be the borders between our States.

A single national government would therefore be able to keep import taxes higher than any state can by themselves. I don’t think any State has an import tax rate higher than 3% right now. France has theirs at 15%. Britain’s is even more than that. I’m sure we could hit at least 9%. As an example, think of the liquor we import: our whole country brings in about 4,000,000 gallons of the stuff per year. Even if we taxed it at only a shilling a gallon (which I’m certain people would be willing to pay), we’d generate £200,000 in taxes! Even if people aren’t willing to pay that much tax, wouldn’t it be just as well for our own economy (and morality) that we not have so much foreign liquor around anyway?

So what if we don’t follow the plan I’m laying out? Well we certainly can’t last long without tax revenue – that’s for sure. We might be forced to join back up with Britain! You know that’s not a realistic option. We NEED tax revenue – but from what source? Taxes on goods and services produced are unpopular (and in primarily agricultural states, insignificant). Taxes on property are hard to track, and may also make people feel hounded by the government – landowners would have to make up the slack (and we know that they alone would never be able to satisfy the government’s appetite for money). The answer is obvious: the people’s hatred of direct taxes, and our State governments’ inability to gather enough money with them, will come together and make plain the need for the higher taxes on trade that only the Union can produce.