Mini-Federalist #30 – Concerning the General Power of Taxation

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 #30, the original text of which can be read here: http://thomas.loc.gov/home/histdox/fed_30.html

Originally published December 28, 1787 by “Publius” – who was in this case, Alexander Hamilton.

We already discussed how the Federal government should provide for the military including raising troops, building a navy, and anything else that might be needed for defense. Of course, this isn’t the only thing that the government should be able to collect tax money for. The Federal government needs to be able to pay off national debts, and pay for other things that have a national scope. Clearly, the proposed Constitution must give the Federal government a general power to collect taxes.

It’s obvious that any government needs money, so it follows that the government ought to be allowed to regularly collect enough of it to do its work. If mechanisms for this collection aren’t in-place, then either the people are going to be hit up for money whenever there’s a crisis, or the government will quickly go bankrupt.

As an example, think of the Ottoman Empire – the Sultan has no power to impose a tax on his citizens. Instead, the governors of the individual provinces are allowed to rob their citizens so that the Emperor has the money he needs for his own (as well as the government’s) use. We face the other problem here: our government has been allowed to whither down to almost nothing. Wouldn’t it be better for both countries to have a well-established, regular tax system?

Our current system was supposed to give the Federal government the means to collect all the funds it needed, but the design is flawed. Congress is allowed to figure out what it needs and ask the States (who are legally obliged to comply) to provide it. The States aren’t supposed to get a say in the matter – except in how they collect the necessary funds – but in practice, they drag their feet if they disagree with Congress’ demand. Things will always be like this as long as Congress is dependent upon the States for funding. Even people who don’t care about politics know that this is going on, and we’ve already talked about it at length in these papers. This is the main reason that our government is a mess, and it is a bad thing for us, and a good thing for our would-be enemies.

How can we fix this other than by changing the whole system? We can’t rely on quotas imposed on the States anymore. We have to allow the Federal government to collect its own taxes. Even smart people can disagree about this at first, but there’s no other solution to keep us from going bankrupt.

Some of our smarter opponents will admit that our solution has merit, but they suggest that we limit the Federal government to so-called “external” taxes, like duties on imported goods, while leaving the “internal” taxes – those against the citizens directly – to the States. This idea doesn’t make any sense. The Federal government would still be depended on the States for funding. We can’t possibly bring in enough money to meet our current needs with these purely “external” taxes. And that is to say nothing of our future needs! We need our government to have maximum flexibility in collecting funds.

These opponents go on to say that any lack of Federal funding can be made up by the States. On the one hand, this admits that we can’t really rely on their solution, but that we ought to for any needs we have above a certain amount. Anyone who has really thought through this problem (or read my other papers) will be horrified at the idea of entrusting our national interests to this system. This proposal would make our country weaker, and lay the groundwork for conflict between the States. What makes us think that the same problems won’t crop up just because the Federal government will theoretically be asking for less money from the States? As if there is some point at which the States could decide that the Federal government doesn’t really need any more money. How could any government operate in a state of constant neediness like this? It can’t possibly have stability or establish credit – either at home or abroad. It can’t address anything but short-term issues, and always in “crisis mode”. There can be no long-term planning to advance the greater good.

What would happen if we’re ever drawn into a war? Let’s assume for the moment that the “external” taxes are enough to handle our day-to-day needs during peacetime. How would the Federal government handle an unexpected attack against us? We already know from experience that we can’t rely on the States to provide the Federal government with money – even during a time of great danger. So the Federal government would be forced to divert funds from normal operations (like paying off our debt) to cover the cost of the military. I can’t imagine any other way. And if that happened, our credit would be ruined at a time when we may need it most. Even countries that are richer than ours need to borrow money when they get involved in a war, and if we can’t be trusted to pay our debts, the amounts and terms of the loans we’ll be able to secure will be far from ideal.

You might argue that even with the Federal government having a full power to tax as it needs to, that we may still find ourselves in a position where we have to divert funds from normal operations like debt repayment during a war. There are still two advantages to the system where the Federal government has its own tax power: 1) we know that all the resources possible will be acquired and used, and 2) it will be easier to get loans to cover any gaps.

If the Federal government has the power to tax as much as it needs to, there will be no problem getting loans from either foreign or domestic sources. But if the Federal government is fully dependent upon the whims of 13 other State governments in order to pay it’s own bills, no creditor is going to loan to it.

These may seem like small concerns to people who imagine that we are building some kind of utopia here in this country. But those of us who know the problems and crises that have been experienced by other countries don’t expect that we’ll be able to completely avoid them. These matters deserve our serious consideration.