Menu
Tax Notes logo

Tax History: The Founders Wanted a Strong Tax State; Slavery Weakened It

Posted on Mar. 2, 2020

Is America a strong tax state or a weak one? And whatever it might be today, what did the Founders intend it to be?

These questions are more than simply academic: They infuse modern political debate, especially when politicians start talking about wealth taxes. However, they aren’t easy questions to answer. For every 18th-century quotation adduced to defend the notion of a strong federal taxing power, there’s another that appears to suggest the Founders were keen to limit that power in important (and still meaningful) ways.

If the evidence seems contradictory, that’s because it is. Still, it’s possible to reach some conclusions on these contentious questions, especially if you are careful about how you state your case. And no historian is more careful — and more successful at distilling order out of chaos — than W. Elliot Brownlee, American fiscal historian at the University of California, Santa Barbara, and author of a 2017 article on early U.S. fiscal history in Financial History.

In “Taxing to Build a Commonwealth,” Brownlee argues that the Founders — a notably heterogenous group — were eager to endow the federal government with a broad power to tax. But those same Founders were also intent on preventing any rupture within their ranks, especially over the contentious issue of slavery. As a result, they agreed to establish important limits on the federal taxing power — limits that have constrained the growth of national government for more than two centuries.

What’s a Tax State?

When historians talk about a “tax state,” they are generally trying to describe a system of governmental institutions that allow for levying and collecting taxes. Most governments, of course, make an effort to collect revenue, although not all bother with the legal niceties of formal taxation: Expropriation has been a popular tool of revenue extraction, too, as have natural asset sales. But tax states, as typically defined, are political entities governed by institutions that raise some or all of their revenue through reasonably well-defined taxes of one sort or another.

When tax states are described as “strong,” it’s usually because they possess the legal authority — and actual power — to levy and collect taxes. Governments that impose numerous taxes but can’t collect them aren’t strong tax states. The Civil War Confederacy, for instance, wasn’t a strong tax state: It imposed a relatively large number of taxes, including an income tax, but proved incapable of collecting them. As a colleague of mine observed dryly when writing of the Confederacy in our Tax History Museum: “Efforts to raise war revenue through various methods of taxation proved ineffective.”

The ability to levy taxes and actually collect them is a necessary precondition for statehood — as well as a signal that statehood has been achieved. War-making may be the most elemental of government powers, but war requires resources. And although taxes aren’t the only way to separate people from their riches, they are one of the most efficient, sustainable, and scalable ways.

That’s why historians have generally treated tax collection as fundamental to state-building. As my colleague Jeremy Scott observed, “the regular collection of revenue and the use of that revenue to fund common goods, such as infrastructure and defense, are the keys to state-building.”

Weak Beginning

In the beginning, the American national tax state was weak. The Articles of Confederation were notorious for their lack of an independent taxing power. The nascent federal government established in 1777 was utterly dependent on the individual states for its revenue needs; it could requisition and request but not levy or collect.

Initially, the weakness of this early American tax state was considered a feature, not a bug. The legacy of British colonial taxation weighed heavily on the first generation of American national leaders as they tried to draft a new model for federal governance. British taxes on colonial trade had been well tolerated for many decades, in large part because American political and economic leaders appreciated the benefits of their membership in the sprawling and prosperous empire, Brownlee notes in his Financial History article.

Problems began to develop, however, once British authorities started asking the colonies to increase their contribution to the costs of protecting that empire. The demands came in stages. The first came in 1765 with the Stamp Act, followed by the Townshend Acts in 1767 and the infamous Tea Act in 1773. Taken together, these acts — and their associated enforcement efforts — constituted an entirely new fiscal regime for the colonies.

“The new regime prompted a crisis in tax consent in the colonies,” Brownlee writes. “To many Americans, the new taxes threatened their regime of internal taxation that they had developed informally and incrementally over the decades.”

Before the imposition of the new internal tax regime, Britain had allowed the individual colonies the authority to manage their own fiscal systems. “The colonies had used their discretionary fiscal space within the British Empire to expand their taxation of property and internal trade,” Brownlee writes. “They used these taxes to administer justice, fund modest programs of road building, schooling and welfare, and help prosecute colonial wars.” The new tax regime imposed by Parliament threatened those functions by crowding the fiscal space that had long allowed for them.

Brownlee’s observation underscores the importance of colony-level (and later, state-level) taxation to the broader story of American taxation. Subnational taxes were vital to the political dynamic that helped spark the Revolution, but they also helped shape the taxing powers of the American national governments that arose in the wake of independence.

Replacing the Articles

The Articles of Confederation were weak because the individual colonies were jealous of their newly asserted powers. The national ship of state managed to stay afloat throughout the war, but it was a near thing. And a dear thing. The war proved to be crushingly expensive for Americans, both individually and collectively. “As a percentage of national product, it was probably the most expensive war in American history,” Brownlee writes.

Absent a national taxing power, moreover, Americans had to pay for the war using a combination of inflation, expropriation, and borrowing. The last had a hangover effect: By the end of the war, Congress and the states were together saddled with more debt “relative to national product or income, than at the conclusion of any other war in U.S. history,” Brownlee writes.

After the end of the Revolution in 1783, the Articles government continued to hobble along for another half-decade or so. But the debilitating weakness of its taxing power was hard to miss, and even skeptics of strong central authority were forced to consider alternatives. National security concerns were a driving force in this reassessment, as American political leaders worried incessantly about their ability to defend the new nation from enemies both foreign and domestic.

Eventually, the Constitution replaced the Articles, and the United States gained a strong national taxing power. The new American tax state relied heavily on tariff duties, but it also gained the power to levy internal taxes. Those included not just excises, like the whiskey tax of rebellion fame, but federal property taxes as well.

In general, however, the federal government made rather sparing use of those internal taxes, at least during the decades before the Civil War. For the most part, Congress ceded the field of internal taxation to the states. “The key element of the compact in the United States was a strong commitment to the fiscal prerogatives of state and local governments,” Brownlee writes.

The British challenge to colony-level tax prerogatives had only strengthened political support for subnational tax regimes. During and after the Revolution, moreover, many state governments continued programs of fiscal expansion and innovation. In New England and the mid-Atlantic states, that innovation included the embrace of “ability to pay” arguments and nascent forms of wealth taxation, often framed as property taxes.

With this history of innovation in mind, the framers of the Constitution took care to protect the states’ fiscal prerogatives. In particular, they agreed to limit the federal government’s ability to levy direct taxes, requiring that they be apportioned among the states according to the distribution of population rather than wealth.

All the states shared a concern about federal encroachment on their fiscal prerogatives, but they differed dramatically in what they were trying to protect. “The differences between the northern and southern states were powerful and tragic,” Brownlee writes. State governments in the North were keen to protect their growing economic and social functions, as well as the property taxes that paid for them. Canals, railroads, hospitals, and colleges didn’t come cheap, and Northern states were determined to protect their tax bases (which even included some early forms of corporate taxation, including capital stock levies and gross receipts taxes).

Southern states were also determined to protect themselves from federal fiscal encroachment, but not in the interest of supporting new spending. Indeed, they had avoided those programs in the years after independence, as well as the tax innovations that might have paid for them. To pay for their rather modest functions, Southern states relied on what Brownlee calls “random fees, licenses, poll taxes and poorly assessed property taxes.” Southern states tended to tax slave owners sparingly, often using poll taxes rather than more burdensome levies on the market value of slaves.

That fiscal solicitude for slaveholders was the driving force behind the constitutional restriction on federal property taxes, Brownlee writes. “If it had not been for the determination of southern slaveholders to shield slavery from federal taxation, the framers of the Constitution probably would have softened the restriction on federal property taxation established by Article I, Section 9,” he writes.

Brownlee’s point is crucial to the current debate over the Constitution’s apportionment requirement — or at least the debate over its moral status, if not its legal significance. As Brownlee argues persuasively, the apportionment requirement was rooted partially in a principled application of fiscal federalism. But it also represented a pragmatic capitulation to the slave states. “By including this provision in the Constitution, the founders were interested not only in protecting state and local tax revenues, but also in accommodating the political power of slave owners and, thereby, holding the new union together,” Brownlee contends.

In the short term, this bargain presumably seemed worthwhile to the framers. But it was expensive in both moral and fiscal terms. To the extent that it institutionalized slavery within the fiscal regime of the new American state, it mirrored the broader moral failures of the founding era — “a tragic compromise of republican ideals,” in Brownlee’s words. But the bargain was also costly in terms of revenue and state-building, limiting the fiscal capacity of the new federal state.

The counterfactual possibilities are obvious. Absent the apportionment requirement, federal lawmakers might have done exactly what the slaveholders feared: attacked slavery by trying to tax it out of existence. At the same time, the federal government might have tried to copy state-level models of activist government, spending federal dollars on infrastructure, education, and welfare — and raising those dollars with taxes on property rather than consumption.

Not everyone today will view these might-have-beens in the same light. Few would defend the Constitution’s protection of the slaveowners from tax-based abolitionism. But many contemporary observers can probably find things to like in the Constitution’s effort to limit the fiscal capacity of the federal state.

Ultimately, the early history of American taxation, from the colonial era to the Civil War, is complicated. It’s not a morality tale about Tea Party tax resisters throwing off the chains of British colonialism and replacing it with freedom-loving, low-tax, small government. The story of activist state-level government in the Northern and mid-Atlantic states makes that myth untenable.

At the same time, however, the story of early American taxation isn’t a teleological tale about the inevitable triumph of rigorous federal state-building. Yes, the Constitution is generally a pro-tax document, and it includes many of the key elements of a strong tax state. But as Brownlee makes clear, that tax state was badly compromised from the start, thanks to the corrosive influence of slavery.

Copy RID