Before the Income Tax

A Tool for Social Planning

The January 1946 issue of American Affairs carried an article written by Beardsley Ruml who, at the time, was Chairman of the Federal Reserve Bank of New York. Ruml devised the system of automatic withholding during World War II, so he was well qualified to speak on the nature and purpose of the federal income tax. His theme was spelled out in the title of his article: "Taxes for Revenue Are Obsolete."

In an introduction to the article, the magazine's editor summarized Ruml's views as follows:

His thesis is that, given control of a central banking system and an inconvertible currency [a currency not backed by gold], a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore, should be regarded from the point of view of social and economic consequences.

Ruml explained that, since taxes are no longer needed to raise revenue for the government, there are only two purposes remaining. The first of these is to combat increases in the general price level. When people have money in their pockets they will spend it for goods and services, and this will bid up the prices. The solution, says Ruml, is to take the money away from them and let the government spend it instead. This, too, will bid up prices, but never mind about that. Ruml explained it this way:

The dollars the government spends become purchasing power in the hands of the people who have received them. The dollars the government takes by taxes cannot be spent by the people, and therefore, these dollars can no longer be used to acquire the things which are available for sale. Taxation is, therefore, an instrument of the first importance in the administration of any fiscal and monetary policy.

Redistribution of Wealth

The other purpose of taxation, according to Ruml, is to redistribute the wealth from one class of citizens to another. This must always be done in the name of social justice or equality, but the real objective is to override the free market and bring society under the control of the master planners. Ruml said:

The second principle purpose of federal taxes is to attain more equality of wealth and of income than would result from economic forces working alone. The taxes which are effective for this purpose are the progressive individual income tax, the progressive estate tax, and the gift tax. What these taxes should be depends on public policy with respect to the distribution of wealth and of income. These taxes should be defended and attacked in terms of their effect on the character of American life, not as revenue measures.

This view will not be startling to anyone who is familiar with how the income tax came into existence. Beginning with the War Between the States, the Marxist philosophy of class conflict became manifest in America. Many people believe that Marxism is a battle of the poor against the rich. Not true. It is a battle against the middle class -- the class that Karl Marx called the bourgeoisie. In The Communist Manifesto, Marx wrote: "The distinguishing feature of Communism is, not the abolition of private property generally, but the abolition of bourgeois property." In order to accomplish this, he called for "A heavy progressive or graduated income tax."

Once this concept of class warfare had been transplanted to America, it found nourishment in the labor movement and eventually blossomed into a powerful political movement known as Populism. The Populists claimed that the farmers and the urban working class were being exploited by rich industrialists, largely because of the unfair way in which taxes were levied. At that time, the nation's revenue was drawn primarily from internal excise taxes on the sale of such items as tobacco and liquor, and from tariffs on imports. Today, tariffs are viewed as a means of protecting jobs for American workers, but, in the political debates of the 1890s, they were seen as subsidies for big business, a means of protecting them from the rigors of foreign competition, thus allowing bloated profits that would not be possible without political protection. Furthermore, since these tariffs were passed along to the consumer in the form of higher prices, they were viewed as nothing but a tax levied against the little man to perpetuate the unearned profits of the rich.

Actually, the Populists were close to the truth in their view. Whatever excuse there might have been in early America for using protective tariffs to subsidize the development of infant industries, it had long lost its reason. By 1892, the only plausible purpose of import duties was to provide revenue for the federal government. So the Populists jumped from the frying pan into the fire by advocating the elimination of tariffs and the institution in their place of a progressive income tax.

Soaking the Rich?

It was perceived as an act of justice and revenge. The rich, at long last, were going to be forced to pay their fair share -- and more. In the House of Representatives, Congressman Thomas J. Hudson of Kansas expressed the prevailing sentiment when he said: "I know that many wealthy men are generous and charitable .... On the other hand, the majority of the very wealthy are haughty, overbearing, autocratic, mean, and it is that class in particular that the income tax is designed to reach." Yes, the working, middle class was in a firm majority, and any politician who promised to "soak the rich" was assured of victory at the polls. How ironic it was that those same politicians came from some of the wealthiest families in the world. Little did the common voters realize that, in their greed to shift the tax burden to others, they were, in fact, doing exactly that to themselves. The bourgeoisie was clamoring for its own extinction.

Our so-called progressive income tax is not progressive at all. In fact, it is not even proportionate. The way it operates makes it one of the most regressive taxes the world has ever seen. If we had a flat-rate income tax with no exemptions or deductions, a person with 20 times the income of another would pay 20 times as much tax. As now constituted, our income tax may require a person with 20 times the income of another to pay considerably more than 20 times as much tax. But the way our present tax was designed to operate is quite different. The same year that the income tax was adopted, Congress also created the tax-exempt foundation, a device whereby, under the cover of charity and education, those family dynasties with great wealth can avoid paying either income tax or inheritance tax, while their fortunes remain under their control and continue to operate for their benefit.

Not far behind the super rich come the very rich, who also share in the spoils system. Over the years, the tax laws have become twisted and turned into a Gordian knot of exemptions, deductions, depreciations, shelters, and credits. Those with sufficient wealth can well afford to hire professionals to trace these convoluted paths, but the common man must be content with "standard" deductions and the crumb of a "simplified" tax return.

The federal income tax was never meant to treat all citizens alike. It will never be fair because it was designed to be unfair. It is theoretically possible, of course, to convert the present system to a flat-rate with no exemptions or deductions for anyone. This would be less unfair than the present progressive system and would probably raise sufficient revenue to run the government, even at its present level of spending, at the relatively low rate of 12 to 15 percent. If government were prohibited from the business of redistributing the wealth of its citizens, it likely could function quite well on as little as three percent of the national output. For one thing, the super rich really would pay appropriate taxes -- at the same rate as everyone else. But it still would be a bad bargain, because the basic concept and underlying mechanism would remain intact, ready at a moment's notice to be reactivated by some so-called emergency. The temptation to make a simple revision in rates or exemptions would be too great for Congress to resist.

Furthermore, it is difficult to imagine a tax that is more cumbersome and expensive to administer. So that each individual's income may be determined, the taxpayers must produce documentation on every aspect of his financial life. In order to assure compliance, a virtual army of agents, auditors, and computer technicians must be maintained by the government at public expense. In the dust of this roving army are the hordes of camp followers, the accountants and tax attorneys, all of whom consume massive chunks of the national wealth without producing anything except paperwork and procedures just to measure income. In the process, every detail of our lives is recorded and made available to the bureaucracy. The right to privacy and protection against arbitrary search and seizure is trampled underfoot.

Impossible To Reform

The income tax cannot be reformed. Its heart and soul are favoritism. Its muscle is political power. Its nature is waste and tyranny. It must be completely replaced.

But what should replace it? The world has been exposed to just about every kind of tax imaginable at some point or another. Nations have tried property tax, production tax, excise tax, import tax, manufacturing tax, carriage tax, window tax, chimney tax, liquor tax, tobacco tax, income tax, sales tax, value-added tax, and even a tax on death. The results almost always have been the same. The taxes become despised by the people and often lead to revolt or civil war.

Is there such a thing as a perfect tax? English poet Alexander Pope answers: "Whoever hopes a faultless tax to see, hopes what ne'er was, is not, and ne'er shall be." But the improbability of ever devising a perfect tax is no excuse for not trying. One thing is certain. We can do a lot better than we are doing now.

Fortunately, we do not have to begin from scratch in this project. It may come as a surprise to learn that much of the work has already been done and that the bulk of the plan already has been drafted. Furthermore, it actually has been tested in America and found to be entirely workable. Where is this plan to be found? It is hidden in a place where it is most unlikely to be discovered by the general public or Congress. It is in the Constitution of the United States.

The story actually begins with the signing of the Magna Carta. In Medieval England, it was customary for the king to derive only part of his tax revenue directly from the people. This was because many of the peasants were under the tutelage of Barons and lesser nobility. Taxes were paid to them, not to the king. That was the essence of the feudal system. When wars or other events created the need for larger sums, the king would go to the Great Council of Barons and ask for permission to "pass through" his taxes to their subjects. Such a tax was called an aid. The Barons would debate the merits of the request and, if approved, would allow the aid on behalf of the king. But, in the process, they often would extract something in return.

The Magna Carta

By the beginning of the 13th Century, King John was in dire need of additional revenue. Unsuccessful military campaigns in France and the need to pay an enormous ransom for the return of his brother, Richard the Lionhearted, who had been captured during a crusade to the Holy Land, forced him to launch one new tax upon another. The Barons became alarmed when he increased the tax on knights (the tax was called scutage and was paid in lieu of actual military service). But when the King levied a fine against knights who refused to join his forces and then, without permission of the Great Council, attempted to pass through this fine to those who were in the service of lesser nobles, he had gone too far. The Barons confronted John on the plains of Runneymede and compelled him to sign an agreement to stop violating the traditional tax customs of the land. That agreement was called the Magna Carta. The key phrase in that document was: "No scutage or aid, save the customary feudal ones, shall be levied except by the common consent of the realm."

Tax historian Charles Adams comments in Fight Flight Fraud, The Story of Taxation:

John's attempt to stretch the revenue devices of the realm had failed, but not entirely. Extra taxes could be collected with consent. In time the consent concept expanded. A rising class of wealthy commoners were called to meet in a House of Commons to approve taxation for commoners in the same way the Great Council approved taxation for the nobility. The king now became a politician. When extra revenue was needed, he did not need to steal it or arbitrarily increase taxation, he would call together his two councils of taxpayers' representatives and present a case for more taxation.

The Consent of the Taxed

The idea of taxation only with consent of the taxpayer was a revolutionary concept. But, by the middle of the 17th Century, it had become a philosophical cornerstone of English tradition. It was at this time that British philosopher John Locke advanced the social contract theory of government and respect of personal property, which so profoundly influenced the thinking of our Founding Fathers and which even was embedded into the ideas expressed in our Declaration of Independence and the Constitution itself. But the concept that most concerns us here is the attitude toward taxation. In The Second Treatise on Government, Locke wrote: "It is fit everyone who enjoys his share of the protection should pay out of his estate for the maintenance of it. But still it must be with his consent -- i.e., the consent of the majority, giving it either by themselves or their representatives chosen by them."

This was the dominant issue that led to the American Revolution. It was not excessive taxation, it was taxation without consent. Since taxes were levied by Parliament, and the colonists were without a representative there, they were unable to consent even if they wanted to. In truth, the tax load on the colonies was quite light, especially by today's standards, and most of it was spent for their own benefit, including military protection. But, without consent, there was nothing to prevent massive tax increases in the future. When they rebelled against "taxation without representation," it was the philosophy of the tax they were rebelling against, not the amount.

While it is true that the Stamp Act of 1765 was the catalyst that united the colonies on the issue of taxation, these taxes never amounted to more than modest fees paid on newspapers, legal documents, business licenses, diplomas, and similar items. When the colonists objected that these were internal taxes and thus should be in the jurisdiction of local governments, the taxes were repealed. Import duties were the chief source of revenue to the Crown at that time anyway. The purpose of these was not only to raise money for the government, but to subsidize British industry by keeping out lower priced goods from competing European countries.

A thriving smuggling trade flourished as a result of these policies and served to justify further infringement upon the liberties of the colonists, for custom officers were authorized to search private property for smuggled goods. In England, they were required to swear under oath before a judge that there was probable cause to believe that smuggled goods were present. A court order then could be issued authorizing a search. In the colonies, however, the rules were relaxed. Judges were still involved, but court orders were not required. Although there is no record that this power was used excessively, the mere possibility of arbitrary search was upsetting to the colonists, who were fiercely protective of their liberty. It was precisely because of this issue that the Fourth Amendment was placed into the Bill of Rights, to prohibit "unreasonable searches and seizures." It was intended to prevent tax agents from snooping around without a court order establishing probable cause. How sad our Founding Fathers would be today to read Chapter 78 of the Internal Revenue Code, permitting exactly what the Fourth Amendment was intended to prevent.

The Boston Tea Party

The Boston Tea Party is often portrayed as an act of defiance against British taxes on tea, but, in reality, quite the opposite was true. Strange as this may seem, it was a protest against cheap tea. Charles Adams tells the story:

American tea merchants had been boycotting British tea for five years. Smuggled Dutch tea was used throughout the colonies. In response, the British government decided to remove the duties on East Indies tea when it arrived in Britain so it could be sold in America at a price cheaper than smuggled Dutch tea. In addition, a monopoly on this cheap tea was given to loyal British merchants in the colonies .... The implication of this to American merchants was frightening. If a monopoly could be granted for tea, it could be granted for other products as well. Economic sanctions of this kind could destroy American merchants. In protest, Bostonian merchants disguised themselves as Indians, boarded merchant ships loaded with tea and threw the tea into the harbor.

It is true that no revolution in history was more deeply rooted in taxation than the War for American Independence. But the colonists were driven against their brothers in England not because of high taxes, but because of taxes over which they had no control; not because of brutal denial of rights, but because of the possibility of such denial. In the final analysis, it was a fight to defend the philosophy of personal freedom, and it is precisely this philosophy that became the foundation of the tax plan that was written into our Constitution a few years later. In fact, that plan incorporates the spirit of the Revolution itself, the very reason that blood was shed.

After the war was won there was no way that the colonists were going to create a new centralized government with the power to tax. They had had enough of that with England. So, when the Articles of Confederation were finalized, they granted no taxing power at all. Whatever was needed had to be requested from the states, and the states were under no firm obligation to pay. Within a few years the impracticality of this arrangement was painfully obvious. The federal government had almost no funds with which to operate and, in fact, Congress did absolutely nothing for four years. It became the laughing stock of the new nation.

It is possible that the United States would have disintegrated into thirteen separate nations with no way to protect themselves from foreign aggression had it not been for a series of tax revolts within the states. The most famous of these was Shays' Rebellion of 1786-87 in Massachusetts. In protest over excessive taxes levied by the state, a brigade of two thousand armed insurgents blockaded the Springfield courthouse. The band eventually was dispersed by a few cannon volleys, but the incident served to dramatize the fact that none of the states was really prepared for military action on any sizable scale. One newspaper said that the city of Genoa could defeat the combined forces of the United States. The disturbance emphasized the need for a stronger central government, and a convention was called for the purpose of revising the Articles of Confederation. Once again, the course of our history, perhaps even our survival as a nation, was influenced by the issue of taxation.

The Constitutional Convention

Once the convention was assembled in Philadelphia, the delegates quickly abandoned the idea of trying to revise the Articles. They were too flawed for repair. Everyone now agreed that the central government simply could not function unless it had some power of taxation. But what would that power be? That was the burning question that would consume the delegates -- and the nation at large -- for many months.

The overriding concern of all was that the new tax must act equally on the majority as well as the minority. In other words, if farmers should find themselves in voting control of Congress, they must not be allowed to shift the tax burden to people in the cities. And those states with greater population must not be allowed to shift taxes to those with smaller population. Regardless of which citizens might find themselves in the majority, they must not be allowed to tax others in any way beyond what they tax themselves. There was unanimous consent on this principle.

The second principle was a direct outgrowth of the tradition of no taxation without consent. It was understood that, in order to have consent, one's taxes must be related to one's representation. They had just fought a war to establish that point. If we pay taxes, then we must have representation. Conversely, if we have representation, then we must pay taxes. That is but two sides of the same equation. Since the whole purpose of representation was to consent -- or object -- to the levying of taxes, it follows that no one should have a voice in these matters who is not paying those taxes. Otherwise, the entire concept of "consent" is undermined. In Massachusetts, even prior to the Revolution, there had been a public uproar over the occasional election of ministers, because they did not pay taxes. Voters, therefore, must be taxpayers. This was already tradition, not only in America, but throughout Europe as well. All citizens are entitled to equal protection under the law, but only those who pay taxes shall be entitled to vote.

The Uniform Apportionment Tax

In an attempt to apply these broad principles of taxation, the convention delegates struggled with very practical problems. The seaboard states with extensive commercial shipping were reluctant to give up their right to collect import duties, because it was their main source of revenue. Those from the industrialized areas were fearful of taxes placed on manufacturing. Those from the agricultural provinces were hostile to land taxes. All parties were convinced that, sooner or later, a political majority would seize control and force them, as a potential minority, into tax servitude. After months of debate, it began to appear that the states were in hopeless deadlock. Then -- many are convinced it was by Divine intervention -- a compromise was reached. No, it was more than a compromise. It was an absolutely brilliant plan for taxation. Unfortunately, it was never given a formal name. Those who drafted it were content merely to describe it in terms of its features. For the purposes of this report, however, we shall call it the Uniform Apportionment Tax.

In order to understand how the Uniform Apportionment Tax was intended to work, we must first define a few terms. As we shall see, the delegates to the Constitutional Convention made extensive reference to two kinds of taxes: direct and indirect. These words were not given a legal definition in the Constitution itself, which was an oversight that would assume major proportions in the following years. James Madison recorded in his notes: "Mr. King asked what was the precise meaning of direct taxation? No one answered." It is equally true, however, as made clear by the debates and essays leading to ratification of the Constitution, that there was wide agreement on the general meaning. It is quite plausible that the reason no one answered King's question was that no one thought it was necessary. In any event, the Founding Fathers' understanding of the words direct and indirect taxes was identical to the following definition taken from Black's Law Dictionary (Third Edition, 1933):

A direct tax is one which is demanded from the very persons who, it is intended or desired, should pay it. Indirect taxes are those which are demanded from one person, in the expectation and intention that he shall indemnify himself at the expense of another. Taxes are divided into "direct," under which designations would be included those which are assessed upon the property, person, business, income, etc., of those who are to pay them, and "indirect," or those which are levied on commodities before they reach the consumer, and are paid by those upon whom they ultimately fall, not as taxes, but as a part of the market price of the commodity.

Danger of Direct Taxes

Direct taxes were viewed by the Founding Fathers as a dangerous tax because they give government great power over its citizens and also because, in order to assess such taxes, agents must have the authority to snoop into the private details of the daily lives of the citizens. They agreed, therefore, that direct taxes are safer if administered by the states, where elected representatives are closer to the people and easier to control. Indirect taxes, on the other hand, were viewed as less dangerous, because people could avoid them, if they wanted, merely by not purchasing the items being taxed. This assumes the establishment of taxes only on those items that are considered nonessential, such as liquor and tobacco, often called luxury taxes. Furthermore, the process of collecting indirect taxes does not endanger the individual's right of privacy. For these reasons, the delegates agreed that indirect taxes are more appropriate for the federal government.

With this understanding in mind, we are ready to examine the Uniform Apportionment Tax in detail. The compromise that allowed the states "to form a more perfect union" consisted of two provisions: (1) The federal government shall derive its primary revenue from indirect taxes, and these must be uniform in all states; (2) In the event of war or similar emergencies, the federal government, with the consent of Congress, may levy direct taxes "passed through" the states to their citizens, but these must be proportional to the number of Representatives that each state has in Congress. This process is called apportionment. In other words, if there were one hundred Representatives in Congress, and the state of Virginia had seven of them, the voters in Virginia would have to pay seven percent of the direct national, emergency tax. The specific wording establishing the Uniform Apportionment Tax is found in Article I of the Constitution, which says:

Congress shall have the power to lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States .... Representatives and direct taxes shall be apportioned among the several states which may be included within this Union .... No capitation [a capitation is a head tax, sometimes called a poll tax], or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.

Let us take a moment to sample the extensive historical record to appreciate the reasoning of the men who created this concept. Alexander Hamilton, who was to become the first Secretary of the Treasury, expressed it this way in Federalist Paper #21:

Imposts, excises, and, in general, all duties on articles of consumption, may be compared to a fluid, which will in time find its level with the means of paying them. The amount to be contributed by each citizen will in a degree be at his own option and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions .... If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds .... Impositions of this kind usually fall under the denomination of indirect taxes, and must for a long time constitute the chief part of the revenue raised in this country. Those of the direct kind, which principally relate to land and buildings, may admit to a rule of apportionment.

An Emergency Measure

It was a cardinal point to these discussions that the power of direct taxation through apportionment was to be exercised only to pay for debt incurred as a result of war, insurrection, or similar great emergencies. This extreme measure was not for the normal operation of the federal government. That function was to be financed by indirect taxes alone.

Robert Livingston, rising before the legislature of New York, observed:

I imagine, sir, that indirect taxes will be generally sufficient in times of peace. But a constitution should be calculated for all circumstances -- for the most critical and dangerous conjunctures.

James Wilson, a delegate to the legislature of Pennsylvania, posed the following question:

Suppose this fund should not prove sufficient?... Should our tranquility be exposed to the assaults of foreign enemies or violence among ourselves because the objects of commerce may not furnish a sufficient revenue?

James Madison commented:

When, therefore, direct taxes are not necessary, they will not be recurred to .... It can be of little advantage to those in power to raise money in a manner oppressive to the people .... Direct taxes will only be recurred to for great purposes .... If this country should be engaged in war -- and I conceive that we ought to provide for the possibility of such a case -- how would it be carried on?... How is it possible a war could be supported without money or credit? And would it be possible for a government to have credit without having the power of raising money? No; it would be impossible for any government, in such a case, to defend itself. Then I say, sir, that it is necessary to establish funds for extraordinary exigencies, and to give this power to the general government.

To the Founding Fathers, the primary purpose of apportionment was to block the central government from using the power of direct taxation -- except in times of great national emergency. The barrier was not in the formula of distributing the tax load among the states but in the procedure for doing so. To lay a direct tax, Congress had to do certain things that no government wants to do. Since each tax is a separate project, each must be written into a revenue act. The purpose and the amount of the tax must be clearly stated. It then must be debated and voted upon. When the tax is collected, the revenue act expires, and the door to more money is closed. How different this is from the ongoing power of general taxation, under which the purpose is seldom known, the amount is always in doubt, and the process is endless. The rule of apportionment, therefore, was the greatest restraint on the power and reach of government that had yet been devised by man, and it is little wonder that it became a thorn in the side of federal politicians in the years to follow.

Requisition Deleted

In drawing up the documents of ratification of the Constitution, seven of the states went even further in seeking restrictions on the federal government's power to levy direct taxes. Massachusetts, South Carolina, New Hampshire, Virginia, New York, North Carolina, and Rhode Island all called for a procedure known as requisition. Under this plan, the central government would have to requisition the states for their proportional share of national emergency funding, but the states would have been responsible for actually levying the taxes in whatever manner they felt best suited their citizens. Only if the states failed to do so would the federal government then have the right to "pass through" its direct tax to the citizens.

In retrospect, one may wish longingly that two more states had been so farsighted; yet, there were compelling arguments at that time against requisition, and it is not entirely certain that it would have been any more workable under the new Constitution than it had been under the old Articles of Confederation. Many of the delegates felt that, if any state failed to raise the tax and the federal government then went directly to the people, it would be viewed by state legislators and citizens alike as a form of punishment, which could lead to resentment and even revolt. The measure, therefore, might well prove to be harmful to the union. This was forcefully expressed by James Madison before the Virginia legislature:

After the states shall have refused to comply, weigh the consequences of the exercise of this power by Congress. When it comes in the form of a punishment, great clamors will be raised among the people against the government; hatred will be excited against it. It will be considered as an ignominious stigma on the state.

Were the federal government ultimately to be given the power to tax directly, it was widely argued, there could be little harm in giving it that power at the outset. At any rate, the final result was that, for better or for worse, the process of requisition fell victim to the process of compromise and was deleted from the final draft of the Constitution. What emerged, however, was truly an amazing formula for taxation. It was the first time in history that men had created a government structure entirely of their own choosing while going to great pains to restrict themselves in the administration of that government.

This is not to say that the Uniform Apportionment Tax was flawless. In truth, there can never be a perfect tax if the people cannot afford it. This is the number one lesson of tax history. Any tax, no matter how fair, will be despised if it is excessive, and even an unfair tax may be acceptable if it is small. This was a lesson that the infant government had to learn at the very beginning of its existence. When Hamilton became the first Secretary of the Treasury, he persuaded Congress to authorize the nation's first indirect tax. It was an excise on whiskey, a few luxury items, auction sales, and negotiable instruments. It was excellent in theory but it was a heavy tax -- resulting in a whopping 25 percent increase in prices -- and it led to a full-scale revolt! Rumors quickly spread that the government was about to extend these taxes to all articles of consumption, including food and clothing. This would be the European experience all over again. Excessive excise taxes were what had driven many immigrants to seek refuge in America. One 18th Century English dictionary even defines an excise as "a hateful tax." So it is not surprising that this first experiment was met with large-scale public resistance.

The Whiskey Rebellion

But the biggest ruckus came from the Western farmers. Because there was a shortage of money along the frontier, it had become common to use whiskey as the medium of exchange. Grain was too bulky for transport, so the farmers grew rye, distilled it into whiskey and moved their produce into national trade in that form. For the frontiersmen, therefore, a tax on whiskey was not an excise tax or luxury tax at all. It was a 25 percent tax on their basic crop, and they complained that no other farmers and no other producers of manufactured goods had to pay a similar tax -- which was quite true. By 1794 the entire region was in open revolt. Tax collectors were tarred and feathered and their houses were burned to the ground. When a judge of the Supreme Court declared a state of insurrection in western Pennsylvania, President Washington called out the militia from adjacent states and, in a show of force, led these troops in full-dress uniform.

This was the only time in our history that a President of the United States assumed his position at the head of troops in the field as Commander-in-Chief. Fortunately, military confrontation was averted: The rebels surrendered in return for amnesty, no one went to jail, and within a few months the excise tax was repealed. Hamilton was defeated by the wisdom of his own words a few years earlier: Duties on articles of consumption are, indeed, like a fluid "which will, in time, find its level with the means of paying them."

The First Direct Tax

In 1798, Congress levied its first direct tax. It was in the amount of $2 million and was proportioned among the states on the basis of the current census, which was also the basis for the number of Representatives each state had in Congress. The purpose of the tax was to extinguish part of the debt incurred by the Revolutionary War. The Congress that enacted this tax included many framers of the Constitution, so we can see in this act a model of how the Uniform Apportionment Tax was intended to work. For one thing, reduction of the national debt was viewed as one of those rare emergencies that would justify resorting to the extreme measure of a direct tax. In this case, the tax was levied on dwellings, land, and slaves. It did not provide for any deductions or exemptions, but, sadly, it was progressive in nature, with larger homes paying more per $100 of value than others.

Herein lay one of the few hidden flaws in the tax concept of the Founding Fathers. They had inherited and accepted the feudal tradition of noblesse oblige, the obligation of noblemen to take care of their inferiors and assume greater responsibility of government. By 1776, however, especially in America, this concept had lost its virtue. In a republic such as ours, there is no justification for allowing class distinctions into the law -- and that includes tax law. If one class can be exempted from taxes on the basis of class, rank, or wealth, that same group, at a later date, can be singled out for extra taxes on the same basis, depending merely on the political majority at the time. The principle of taxing those with wealth at a higher rate than others must have seemed harmless at the time -- perhaps even humanitarian -- but it was destined to fester into a huge boil that would torment Americans for many generations to come.

All of these issues aside, the fact remains that the first direct tax in the United States was entirely constitutional. Congress had stated the purpose and the amount. It had been debated and passed. Most important, once collected, the tax would expire. In spite of these constraints, however, the tax met with considerable resistance and, in fact, soon led to a second revolt, this one among German settlers along the Eastern seaboard. Pennsylvania's quota of the $2 million tax was $273,000, which fell mainly on land and houses. The valuation of houses was estimated by counting the number and size of windows. This was a practice inherited from England. But, when the tax assessors arrived, the German residents thought they were reviving the hated European hearth tax. They organized into small bands and set out to assault the assessors and drive them from the district, which they did in short order. When some of the rebels were arrested and put into prison, an auctioneer named John Fries led a march on the courthouse and freed them. President John Adams once again called out the militia. Fries was captured, tried, and convicted of treason, but later received a presidential pardon.

Jefferson's Decentralization

By the time Thomas Jefferson became President, the nation had already experienced two uprisings over taxes -- small scale, to be sure, but revolts nonetheless. Hamilton and Adams had wanted to forge ahead with a powerful central government, and for this they needed revenue. Their report cards on taxes were not good. The political tide now turned back to Jefferson's views of limited government. In his first Annual Message, he urged repeal of all internal taxation and a return to a reliance on import duties alone. He said:

Considering the general tendency to multiply offices and dependencies and to increase expense to the ultimate term of burden which the citizen can bear, it behooves us to avail ourselves of every occasion which presents itself for taking off the surcharge; that it never may be seen here that, after leaving to labor the smallest portion of its earning on which it can subsist, Government shall itself consume the whole residue of what it was instituted to guard.

Jefferson was not just making a speech to please the voters. He followed through. He cut government spending to the bone and even put much of the Navy into dry-dock. Meanwhile, treasury receipts from import duties were growing rapidly with the expanding nation. Lower taxes left the consumer with more money to buy imported goods. Jefferson proved his point. At the end of his term, the government actually had a surplus and had accelerated repayment of the federal debt -- all of this as a result of import taxes alone.

The second time a direct tax was levied in accordance with the apportionment requirements of the Constitution was in 1813, principally to pay for the War of 1812. In fact, there was another direct tax assessed two years later for the same purpose. The first was for $3 million and the second for $6 million. The terms of assessment and proportion among the states were similar to those of the first revenue act. One interesting variation, however, was that the states were given the option of levying the tax entirely on their own according to whatever method of distribution they wished, saving the federal government the expense of administering the project. The states could take a fifteen percent discount if they paid within six months, and a ten percent discount if they paid within nine months. This was an excellent improvisation and almost converted the tax into requisition, which seven of the states had wanted in the beginning.

The first part of the 19th Century was a period of great growth and prosperity for the United States. True, there were two rather stupid wars -- the War of 1812 and the Mexican War -- but these were abruptly terminated when funding through taxes and borrowing became difficult. Excise taxes had been repealed, and the debts of war had been repaid. By and large, the central government was weak regarding internal affairs, which meant that the people were strong. The bureaucracy stayed out of the way and let Americans get on with their lives. Commerce flourished; wealth was created; the standard of living for the common man soared. The Old World watched in amazement and envy. Then, with the advent of the War Between the States, the long retreat from greatness began.


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