Given the debt that America found itself in after the War of Independence, which was a major factor in the drawing of the new constitution, it is surprising to find that it is only in the thirtieth Federalist Paper the issue of taxation is directly addressed, especially given that only 25 papers had been planned to begin with.
However, the argument of this paper is made stronger since its issues build upon the series of papers that deal with the need for the United States to maintain a standing army. It is both a starting point to consider the variety of expenses a federal government must raise money for, as well a cautionary point concerning the state of the federal system should the status quo be maintained.
Hamilton points out that the government is responsible not only for the payment of armies, but the civil list, national debts contracted by the government and all matters that draw upon the national treasury. I guess he means things like roads and bridges and other infrastructure, although he is not specific.
The problem faced by the United States government under the current constitution of the time, was that it could not tax states directly. It was in a peculiar situation in which it was
authorized to ascertain and call for any sums of money necessary, in their judgment, to the service of the United States and this was
in every constitutional sense obligatory upon the States. In reality, this made states disproportionately powerful, forcing upon the federal government a system of
quotas and requisitions which were not always met to their full obligation by its State goverments.
An alternative to direct taxation, as proposed by the new constitution, advocated by some anti-Federalists, was a system of
external taxation. Internal taxation meant all the taxes currently collected within the States, while leaving the Federal government to rely upon duties on imported goods. This has a kind of logic to it, since States can grow their own resources based upon the wealth they produce, while the Federal government is funded by the nation’s external trade. However, Hamilton points out that present import duties could not fund the Federal government as it stood in 1787, let alone for the country’s future needs. The system
would still leave the general government in a kind of tutelage to the State governments, inconsistent with every idea of vigour or efficiency. This is a paradoxical position if one accepts Hamilton’s assertion that
the necessities of a nation, in every stage of its existence, will be found at least equal to its resources.
Hamilton outlines some logical outcomes of this. If the government were to adopt a system that was inadequate to serve its current needs, how would future expansion or other plans for the public good beyond the basic necessities ever be afforded?
Hamilton also takes the argument back to the problem of armies and wars. If the nation were to become involved in a war, the country’s financial system would be at risk. Public credit would be destroyed since a federal government which could not raise funds directly to pay loans but relied upon the thirteen states to fulfil its contracts and loan obligations, would be forced into usurious borrowing arrangements in order to fund the war effort. The Federal government would have little credibility in financial negotiations of this kind.
Hamilton does not say this explicitly, but it seems to me that in some circumstances, (for instance when the support of the national government by richer states might be deemed to be less in the interests of those states, but rather more in the interests of smaller states to receive that help) such a system would make secession attractive to the more prosperous States, a potential scenario which would always be a threat to stability.
3 July 2018