DISCLAIMER: I am not a historian nor a political scientist. I do have a fascination and interest in the Constitution and so I started reading the Federalist Papers and posting my interpretation on my own blog. I thought it might be of some interest here. Your interpretations and thoughts are greatly appreciated in the comments!
You can find the Federalist Papers in their entirety at The Library of Congress website.
Federalist No. 12 and links to previous Federalist Papers entries below the fold and previously posted at LiveJournal
Federalist No. 1 here
Federalist No. 2 here
Federalist No. 3 here
Federalist No. 4 here
Federalist No. 5 here
Federalist No. 6 here
Federalist No. 7 here
Federalist No. 8 here
Federalist No. 9 here
Federalist No. 10 here
Federalist No. 11 here
The Utility of the Union In Respect to Revenue
From the New York Packet.
Tuesday, November 27, 1787.
Ah, revenue, or TAXES. Hamilton begins this paper talking about commerce and how a healthy economy is a boost to the national welfare and wealth is spread to all who partake in the commerce of the nation.
The prosperity of commerce is now perceived and acknowledged by all enlightened statesmen to be the most useful as well as the most productive source of national wealth, and has accordingly become a primary object of their political cares. By multipying the means of gratification, by promoting the introduction and circulation of the precious metals, those darling objects of human avarice and enterprise, it serves to vivify and invigorate the channels of industry, and to make them flow with greater activity and copiousness. The assiduous merchant, the laborious husbandman, the active mechanic, and the industrious manufacturer,--all orders of men, look forward with eager expectation and growing alacrity to this pleasing reward of their toils.Even in the case where agriculture and commerce were believed to be at odds, Hamilton notes that an increase in overall commerce leads to an increase in the value of land which benefits the farmer.
Hamilton notes that the ability to pay taxes is in direct proportion to the overall commerce of a nation.
The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury.Commerce is the source of taxes to the government and a healthy economy makes the flow of money into the treasury easier.
Hamilton this discusses at length the ways in which revenue can be brought into the government and how those ways are impacted by a union. He starts by stating the current experience with direct taxation and it's failures.
It is evident from the state of the country, from the habits of the people, from the experience we have had on the point itself, that it is impracticable to raise any very considerable sums by direct taxation. Tax laws have in vain been multiplied; new methods to enforce the collection have in vain been tried; the public expectation has been uniformly disappointed, and the treasuries of the States have remained empty.At the time, the failure of direct taxation was according to Hamilton due in large part to a poor state of commerce within the young nation.
Hamilton then goes on to state that indirect methods of taxation are preferable, even in a nation such as Britain where direct taxation of inherited wealth is more tolerable. Duties levied upon imports then becomes the focus of revenue generation in the young nation. He cautions however, that the imposition of duties must not be broad:
In most parts of it, excises must be confined within a narrow compass. The genius of the people will ill brook the inquisitive and peremptory spirit of excise laws. The pockets of the farmers, on the other hand, will reluctantly yield but scanty supplies, in the unwelcome shape of impositions on their houses and lands; and personal property is too precarious and invisible a fund to be laid hold of in any other way than by the inperceptible agency of taxes on consumption.He then goes on to state that the state of national revenue is directly tied to the political welfare of the nation. It is in that respect that a strong union most benefits both the generation of revenue and the strength of the political system. The regulation of revenue generation would be streamlined and applied more fairly by a strong union. In addition, the rates of taxation would be controlled without prejudice to a particular trade.
Hamilton then points out that the very geographical nature of the United States with its many waterways and the ease of communication in all directions within the states is ripe for illicit trading. This necessarily leads to a situation of controlling trade to prevent friction between states or loose confederations. He then uses France as an example of the extreme cost of controlling such trade issues stating that France has more than 20,000 officers to patrol the country to seek out contraband and illicit trade. Further he states, the necessity of these officers to be armed would not be tolerated in this free nation.
Hamilton then points out that a strong union would then require the nation to only control the East Coast with respect to trade and duties - a much more satisfactory proposition that trying to control the entire nation of rivers and byways. Foreign nations would be discouraged from trying to circumvent bringing goods into the country by ways other than the coastal ports. The level of vigilance on the part of the United States would be lower and could be accomplished by having only a few armed ships at the entrance to the ports along the coast. This would have a trickle-down effect with respect to the security of the states:
And the government having the same interest to provide against violations everywhere, the co-operation of its measures in each State would have a powerful tendency to render them effectual.Again, a natural geographic reason exists for preserving a strong union with respect to revenue and commerce:
Here also we should preserve by Union, an advantage which nature holds out to us, and which would be relinquished by separation. The United States lie at a great distance from Europe, and at a considerable distance from all other places with which they would have extensive connections of foreign trade. The passage from them to us, in a few hours, or in a single night, as between the coasts of France and Britain, and of other neighboring nations, would be impracticable. This is a prodigious security against a direct contraband with foreign countries; but a circuitous contraband to one State, through the medium of another, would be both easy and safe. The difference between a direct importation from abroad, and an indirect importation through the channel of a neighboring State, in small parcels, according to time and opportunity, with the additional facilities of inland communication, must be palpable to every man of discernment.In a united nation, temptations at subverting taxes via illicit trade would be less likely than if the nation were split into loose confederations. In the latter instance, foreign trading partners could subvert taxation by smuggling from one state into another. This would be more difficult in a united nation.
Hamilton then states that generation of revenue would be much more efficient if handled by a federal government over the individual states. He then goes on to use an examples of a "sin tax" - the imposition of duties on alcoholic spirits - as a means for revenue generation.
The single article of ardent spirits, under federal regulation, might be made to furnish a considerable revenue. Upon a ratio to the importation into this State, the whole quantity imported into the United States may be estimated at four millions of gallons; which, at a shilling per gallon, would produce two hundred thousand pounds.He says that this article of commerce would support this rate, and even if it didn't and consumption decreased, that would be acceptable as well because it would benefit the nation in commerce, health and overall morals.
The paper then closes with a discussion of the consequences of NOT being able to generate revenue for the young nation. Hamilton states the obvious that without revenue, the nation will be forced to give up its independence - an unacceptable choice. Therefore generation of revenue is a must. If the decision is made not to derive the revenue from commerce, then by default the only choices is to take the taxes from land. Hamilton states that this choice is less than ideal in that the amounts of revenue generated from direct taxation would be insufficient. It would also fall disproportionately upon the agricultural class leading to further fractionation of the country.
Thus we shall not even have the consolations of a full treasury, to atone for the oppression of that valuable class of the citizens who are employed in the cultivation of the soil. But public and private distress will keep pace with each other in gloomy concert; and unite in deploring the infatuation of those counsels which led to disunion.