|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?
The overriding concern for all was that the new tax must act equally on the majority and the minority. 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.
Another principle was a direct outgrowth of the tradition of no taxation without representation. The colonists had just fought a war to establish that point. Conversely, if one has representation, then he must pay taxes. 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. All citizens are entitled to equal protection under the law, but only those who pay taxes shall be entitled to vote.
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."
The Constitution acknowledges two kinds of taxes: direct and indirect. Direct taxes, as the name implies, are charged directly to the person who ultimately pays them. Examples of direct taxes are income and property taxes. Although they may be thought of as taxes on income or on property, remember that only people pay taxes: Money and property do not. Direct taxes, therefore, regardless of what they may be based on are charged directly to the ultimate taxpayer. Indirect taxes, on the other hand, are levied on a commodity with the expectation that the taxes will be passed along to the consumer as part of the market price of the commodity. Examples of indirect taxes are import and excise taxes. The taxpayer always knows when he is paying a direct tax, but is often unaware of the indirect tax.
Danger of Direct Taxes
Direct taxes were viewed by the Founding Fathers as dangerous 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 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 to the Constitutional Convention agreed that indirect taxes would be more appropriate for the federal government. The compromise that allowed the states "to form a more perfect union" consisted of two provisions:
1) The federal government was to derive its primary revenue from indirect taxes, and these were to be uniform in all states.
2) In the event of war or similar emergencies, the federal government, with the consent of Congress, would have authority to levy direct taxes "passed through" the states to their citizens, but these were to be proportional to the number of representatives that each state had in Congress.
This process is called apportionment. In other words, if there were 100 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, and specifies:
Representatives and direct taxes shall be apportioned among the several states which may be included within this Union.... The Congress shall have 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.... No capitation [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.
A sample of the extensive historical record of the founding era demonstrates the reasoning of the men who created the concept. Alexander Hamilton, who was to become the first Secretary of the Treasury, wrote in The Federalist, #21:
Imposts, excises, and, in general, all duties upon 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 of a rule of apportionment.
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 emergencies, but not for the normal operation of the federal government. That function was to be financed by indirect taxes alone. 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 would have to be written into a revenue act. The purpose and the amount of the tax would have to be clearly stated, and then debated and voted upon. When the tax was collected, the revenue act would expire, and the door to more money would be 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.
Of course, the Uniform Apportionment Tax was not flawless. In truth, there can never be a perfect tax if the people cannot afford it. 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. So it is not surprising that this first experiment was met with large-scale public resistance.
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 a 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 frontiersman, 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.
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.