In Federalist Paper number 30, Hamilton turns to a topic that was as contentious in his day as it is in ours: taxation. I'll try to keep it brief; I can talk tax policy until the cows come home, but I know, gentle reader, that you have stuff to do.In order for a government to function, Hamilton writes, there must be "a general power of taxation, in one shape or another." Well, he has a point - even the smallest governments need money. One of the problems with the Articles of Confederation was that the federal government could not collect its own taxes. The feds could levy taxes, sure, but they had to ask for the states to give it to them. It might shock you to learn that states were not too happy when the feds asked them to kick in a little cash, and sometimes they didn't pay up.
This, Hamilton writes, is no way to run a country. "What substitute can there be imagined," he asks us, "for this ignis fatuus in finance, but that of permitting the national government to raise its own revenues by the ordinary methods of taxation authorized in every well-ordered constitution of civil government?" Indeed. And just to refute the libertarians of his time and ours, Hamilton spends a paragraph discussing the insufficiency of tariffs alone to fund the government. Damn, he's always one step ahead of us!
I'm with him so far, but then it starts to get weird. Hamilton further protests that even if it could be determined that tariffs were sufficient to fund the government now, how can we know that it won't need more money later? First he mentions wartime, and the difficulty of borrowing large sums. Then, he lets loose this gem: "How can it undertake or execute any liberal or enlarged plans of public good?" Whaaa? I thought that was the point of keeping taxes low -- to limit the power of government. To be fair, "liberal or enlarged plans of public good" in Hamilton's day meant building roads and lighthouses, and founding a bank to keep the government's gold in. He wasn't talking about creeping socialism, but there were certainly some in America in the 1780s who would view the two with equal horror. Anyhow, Hamilton is right, but for the wrong reasons. We need taxes, 'tis true, but not to the extent that the government can fund whatever it wants. After twenty-nine essays telling us how little and unobtrusive the federal government will be under the Constitution, with this one essay he just scared the bejeezus out of the Anti-Federalists again.
6 comments:
kyle,
i love this blog, please keep it up-- been reading the federalist papers for the first time since school, and this is an excellent companion piece. i'm sharing this with all my civic-minded friends. thanks!!
I took my masters in DC, studying under some real government and military project managers. The consensus was that the government would generally not initiate a project unless there were at least a 10 to 1 benefit/cost ratio for the public. Most of those projects would be rejected because somebody's ox would be gored. So the upshot is that the government can actually spend my money better than I can. They can spend it on projects that are good for most people, including myself, and objectionable to very few. While government is inefficient, there are many things it can do which are not addressable by market forces, and if these things are cost-effective, why not do them?
Remember the Laffer Curve? Many people think that we were on the downslope at certain times in our history where additional taxes generated reduced total revenues. It's really hard to know since there is so much remove between government fiscal actions and economic conditions. I'm inclined to think we are on the upslope side and always have been. During those periods where taxes have been lowered, the economy was due for an upswing anyway.
Now one of the motivating hypotheses behind the Laffer curve that is not widely publicized is that the best level of government taxation is actually that point where revenues are maximized. It is, by this thinking, the duty of government to maximize revenues and use those revenues for the benefit of the country as a whole. Since it is very hard to recognize the optimal level, it certainly makes sense to err on the low side. That reduces the costs of collection and avoids the risk of revenue collapse. Since taxes have been much higher in the past, however, there is every reason to believe that we are already very much on the low side of the optimum.
In Hamilton's time, there were many projects crying out for capital investment, the kind of investment that only the Federal Government could provide. In fact, the Erie Canal, probably one of the most spectacularly cost-effective investments of all time, was initiated beginning in 1798 but was not properly funded until 1817 when Gov. DeWitt Clinton persuaded the NY state legislature to make this no-brainer investment. It was a disaster for Philadelphia. Pennsylvania started too late to ever catch up.
Jesus, that's a long comment.
Does it violate some etiquette that I don't seem to know about? I think it's an important subject.
Certainly not -- thanks for reading, and for commenting.
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