SMITH IN THE EARLY REPUBLIC
Americans in the early republic were more familiar with Adam Smith than previous generations of historians have acknowledged. Samuel Fleischacker notes that the “consensus among intellectual historians has been that Americans paid no special attention to Wealth of Nations in the founding period” (Fleischacker 2002, 899-900). Most intellectual historians have focused on the period leading up to the Constitution, and noted that references to Smith are scanty in the ratification debates. Surveys of early American libraries reveal that Smith’s works were read more widely than the ratification debates suggest and that his works grew in popularity in the decades following their publication. David Lundberg and Henry May found that Wealth of Nations appeared in 28 percent of American libraries in the years 1776-1790, 42 percent of libraries sampled from 1791 to 1800, and 65 percent of libraries between 1801 and 1813 (Lundberg and May 1976, 288). Aside from a few religious tracts, Smith’s Wealth of Nations appears to have been one of the most popular books in American libraries by the first decade of the nineteenth century.
Although the Wealth of Nations provided the clearest explication of Smith’s maxims regarding taxation, iterations of these arguments could be found in many eighteenth- and early nineteenth-century treatises on political economy. State legislators would not have needed to consult Smith to have recognized which forms of taxation best satisfied the revenue needs of the state while minimizing distortions in the market. Americans benefited from being able to observe firsthand the multitude of tax reforms taking place in Europe.4 New techniques in public finances spread quickly across countries and continents, and lawmakers readily discarded strategies that failed in favor of those that proved more reliable or efficient. In describing how quickly fiscal policy innovations had spread within Europe, Smith remarked that there “is no art which one government sooner learns of another than that of draining money from the pockets of the people” (Smith  1981, 2:861).
Popular histories written in the eighteenth century described the tax systems of ancient and early-modern governments in great detail.5 For early American readers, understanding the seemingly trivial differences between various systems of taxation contributed to their knowledge of the fall of Rome and the development of early modern England and France. Like many of his contemporaries, Smith provided a historical overview of each form of taxation, using examples from history to demonstrate the advantages and shortcomings of each source of revenue. Other political theorists from the period used similar rhetorical techniques, but they often confined their examples to instances of taxes imposed in Europe or in ancient Rome. Smith exceeded previous discussions of taxation not only in his thorough treatment of the subject, but also in his range of examples. By including numerous references to taxation in the American colonies, Smith wrote a treatment of taxation that would have been more engaging for American readers.
Several of the most prominent members of the post-revolutionary generation revealed their familiarity with Smith’s work. An early biography of Alexander Hamilton claimed that Hamilton wrote a detailed commentary on the Wealth of Nations while serving in the Confederation Congress in 1783 (Syrett 1966, 10:8). It is well known that Alexander Hamilton was influenced by Smith in developing his positions on political economy, but other leading members of the founding generation cited Smith approvingly. John Adams, James Madison, Thomas Jefferson, and James Monroe were all aware of Smith’s work and in a few cases cited the Wealth of Nations directly. Jefferson praised Smith’s treatise in a letter to Thomas Mann Randolph Jr., noting that in “political economy I think Smith’s wealth of nations the best book extant. In the science of government Montesquieu’s spirit of laws is generally recommended.” In a later letter to John Norvell, Jefferson wrote that Smith’s Wealth of Nations “is the best book to be read, unless Say’s Political economy can be had.” Beyond the founding elite, treatises on political economy were read more widely among early American statesmen. James Madison recorded a list of books purchased for the Confederation Congress in 1783. The list included both the first and second editions of Smith’s Wealth of Nations, along with the collected works of Montesquieu and Hume’s political essays.6
Although the theories developed by Smith and others circulated beyond the founding elite, their influence among state legislators is much more difficult to trace. It would be a tremendous undertaking to attempt to reconstruct the debates surrounding changes made to each state’s tax laws over the course of four decades. State taxes in the early republic involved thousands of legislators and countless petitions from taxpayers and local officials seeking changes to the existing laws. State legislatures in the eighteenth century did not always keep detailed records of their debates, votes, or, in some cases, even the bills under consideration. Most legislatures recorded only summaries of the topics discussed and indicated whether or not the proposed bill had passed. These summaries occasionally provided the number of votes for and against the proposed legislation, but they rarely list the names of those voting or abstaining. Although policy makers and tax collectors left voluminous records and collections of personal papers, they rarely recorded their thoughts on taxation or identified the theories or theorists who had guided their decision making. It is not necessary to reconstruct the politics surrounding tax legislation to understand the guiding philosophies behind tax policy, however, as we can examine the extent to which the founding generation followed Smith’s recommendations by examining the economic consequences of successful legislation.
Smith’s principles of equity, transparency, convenience, and efficiency informed American policy makers’ understanding of taxation in the early republic and were reflected in the state and federal systems of taxation. The period immediately following the American Revolution was one of bold experimentation as the state governments struggled to repay the immense debts incurred during the war. The absence of strong taxing authority under the Articles of Confederation left the burden of debt entirely on the newly formed state governments. Dealing with this burden proved particularly challenging in the decade following the Revolution, as consistent deflation magnified the states’ obligations. Colonial officials had employed a strategy of raising taxes considerably for short periods of time after a war to avoid a standing public debt. Such policies had been employed successfully after the French and Indian War, when the colonists repaid their debts within a few years of the conclusion of hostilities. The debts incurred during the Revolutionary War exceeded that of any previous colonial conflict, however, and by some estimates amounted to more than twenty times the cost of the French and Indian War (Perkins 1994, 94). State governments also operated in a period of significant social unrest and taxpayer resistance that included the outbreak of Shays’ Rebellion in Massachusetts and similar incidents in other states. The states pursued a variety of policy strategies to address their fiscal crises, with mixed results. One effect of this decade of experimentation was an expansion of state fiscal capacity. The crises of the Revolution pushed state policy makers to implement tax laws that could raise revenue but also minimize the burden on the average taxpayer.
As the states struggled to develop a functioning tax system, the fiscal crisis facing the Confederation Congress prompted calls for a Constitutional Convention. The delegates in Philadelphia proposed expanding federal taxing authority to move away from the haphazard collection system in place under the Articles of Confederation. Under the Articles of Confederation, the Confederation Congress could only levy a tax on imports with unanimous approval from the states, and could only enact direct taxes if those taxes were apportioned to the states based on each state’s proportion of the total value of real estate in the United States. Because Rhode Island consistently resisted calls for a tax on imports, and because no state submitted a survey of its real estate to Congress, the opposition of only a few states scuttled plans that would have improved fiscal solvency. Congress had only the power to request “requisitions,” tax quotas assigned to each state for the purposes of repaying loans contracted by the Continental Congress. No state came close to fulfilling its quota, and the Confederation Congress languished under the voluntary requisition system. In light of the nation’s fiscal challenges, federalist delegates to the Constitutional Convention proposed a system of taxation that would prove remarkably resilient. Congress would have unlimited power to enact indirect taxes on imports, but its powers over direct taxation would be constrained. The Constitution required that direct taxes be apportioned based on population, and granted Congress the authority to conduct a census every ten years to provide a basis for that apportionment. State governments conceded their ability to enact their own tariffs, but maintained their system of direct property taxes. Granting Congress the power to collect its own revenues reduced the overall costs of collection and relieved the state governments of burdensome taxes, particularly after Hamilton’s funding plan assumed and annuitized the state debts. Perhaps more importantly, the system of taxation that emerged out of the Constitution eased the tax burden for the average taxpayer. The tariff obviated the need for the requisition system, and state governments reduced property taxes substantially in the years following the ratification of the Constitution. The tariff provided the vast majority of federal tax revenues in the early republic, and between 1817 and 1861 the tariff was the only source of federal taxation. By establishing clear rules for tax collection, improving the efficiency of the collection system, and shifting the burden of taxation to voluntary consumption, the American system of taxation was consistent with Adam Smith’s principles.
The advantages of the new tax system were not immediately apparent and many Americans challenged the wisdom of empowering federal tax collectors. In the debates over the ratification of the Constitution the anti-federalists raised a number of challenges to strengthening federal taxing authority. Antifederalists argued that granting Congress expanded taxing powers would invite a host of abuses. The “necessary and proper” clause was a primary target of anti-federalist opposition. Robert Yates, writing as Brutus, argued that this clause would serve as a justification for a federal government whose “power, exercised without limitation, will introduce itself into every corner of the city, and country.” Brutus emphasized that federal power would permeate every facet of American life, and that this power would even “wait upon the ladies at their toilet, and will not leave them in any of their domestic concerns” and that revenue collectors would “enter the house of every gentleman, watch over his cellar, wait upon his cook in the kitchen, follow the servants into the parlor, preside over the table, and note down all he eats and drinks; it will attend him to his bedchamber, and watch him while he sleeps.” Brutus described the potential revenue demands of the new federal government as insatiable, adding that “[t]o all these classes of people, and in all these circumstances, in which it will attend them, the language in which it will address them, will be GIVE! GIVE!” (Borden 1965b, 88). Compared to the Articles of Confederation, the Constitution afforded Congress with broad taxing authority and few restrictions. The anti-federalists believed that, left unchecked, unrestrained taxing authority would lead to tyranny.
The attentiveness of the legislature presented another avenue for potential abuses according to anti-federalist writers. An anonymous Virginian writing as Cato Uticensis asked his fellow taxpayers if “it ever enter[ed] the mind of any one of you, that you could live to see the day, that any other government but the General Assembly of Virginia should have the power of direct taxation in this state?” (Borden 1965a, 80). Anti-federalists feared that legislators from other states would be unresponsive to the needs and concerns of taxpayers outside their constituencies. These authors worried also that Congress would levy taxes that would discriminate against particular trades, or introduce taxes that would place a disproportionate burden on some states in favor of others. Patrick Henry described the situation clearly in his arguments during the Virginia ratifying convention by emphasizing that it “has required the most constant vigilance of the legislature to keep them [the sheriffs] from totally ruining the people. . . . If sheriffs, thus immediately under the eye of our state legislature and judiciary, have dared to commit these outrages, what would they not have done if their masters had been at Philadelphia or New York?” Borden 1965c, 93). Fear of unsympathetic legislators enacting discriminatory taxes pervaded anti-federalist thought. Opposition to taxes imposed by an external power stemmed from the ideology of the American Revolution, and anti-federalist authors occasionally invoked comparisons with the British colonial system to bolster their arguments. As Cato Uticensis emphasized, “[Are] we not to expect that New England will send us revenue officers instead of opinions and apples?” (Borden, 1965a, 81).
Both anti-federalists and federalists greeted direct taxes with suspicion. The revolutionary generation drew a distinction between direct or internal taxes levied on land or capitation, and indirect taxes on imported commodities. Although many anti-federalists were willing to concede indirect taxing authority to the federal government, direct taxes proved a source of contention in the state ratifying conventions. As an alternative to direct taxing powers, the anti-federalists proposed adding an enforcement mechanism to the requisition system. If any state failed to remit their apportioned quota, Congress could use its own agents to collect the tax and increase the tariff on taxpayers in that state until the balance had been paid with interest. In granting Congress the power to levy direct taxes, the framers intentionally restricted Congressional power by requiring Congress to apportion direct taxes based on population. The framers did not intend to make the obstacle insurmountable, however, as the system of apportionment resembled previous limitations placed on the Confederation Congress under the Articles of Confederation.7 The Articles required Congress to apportion direct taxes based on the value of each state’s real estate in proportion to national wealth. The apportionment process also had historical antecedents in the system of taxation adopted in New England, where legislatures apportioned tax quotas to towns based on wealth or population and provided local officials with some flexibility in assessing and collecting the tax. The framers believed that apportionment would prevent Congress from levying a direct tax on forms of property that would discriminate against a particular trade, state, or region. By establishing a clear system for collecting a direct tax that could not be manipulated, Alexander Hamilton argued in Federalist 36 that apportionment “effectually shuts the door to partiality or oppression” (Hamilton 2008, 170).
Perhaps chief among the anti-federalists’ complaints with respect to taxation was the fear of double taxation. The anti-federalists believed that providing strong taxing authority to Congress would undermine the states’ ability to levy their own taxes, or worse, that federal revenue officers would duplicate the efforts of state tax collectors and effectively double the tax burden. In the Virginia ratifying convention, Patrick Henry contended that in “this scheme of energetic government, the people will find two sets of tax-gatherers—the state and the federal sheriffs. This it seems to me, will produce such dreadful oppression as the people cannot possibly bear. The federal sheriff may commit what oppression, make what distresses, he pleases, and ruin you with impunity; for how are you to tie his hands?” (Borden 1965c, 92). In every case, anti-federalists believed that strong federal taxing authority would lead to a concentration of federal power at the expense of state governments. As Brutus emphasized, “The command of the revenues of a state gives the command of every thing in it” (Borden 1965b, 84).
The anti-federalists resisted efforts to expand federal taxing authority because they believed ultimately that state governments were capable of handling the fiscal concerns of the new republic. Although every state failed to fulfill their requisitions to the Confederation Congress, and the immediate postwar years saw taxpayer revolt in the form of Shay’s Rebellion, most states avoided widespread unrest by responding proactively to the needs of their constituents. Having witnessed the various tax relief measures introduced at the state level during the 1780s, the anti-federalists believed that state governments could be trusted to protect their interests. From the standpoint of the anti-federalists, the states had a long history of collecting colonial taxes, and had the infrastructure in place to collect significant revenues. While the Revolution had strained the limits of their taxing authority, the states had weathered the storm with their fiscal capacity intact. The anti-federalists could even point to a few successes under the Articles of Confederation. The Confederation Congress had recently negotiated a policy for organizing and settling western lands, and the states had agreed to cede the Northwest Territory to the new national government. The anti-federalists could not envision how a stronger national government might raise additional revenues without resorting to force, compelling delinquent taxpayers to make payment on their debts during periods of hard times. Federal taxes might be costly to administer, and additional taxes threatened to incite an already burdened populace.
In his defense of concurrent powers, Alexander Hamilton proposed a solution to placate anti-federalist fears of federal revenue collectors. Rather than the federal government subsuming state tax collection efforts, Alexander Hamilton argued in Federalist 36 that the federal government could rely on each state’s fiscal infrastructure to collect federal revenues. Hamilton argued that “there is a simple point of view in which this matter may be placed, that must be altogether satisfactory. The national Legislature can make use of the system of each State within that State. The method of laying and collecting this species of taxes in each State, can, in all its parts, be adopted and employed by the Federal Government” (Hamilton 2008, 170). Hamilton envisioned using state tax collectors to collect federal direct taxes, believing that the direct taxes could be assessed and collected alongside state property taxes with little additional effort on the part of local officials. Although many
Federalists disparaged the states’ unsuccessful attempts to meet their requisitions to the Confederation Congress during the 1780s in advocating for a stronger federal government, Hamilton believed that state governments were ultimately competent and could be relied upon to use their local knowledge to assess and collect federal direct taxes. Congress employed this method successfully in each of the four federal direct taxes levied in 1798, 1813, 1815, and 1861. The federal government supervised the collection of each tax by appointing federal commissioners to oversee the assessment process and ensure that the tax was applied equally between districts. Congress went further in 1813, 1815, and 1861 by incentivizing state governments to assume their portion of the tax burden, offering a 15 percent discount to states that agreed to collect the entirety of the tax themselves (Einhorn 2006).
The ratification of the Constitution provided tax relief for indebted tax payers by reducing the fiscal burdens facing state governments. The federal tariff provided Congress with an independent revenue source that eliminated the need to call upon the states for contributions. By assuming and annuitizing the Revolutionary War debts under Hamilton’s assumption plan, Congress reduced its immediate revenue needs further and made steps toward fiscal solvency. With the pressure to produce revenues alleviated, many state governments elected to reduce taxes considerably in the years following 1787. For example, legislators in Virginia voted in October 1787 to repeal the poll tax on adult white males, along with taxes on cattle and slaves under the age of twelve. The poll tax and the tax on cattle would have been particularly welcomed by poorer taxpayers, as these taxes would have constituted the majority of their assessment. The legislature moved again, in December 1788, to reduce taxes for the following year by one-third but required that future payments be remitted in specie. In 1789, the General Assembly elected to reduce taxes further, this time slashing rates across the board by 25 percent.
Hamilton’s belief that state governments could be relied upon to collect federal taxes remained persuasive as Congress made plans to levy the first direct tax. In 1796, Congress requested that the Secretary of the Treasury, Oliver Wolcott Jr., prepare a report on the practicality of levying and collecting the direct tax using the states’ existing fiscal infrastructure. Wolcott extolled the benefits of employing state and local tax collectors, and emphasized that “the fiscal systems of the several States . . . have been long established; that, in general, they are well approved by the people; that habit has rendered an acquiescence under the rules they impose, familiar.” State legislatures “possessed of a minute and particular knowledge of the circumstances and interests of the respective States” and Wolcott emphasized that “it may be conceded that, so far as the principles of the State systems can, with propriety, be adopted by Congress, the hazards of new experiments, and the delays incident to the organization of a new plan, will be avoided.” Wolcott noted additionally that to
establish officers in every district, possessed of skill competent to institute and maintain a check on the collectors, would be attended with enormous expense; to allow the people to elect assessors in the manner now practised, and, at the same time, to renounce the idea of local responsibility, would be manifestly unsafe. Under such a system, there could be no security that local partiality would not lead to the connivances for the suppression and concealment of property justly subject to taxation.
At the same time, Wolcott noted that the plan was “liable to great, if not insurmountable objections.” The challenge of leveraging state tax administrations remained in the difficulty of standardizing tax collection efforts on a national scale. Wolcott noted that “the State systems are utterly discordant and irreconcilable, in their original principles” (Wolcott  1832, 1:436-38). Although the distinctive features of each state’s tax administration prevented Congress from devising a national system based on existing state tax laws, Wolcott emphasized repeatedly that leveraging the states’ fiscal capacity would provide the most efficient means of collecting a federal direct tax. The fact that Congress considered introducing a system of direct taxation that would have been entirely reliant on state property tax collectors, and that policy makers decided ultimately to enlist state and local officials in assessing and collecting the tax, suggests that the founding generation placed a high degree of trust in the reliability of state tax administrations.
The federalists developed an ingenious system of taxation that minimized distortions in the market process by outsourcing the collection of direct taxes to state governments and consolidating indirect taxes in the form of the tariff. A few hundred revenue officers in a handful of port cities succeeded in collecting the vast majority of federal revenues. Ratification of the Constitution brought tax relief to the state governments, who could reduce their property taxes now that the requisition system had been abandoned. The combined state and federal tax system allowed Americans to raise significant revenues from taxation without burdening the average taxpayer. Constraints on federal taxing authority guarded against oppressive taxes, and Congress resorted to direct taxes only four times to raise revenues in times of war. The system of taxation developed in the early republic followed Montesquieu’s observation that governments “can levy heavier taxes in proportion to the liberty of the subjects” (Montesquieu  2005, 220). Decentralized taxing authority and constitutional limitations facilitated the market process by minimizing distortions in the early-American economy.