Policy makers in the early republic generally followed the principles outlined by Adam Smith and adopted an effective system that succeeded in repaying the Revolutionary War debts. At the same time, Americans were not always consistent in applying Smith’s principles, and the system of fiscal federalism introduced at the founding gradually broke down in the nineteenth century. Hamilton’s funding plan called for a sinking fund that Smith explicitly rejected (Stabile 1998, 92). As the federal tariff emerged as the primary source of federal tax receipts, the very qualities that made the tariff so desirable also made it subject to abuse. Smith and Hume had argued that tariffs were invisible to the average taxpayer, as consumers conflated them with the cost of the imported good. Imperceptible taxes on luxuries quickly gave way to protectionism, logrolling, and vote trading in the nineteenth century as new theories of political economy emerged. As federal power expanded, the Congressional taxing authority outgrew its constitutional limitations. The Sixteenth Amendment to the Constitution expanded federal power to provide unlimited authority to raise taxes on income and state governments moved away from property taxes as their primary source of revenue. The federalist system of taxation developed in the early republic eroded gradually and paved the way for the modern administrative state.

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