After The Tax Bill Passed

cartoon shows tax inspectors looking under a woman's crinoline and under a bed in her home.

A federal income tax was first levied in the United States in 1862.  Congress instituted the tax to meet the extraordinary expenses of the Civil War.  The Revenue Act of 1862 levied a progressive tax on Americans, of 3% on incomes between 600 and 10,000 dollars, and 5% on incomes over 10,000 dollars (roughly $238,000 today).

Prior to the Civil War, the federal government relied primarily on tariffs (duties on goods imported into the US) to finance its activities.  The use of the tariff protected the growth of nascent American manufactures, by making foreign goods more expensive relative to those made in the US.  This arrangement allowed the government to operate without taxing citizens directly.

The cartoon above, published in Frank Leslie’s Illustrated Newspaper soon after the Revenue Act went into effect, captures its impact on American psyches.  The tax is depicted as indecorously invasive.  In the drawing, four federal tax collectors are snooping around inside the home of an American citizen named Scroggs.  Caught in the act of arranging his hair, Scroggs faces interrogation armed only with a brush and comb.  A tax commissioner in a high hat accosts him while fingering Scroggs’s pocket-watch.  Another visitor peeks under his wife’s skirt, while still others scrutinize the couple’s clothes and look under their child’s bed.  The caption: ‘Scroggs says he is ready and willing to pay any amount of tax, but he would like them to leave his wife’s crinoline and other domestic trifles alone.’

Did instituting the income tax create an antagonistic relationship between citizens and the government that had not existed before?  What we do know is that in 1867, the Civil War at an end, the income tax was sharply reduced, and in 1872 it was eliminated.  According to the Internal Revenue Service website, between 1868 and 1913, 90 percent of internal revenue was garnered through taxes on alcohol and tobacco.  The income tax was re-instituted only in Woodrow Wilson’s era, following the ratification of the Sixteenth Amendment, which increased Congress’s discretion in levying income taxes directly on the citizenry.

Image: from this source.

Before There Were Income Taxes

Drinking glass with McKinley's image and the motto "Protection and Plenty" (courtesy Cornell University Library via Flickr Commons)

Do you ever get the sense that there are forbidden topics in American politics?  If there are, I think one is the tariff and the costs of “free trade.”  (Another is the price of food, but I’m not going to write about that today.  Nor am I going to write about the relation between rising domestic gas prices and the export of our own oil and gas, which has recently reached an alltime high.)

No, my only topic today will be the tariff, not because it’s timely or explosive or even the slightest bit sexy, but because it’s been tugging at the edges of my attention lately.  And I’m going to indulge myself by writing about the tariff nostalgically, in my capacity as a citizen and an historian, not as a trade expert or an economist—because of course I’m neither of those things.  (If you’re fuzzy on what a tariff is, you may wish to read this.)

Recalling the tariff is important, because it was once a central element of US fiscal and trade policy.  Thinking about this now-forgotten source of federal revenue may free us to grapple with the budget woes confronting us more creatively.  But first, let me back up and locate my nostalgia in a specific situation—several situations, really, existing concurrently.

1. The Tax Man Cometh

Last month, the nice man who does our income taxes paid us a visit.  We had a nice lunch, then Bob and I handed off all the forms and papers he needed to take away.  It was a nice modern ritual.  It couldn’t have happened in the 19th century (except for a brief period in the 1860s—and there were no professional accountants then—), because the federal income tax was established permanently only in 1913.  Ever wonder how the federal government was funded before then?  By 1913, the US was 124 years old.

Tariffs are a big part of the answer.  From the nation’s founding until 1913, tariffs on goods imported into the US typically accounted for the bulk  (sometimes more than 90 percent) of the government’s revenue stream.  The remainder of its needs were met through excise taxes on goods such as whiskey.

2. Red-Ink Ricochet and the Mood of 2011

We live in a time of red ink, a condition that’s occasioned conflict and a fit of soul-searching.  The mood of 2011 was angry and irritated.  Occupy Wall Street, the strident clamor of the Tea Party, protracted and still unresolved quarrels in Congress over tax cuts and the debt ceiling: these events showed a nation under strain and increasingly divided along party and class lines.  At the heart of the buzz is a widespread conviction: we cannot continue on the same path we’ve been treading.  Our current fiscal policies cannot be sustained, we cannot continue along with more of the same.  As the federal deficit has spiraled, balancing the budget has come to seem an impossibility, the how of it becoming a vexatious topic to a population afflicted with high long-term unemployment and rising income inequality.

Given that the government lacks the will to cut spending, how do we come up with more black ink?  The red stuff is as pesky as the pink snow in The Cat in the Hat story.  We may shift our tax burdens around endlessly, but we’re not due for relief, at least not as long as internal taxation constitutes the US government’s principal revenue stream.

The tariff is germane to these meditations, because the mechanism of the tariff was used in the past to address a constellation of problems similar to those we confront today.

When the country was first founded, it occupied an inferior and economically vulnerable position.  The government was saddled with enormous debts accrued from fighting the Revolution.  Our fledgling economy, based primarily on agriculture and trade, was heavily dependent on more mature economies who actually made things.  Globally, industrial manufacturing was in its infancy, but a technology gap and America’s relative labor scarcity hampered our efforts to compete with Europe’s more rapidly industrializing powers, notably England.  Finally, to say that our population was averse to internal taxation was putting it mildly.  For all these reasons, the tariff became the backbone of government financing, a development that also created conditions under which a diversified economy could grow.

The government’s needs then were far more modest.  Yet, throughout the nineteenth century, protective tariffs were more than a great source of federal revenue.  They protected domestic manufacturing, fueling the development of a broad industrial base and abundant labor opportunities.  Indirectly, the tariff promoted conditions in which American laborers could mobilize politically and successfully push for fair wages and other labor standards that gradually improved their quality of life.

Which is not to say the tariff was without political controversy.  For every statesman like Henry Clay, who tirelessly championed tariffs and “home industry,” there was another like John Calhoun, who, when confronted with the Tariff of 1828 (the so-called “Tariff of Abominations“), argued that his state would be justified in striving to nullify and defy the federal law.  Tariffs benefited the more mercantile and industrial parts of the country, while imposing negative effects on those engaged in agriculture.  Each new tariff measure spurred hot debate; countless hours were spent arguing over tariff rates and the specific goods on which tariffs would be imposed.  Yet, despite these drawbacks, tariffs served the national interests of the United States admirably.  Above all, the tariff proved popular politically.

3: Handkerchiefs Spoke To Me

Evidence for this last point came to hand recently, in the form of political handkerchiefs made in the late nineteenth and early twentieth centuries.  That’s right: political handkerchiefs.  They spoke to me.  And they might speak to you, too.

Textile touting the presidential candidacy of Benjamin Harrison (Courtesy Cornell University via Flickr Commons)

While trolling the internet for images to illustrate this post on party platforms, I stumbled on a trove of old political handkerchiefs preserved at Cornell University Library.  Dating mainly from the 1880s through the 1910s, these textiles bespeak the wild popularity of tariffs and “home industry.”

Political handkerchief from the 1888 Republican presidential campaign

Adorned with patriotic symbols and images of prosperity, woven on homespun in American mills, the artifacts suggest a dovetailing of political and economic interests that we think of as inevitably antagonistic.  Indeed, the protective tariff was a powerful political bond mitigating the conflicting interests of American labor and the captains of industry.

1888 Political handkerchief with flags and the words "Protection--Home Industries"

Interestingly, the Republican party was the champion of protectionism in those days.  The question for Republicans in the late 1800s was not whether there should be a tariff, but how high it should be.  In the election of 1888, the budgetary surplus resulting from tariff revenues had grown to be so large that it was something of an embarrassment for the party.  A theme of the election was whether to lower the tariff so that the government would not end up with funds it didn’t need.

Political textile with the slogan "True Blue Republican--Protection--Home Industries"

Despite some modification, the tariff remained a popular element of Republican ideology for at least two more decades.  Industrialists, workers, and politicians shared an interest in maintaining the tariff system, which imposed tax burdens on “the other guy”: those who wanted access to our markets, manufacturers and purveyors of goods from overseas.

Pro-protection handkerchief from Theodore Roosevelt's 1904 campaign (Courtesy Cornell University Library via Flickr Commons)

4. The limits of nostalgia

Back to the present: we live in an era of free trade.  By 1900, our economy had become vastly more productive.  We needed larger markets for the goods we made, the natural resources we harvested, and the crops we grew.  Gaining access to foreign markets has been America’s goal for a century, one integral to the global dominance that we’ve enjoyed.  Achieving this has entailed opening our own market to foreign goods and nearly eliminating the tariff protections American industry once knew.  The US is now party to many reciprocal and multilateral trade agreements, and our capacity to change the terms under which we trade is modulated by our participation in the World Trade Organization (WTO).  The tariff is a mere relic of the nineteenth century, and to write about it is to go against the grain of what we’ve become.

Yet, in the current climate of economic and political unease, Americans are re-examining the role of government and how its fiscal policies can be made a more perfect mirror of the people’s needs.  At such a moment, it may be fruitful to ponder the constructive role of the tariff and all that this alternative system of taxation enabled us to become.

All images in this post are courtesy of the
Susan H. Douglas Collection of Political Americana
at Cornell University Library.
You can visit its photostream here.

RELATED:
Susan Barsy, Bring Back The Platform!, Our Polity.
Ron Grossman, “Globalism and Its Discontents,” Chicago Tribune.
“The Rise of the Income Tax,” a succinct time-line by TurboTax, on view here.

Fiscal Policy is Not Economic Policy

One of the strange features of the period we are living in is that discussions of fiscal and monetary policy have pretty much preempted a more direct examination of structural problems in the American economy.  These topics have become our obsession, precluding direct debate about what sort of economy we want to be.

Perhaps because Americans are phobic about the idea of having a larger economic vision, we do not talk about how we would like the various parts of our economy to function together for our greatest well-being.  Instead, we talk about monetary policy (the Fed and the money supply) and fiscal policy (the role of government as a taxing and spending agent), as though getting these two parts of the equation right will, in themselves, produce a national economy that is prosperous and serves the various needs of the citizenry.

Perhaps it’s inevitable, because these are the two parts of our vast economic system over which officialdom can hope to exert control.  Almost occluded is the whole world of work—the whole world of enterprise—, the aggregate shape of which should always be our main point of reference.  Anti-statists though we are, we focus on government action more than on what American workers and companies are actually doing, or on the cultural and practical developments that could help them continue more happily, successfully, and harmoniously.

Instead, all roads lead back to the government, the federal government, which, as the economy has grown, so too has it, grown to be a huge economic agent, one so huge and complex that citizens can scarcely apprehend its many functions.  The government’s role as an employer—as a regulator—as a consumer—is massive.

Readers of this website have noted already that, while public discussion of government spending often focuses on social benefits distributed to the ill, the poor, and elderly, the government gives mightily to other economic actors, whether in the form of tax breaks, farm subsidies, employment, military spending, or other government contracts, forming a great gift-cycle that is myriad and so circular!  Because, of course, we pay our part for all of these things.  It’s all so different from the days, long long ago, when there were no income taxes, and the government’s main functions were running the P.O. and sending farmers experimental seeds!

Notwithstanding the benefits that might follow from keeping our sights trained on creating opportunities for American labor and improving the character of our own economic activities, we are entering a period when fiscal policy will remain at the center of public consciousness, where more and more attention will be trained on issues of taxation, and on tax reform itself, of all things.

Federal Revenues & Expenses as a Percent of GDP, 1981-2012

Image: from this source

RELATED:
The Map of Federal Benefits
Help Understanding the Federal Budget
Eduardo Porter, “A Nation With Too Many Tax Breaks,” New York Times, 14 March 2012.
GRAPHIC: “Who Gets the Breaks and Benefits,” New York Times, 14 March 2012.
Tracy Gordon, “What States Can, And Can’t, Teach the Federal Government About Budgets,” Brookings, March 2012.
GRAPHIC: “Government Spending by Level, as a Percentage of GDP,” Brookings.