Shorn on the Fourth of July

Email Print
FacebookTwitterShare


DIGG THIS

The history
of taxation is mostly a history of rising taxes. It makes depressing
reading. Tax increases tend to accelerate as the right to vote is
extended to more people. It may take time for this process to be
evident, but rarely does it take longer than one generation.

In no nation
has this process been more true than the United States. Yet the
history textbook writers have successfully told the story as if
the reverse were true.

Am I exaggerating?
Consider whether the following verifiable story is familiar to you.
Is this what you have been told?

THE STORY
BEHIND THE TAX STORY

When I was
in graduate school four decades ago, I wrote a paper on then-current
academic opinion regarding the burden of colonial taxation in 1775,
i.e., the cost of funding the British Empire. When I say "academic
opinion," I mean the opinions of specialists in colonial American
economic history. Here is what I found. The total tax burden imposed
by the British Empire on the colonies in 1775, as distinguished
from the taxes imposed by colonial legislatures, was approximately
1% of national income in the North, and about 2.5% in the South.
The main burden was from customs duties placed on non-British imports
into the colonies. These were tariffs, i.e., sales taxes on imports.

Against this
"intolerable tax tyranny" of 1%, the colonists were persuaded
by political organizers to revolt. They fought and died for seven
years. They won in 1783.

From 1783 until
1788, they enjoyed virtually tax-free living at the national level.
The national government could only beg states to pay taxes voluntarily.
They paid very few. This produced a growing economy and generally
stable politics. Prof. Merrill Jensen told this story back in 1950,
in his book, The
New Nation
. It has not yet filtered down into the American
history textbooks.

After 1783,
a small
group of young men
who had exercised national leadership during
the Revolutionary era were discontented. State governments offered
no opportunities for lasting
fame.
They also wanted a national government that could impose
taxes that Americans would have to pay — an end to voluntarism.
So, they organized a political convention in 1787 to change all
this. They were successful. The voters supported the replacement
of the Articles of Confederation. The new national government could
impose customs duties and luxury sales taxes, most notably on whiskey.

Americans in
1788 chose to be taxed by their very own national government, which
was nearby and powerful, despite the fact that they had fought a
revolution against sales taxes on non-British imported goods, imposed
by a distant government which had proven itself nearly impotent
in collecting direct taxes in the colonies. The voters got what
they wanted: national taxation with representation.

George Washington
in 1794 then got to command the largest military force of his career:
13,000 men. He led them into Western Pennsylvania to crush a tax
revolt against the Federal whiskey tax.

You say that
you did not hear the story told in this way?

Let me fill
in some gaps.

"NO
TAXATION WITHOUT REPRESENTATION!"

American school
children have memorized this political slogan for a hundred years.
But where did it come from? From textbook writers. Nobody ever went
into print with this phrase in colonial America.

Linking taxation
to representation goes back to the Magna Carta of 1215. The connection
regained public attention as a result of the Stamp Act crisis of
1765—66.

The British
in 1763 had signed a treaty with France settling the Seven Years
War, which was called the French and Indian War in the colonies.
This war had drained the treasuries of both countries.

The name of
the war is incorrect. It refers to the dates of the official hostilities:
1756—63. It should be called the Nine Years War, because it
began, not in 1756, but in 1754. It began on May 28, when an inexperienced
22-year-old Virginia militia officer led about thirty-five troops
in an unprovoked surprise attack on a small group of Frenchmen commanded
by Ensign Joseph Coulon de Villiers de Jumonville. The battle is
called the Battle of Jumonville Glen. It took place in Western Pennsylvania.

The previous
year, the militia’s commander had established an alliance with a
village of Seneca Indians. He consulted with their leader the day
before the attack. The Indian had encouraged him to strike first,
without warning, which he did the next morning. The French lost
the skirmish. Nine
were killed; 21 were captured. Thirteen were wounded, but the group
of about eight Indians without warning killed them. The Virginian
met with the wounded French commander to discuss the terms of surrender.
Before he could formally surrender, the Indians’ leader smashed
his skull with a tomahawk.

France and
England had not been at war. This was the opening salvo.

Another 400
men soon arrived. This was not enough. He surrendered on July 3
to a French and Indian force of 600 French and 100 Indians. As a
condition of his troops’ release, he signed a document admitting
that the French commander had been assassinated while surrendering
to him. The French word was "l’assassignat," which the
young officer later said he thought meant "killing."

The officer
was Lt. Col. George Washington.

And the war
came.

As a result
of the war, which was mostly a naval battle for control over the
West Indies, the French surrendered their claims to territory in
North America, but not to the British. In 1762, France had surrendered
its territory to its ally, Spain. When Napoleon defeated Spain four
decades later, France got this territory back, which he sold to
the United States.

The French
after 1763 were no longer a threat to the colonists. So, the immediate
benefits of having British troops stationed in the colonies fell
rapidly. "What have you done for us lately?"

Then, in 1765,
the British Parliament imposed a small tax on colonial paper. Official
transactions had to be printed on taxed paper. So did newspapers.
So did playing cards. The paper had to receive an official government
stamp from tax collectors sent to the colonies.

This, I would
argue, was the most shortsighted political decision of the British
Parliament in the eighteenth century. The tax alienated three groups:
lawyers, newspaper publishers, and card players.

The media response
was immediate. "We shall not submit to such tyranny!"

Tax collectors
were chased out of town, tarred and feathered by mobs, and otherwise
treated in ways that would get you sent to jail for ten years today.

It was a widespread
tax revolt. Most colonists decided that they were not going to pay.
The problem was, they needed plausible excuses not to pay, other
than the real ones: "We have been manipulated into mob action
by lawyers and the media, and we love to play cards."

So, they invented
some arguments. This was the main one: "The
British Empire cannot lawfully impose internal taxes. It can lawfully
impose only external taxes, such as on trade." This was a very
good argument, because it meant that smugglers would have to be
tried in colonial courts, and juries would not convict.

The British
knew this. So, they transferred to Admiralty Courts the right to
try smugglers and violators of the Stamp Act. These courts were
held in distant Canada. This abolished trial by jury.

One man understood
all this better than anyone else. In 1764, he had inherited a shipping
company from his uncle, making him the richest man in New England.
His uncle Thomas had been a respected trader, but like all New England
traders, he had learned how to evade taxes. He smuggled goods into
small ports where British customs agents were absent. If caught,
no jury would convict. His nephew had learned the trade well. His
nephew was John Hancock.

In October,
1765, a Stamp Act Congress was held in New York City. It adopted
a Declaration of Rights and Grievances. This document denied the
right of Parliament to tax colonists directly, because the colonists
were not represented politically in Parliament. Only colonial legislatures
had the right to tax colonists.

Parliament
backed down and repealed the Stamp Act in 1766.

But it formally
retained the right to tax the colonies.

In 1767, n
new government passed what came to be known as the Townsend
Acts
. Townsend was Chancellor of the Exchequer, the man in charge
of taxes. He took seriously the Stamp Act document’s declaration
of a distinction between internal and external taxes. So, he imposed
lots of taxes on imported goods. Then he died.

These taxes
did not produce widespread resistance in the colonies. The once
exception took place in 1768, when customs agents impounded Hancock’s
ship, Liberty. Hancock organized protests by writing a
letter
attacking taxation and the quartering of British troops
in cities.

The riot in
Boston persuaded the governor to call in the British Navy. The presence
of the Navy and British troops in Boston was a constant irritant.
They did not leave until March, 1776.

The Townsend
duties were repealed in 1770, except for a symbolic duty on tea.
Americans then started importing Dutch tea. This hurt the British
East India Company, the tea seller.

A REVOLT
AGAINST A TAX CUT

In May, 1773,
the British government granted the failing East India company a
monopoly to ship tea to the colonies directly, threreby avoiding
import taxes that had previously been imposed in England before
shipping the tea to the colonies. The English duties of course were
sales taxes. This tax cut reduced import costs. With the Townsend
tea tax a fraction of the total savings from removing the British
sales tax, East India tea was now cheaper than any other tea in
the colonies.

This pressured
the colonial merchants to stop selling non-British tea. They tried
to organize a boycott of East India Company tea. But boycotts rarely
work when the item being boycotted is cheaper than its rivals. The
merchants were stymied.

Sam Adams saw
an opportunity for some political mischief. He persuaded a group
of them to conduct what became known as the Boston Tea Party in
December, 1773. They dressed up as Indians and tossed overboard
privately owned, duty-free tea. This was a protest in favor of taxes
on tea.

The British
retaliated by closing the port of Boston. This gave Adams a chance
to organize a national protest through his correspondence committees.

On April 19,
1775, the American Revolution began in Concord, Massachusetts. Colonists
shot and killed British troops in a successful effort to protest.
To protest what? Tax-free tea. From that day forward, there would
never again be tax-free tea in America.

And the war
came.

WHEN,
IN THE COURSE OF POLITICAL EVENTS

By June, 1776,
the American Revolution had been going on for over a year. A booklet
written by an unemployed recent immigrant, Thomas Paine, titled Common
Sense
, was being read everywhere. Yet the Second Continental
Congress had yet to declare independence. Apparently, its members
did not possess common sense. This was becoming a huge embarrassment
for Congress. The independence movement’s national politicians needed
to get to the head of the parade, in order to exercise leadership.

George Washington
took command of the Continental army on July 3, 1775. Over the winter,
his army and the Massachusetts militia gained control over Boston
Harbor by placing the recently confiscated cannons from Fort Ticonderoga
on Dorchester Heights. British troops and loyalists boarded ships
in Boston Harbor on March 17. The militia had run them off land.

This was Boston’s
greatest St. Patrick’s Day ever, even without a parade. (The event
had begun to be celebrated in Boston in 1737.)

The British
fleet commander promised not to set fire to the city — an act of
terrorism against a civilian population — if Washington would allow
the fleet to sail out unharmed. Washington agreed. On March 26,
the fleet sailed off to Halifax, Nova Scotia. The Massachusetts
militias went home. Washington took the Continental army to New
York City.

This was bad
news for Congress. The British would likely reinforce the fleet
sometime in summer. Something had to be done. But what?

Congress needed
what Congress has needed ever since, every time events have gotten
way ahead of them: a public relations campaign. They needed a photo-op,
but photography had not yet been invented. So, they had to settle
for a press release. It turned out to be a doozy.

"LET’S
FORM A COMMITTEE!"

A little background
information is called for. On June 7, Richard Henry Lee introduced
a resolution calling for independence. They debated. They could
not decide.

So, the next
day, the delegates did the traditional thing. They referred the
whole matter to a committee. It mattered not at all that the committee
was themselves — all of them: a committee of the whole. It was a
committee, and this is the sort of thing that committees do. Then
they debated some more. They came to no conclusion.

So, on June
11, they created a new committee, which was instructed to write
down some plausible reasons to justify Congress in joining with
the thirteen colonies, which were all in the process of seceding
from the British Empire.

Another committee.
That will fix things!

Some things
don’t change.

The five-man
committee had distinguished members: Thomas Jefferson, John Adams,
Benjamin Franklin, Robert Livingson, and Roger Sherman. They assigned
the writing assignment to Jefferson, who was a skilled writer.

Jefferson spent
two weeks drafting the document. Meanwhile, Congress debated. Nothing
was settled.

Jefferson submitted
a draft to the other committee members for review. The committee
then submitted its final draft to Congress on June 28.

Congress spent
Friday, June 28, making about two dozen alterations. For a group
of over 50 people, this was rapid work. On Monday, July 1, they
returned to debate the issue of independence. Still, they reached
no conclusion.

Then, on July
2, delegates from twelve of the thirteen colonies voted for independence
— secession, to use a less politically correct word. New York’s
delegation held out until the legislature could vote, which it did,
on July 9.

On July 3,
a huge British fleet carrying 32,000 troops landed in New York’s
harbor. This was the first anniversary of George Washington’s assumption
of command over the Continental Army. Washington’s army was in New
York, vulnerable to destruction.

On July 4,
Congress was unaware of the previous day’s events in New York City.
Members tinkered with wording and then voted to accept it. July
4 seemed to be a perfect time for the press release.

These were
men of considerable wealth, stature, and above all, prudence. They
were also professional politicians. So, they did not sign it. Only
John Hancock (President) and Charles Thomson (Secretary) signed
it. Thomson was not a delegate. But he put his life on the line
and signed it anyway.

Congress then
adjourned.

Thomson sent
the document to Congress’s printer, John Dunlap, who printed 150
to 200 copies. The original copy immediately disappeared. (Perhaps
Dunlap or someone in his shop stole it, seeing the collector value.
But this may just be a very early governmental foul-up — the first
recorded one after the official birth of the nation.)

As soon as
the printer returned the copies, Thomson sent out copies to the
media of the day.

In later years,
this sort of procedure was called, "Let’s run it up the flagpole
and see if anyone salutes."

A lot of people
saluted, including New York’s legislature.

On August 2,
56 delegates signed a new version of the document, which had to
be drawn up to replace the lost one. This time, Thomson did not
sign it.

A BRIEF
HISTORY OF REVOLUTIONARY WAR TAXATION

The tax escalation
process then began in earnest. State taxes rose when state legislatures
imposed direct property taxes to fight the war. They also rose through
emissions of fiat paper money by states. Federal taxes rose by way
of fiat money, the legendary "continentals."

These fiat
money taxes rose unevenly. Some paid, some didn’t. Those who paid
were the patriots who voluntarily accepted a government’s paper
money in exchange for resources. Other patriotic taxpayers bought
state bonds at face value, or accepted them in payment for things.

Rising prices
(universal) and falling market prices for the bonds (universal)
revealed the extent of the taxation. Those trusting colonists who
paid the inflation tax and the bond depreciation taxes by having
surrendered resources paid a rate of approximately 100% on the value
of the assets surrendered.

In contrast,
skeptics who refused to believe either the Congress or the state
legislatures refused to accept paper money. They became what economists
call free riders. They gained the post-war advantages of the new
nation without having paid for them in the form of taxes.

Pennsylvania’s
government in 1777 declared price controls.

One immediate
outcome was the army’s crisis at Valley Forge. Farmers refused to
sell Washington’s army any produce at the controlled prices. The
army almost starved.

In short, great
wealth was transferred from people who believed in the promises
of politicians to those who did not. There is a lesson here, I think.

OUT OF
THE JAWS OF VICTORY

Colonial legislatures
then hiked tariffs against imports from other states as a way to
raise funds. This shrank the division of labor compared to the free
trade domestic economy of 1775. This practice was one of the reasons
why colonial legislatures in 1787 called for a modification — though
not abolition — of the Articles of Confederation in 1787.

Colonial governments
no longer were restricted by the British government from issuing
paper money. They did so with abandon. Prior to 1776, the main currency
in circulation was Spain’s silver coins, called "reals."
There was no domestic mint.

From 1775 until
today, there has never been a year in which some agency of civil
government in the United States has not issued fiat money that is
unbacked by gold or silver, and forced the public to accept this
money as legal tender.

In Massachusetts,
speculators bought up war bonds at a steep discount. These had been
issued to soldiers in lieu of money. Speculators paid a few cents
on the face value of these bonds. This continued after the war.

In
1785, John Hancock decided not to run again for governor of Massachusetts.

He blamed gout. He had never demanded that rural taxes be collected
in silver coins. His successor and the legislature immediately imposed
new taxes, payable in silver coins, to pay off bondholders at face
value. He was a bondholder. So were other members of the General
Court of Massachusetts (the legislature). Most Massachusetts bondholders
lived in the Boston area. When local governments revolted in 1786,
and put a resistance force into the field under Captain Daniel Shays,
the state militia put down the rebellion.

Massachusetts’
government then asked the Congress to send the Army to put down
the revolt. Congress refused. In 1786, the total size of the United
States Army was about 700 men.

Henry Knox,
who had commanded the government’s troops in Boston in 1776, when
the British departed, began sending George Washington a series of
letters about radical revolution against property in Massachusetts.
These letters persuaded Washington to attend Madison’s proposed
Constitutional Convention. Until then, he had refused, for he understood
that this would be unconstitutional, according to the Articles of
Confederation.

The Constitutional
Convention was called to revise the Articles of Confederation, and
many of its delegates were sent by their legislatures with an explicit
command not to replace the Articles. On the first day, a plan was
introduced to scrap the Articles. For the next three months, the
delegates met secretly on the second floor of what we now call Liberty
Hall, so that passers-by could not hear the proceedings. The media
were not invited.

As soon as
the Constitution was ratified in 1788, Washington appointed Henry
Knox as his Secretary of War. In 1791, Congress voted to create
a privately owned central bank to control the nation’s money supply.
This was Alexander Hamilton’s idea. His other big idea was for the
Federal government to assume all state debts. This guaranteed bond
payments at face value for speculators.

When Western
Pennsylvania revolted against the Federal whiskey tax in 1794, President
Washington personally led an army of 13,000 militia members to crush
the tax rebels. This was the first time the Militia Act of 1792
had been invoked: the right of the Federal government to mobilize
the militia of one state to enforce U.S. laws in another state.

The mobilized
national militia of 1794 was surely a lot more impressive than a
squad of 40 Virginia militia troops in 1754 (five of whom got lost
in the woods).

And a lot more
expensive.

CONCLUSION

When the textbook
writers coined the phrase, "No taxation without representation,"
they baptized its opposite: "Taxation with representation."

I
am willing to make a deal with the Internal Revenue Service. I’ll
give up my right to vote in U.S. elections if the Federal government
will cut my taxes to 1%.

I’ll even pay
2.5%, because I live in the South.

How about you?

July
4, 2007

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 19-volume series, An
Economic Commentary on the Bible
.

Gary
North Archives

Email Print
FacebookTwitterShare