by Gary North
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 EVENTSBy 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.
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
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