The locus and scope of the authority to tax were prominent issues in the debates leading up to the American revolution. Fiscal matters continued to loom large during and subsequent to the war for independence. Having cast off the fetters of monarchy, the citizens of 13 independent republics turned to local representative institutions to preserve their liberties, giving little sustained thought to the viability of a larger, unified nation. A growing number of nationally-oriented citizens, however, began to realize that the exigencies of war and peace required a more vigorous central government than many Whig patriots had contemplated. Challenging a number of radical conventions that had fueled the recent revolution, the framers of the Constitution of 1787 designed a federal government to address these needs. Broad constitutional powers to raise revenue were central to the Federalists’ conceptions of nationhood. Following ratification, their blueprint dictated how the country responded to fiscal challenges, both foreign and domestic, during its first three decades.

1777 On November 15, the Continental Congress passed the fledgling nation’s first constitution, the Articles of Confederation [external link]. The Articles, like most republican state constitutions written around this time, shunned vigorous executive power in favor of a more decentralized form of government constructed around a powerful legislative body. The first national government consisted of a loose confederation of independent states that retained their sovereignty in most matters, with the exception of diplomacy and defense. Each state had one vote in Congress, regardless of population, and unanimous consent was required to enact measures of major import. This arrangement severely circumscribed Congress’s fiscal capacity. The Articles did not grant Congress the power to tax; it could only request funds that states might eventually get around to remitting. Given the history of their past relationship with Britain, the states were understandably loathe to sacrifice their own autonomy and vest powerful fiscal authority in a distant centralized government.

State officials tended to print money rather than resort to increased taxation in order to raise war revenue. As a consequence, most state currencies depreciated quickly and severely. The Continental Congress relied on loans from the French, Dutch, and wealthy Americans at first, but soon turned to the printing press as well, with similar results.

Robert Morris, Superintendent of Finance (larger version)

1781 Superintendent of Finance Robert Morris attempted to expand governmental powers beyond the limits set by the Articles of Confederation. He released a Report on Public Credit, calling for the Confederation government to assume the entire national debt, issue new interest-bearing debt certificates, and impose tariffs and internal taxes to pay the interest costs. This plan essentially prefigured Alexander Hamilton’s later fiscal program.

Morris’s attempts to raise revenue were rebuffed at every turn. Rhode Island, for example, objected to his proposal for a national tariff (an import duty of 5 percent on foreign goods), leading to its defeat in Congress.

1783 Other states like New York joined in vetoing similar tariff measure. Having resisted British import duties, they were not about to accede to new sets of duties, even those sanctioned by their own government. Key commercial states like New York, Massachusetts, and Pennsylvania determined their own trading policies.

1786 Government inefficiencies encountered during and after the Revolutionary war, particularly with respect to matters of taxation and finance, frustrated a growing number of influential public figures. This group of nationalists ­ George Washington, Robert Morris, James Madison, Benjamin Franklin, John Jay, Alexander Hamilton, and John Adams, to name a few ­ advocated a stronger central government to administer fiscal and commercial policies directly, rather than devolving control to the individual states. Nationalists had several concerns. The intransigence of states like New York and Rhode Island prevented the passage of a tariff, impeding the national government's ability to pay its bills. Furthermore, a number of states had decided to discharge some of the national debt on their own, undermining Morris's plan for the Confederation government to assume the debt burden unilaterally. But without a revenue-raising mechanism of its own or timely contributions from the states, the Confederation could not hope to pay even the interest on the national debt. As early as 1780, Hamilton had warned that "without revenues, a government can have no power. That power which holds the purse-strings absolutely, must rule."

Currency issued separately by New York, Pennsylvania, and the Continental Congress. The rapidly depreciating Continental currency gave rise to the disdainful expression "not worth a Continental." (larger version)

The fiscal and monetary policies the individual states adopted threatened to undermine the stability of the national economy. In an effort to avoid raising taxes, and in response to the petitions of debtor interests, state legislatures endorsed the emission of large volumes of paper money. As had been the case during the War, currencies rapidly depreciated, and creditors despaired of recouping a fair value on the funds they had advanced. They also resented relief bills that interfered with the collection of private debts. Holders of government securities, meanwhile, disliked the fact that southern legislatures were granting tax relief to specific groups of citizens, thus diminishing the flow of revenue and delaying redemption of public debts.

In September, James Madison organized a commercial convention at Annapolis [external link], Maryland, to discuss tariff and taxation policies. Only five states sent delegates. Subsequently, Madison and Alexander Hamilton called for a convention in Philadelphia, to be held in the summer of 1787, that would address the powers and responsibilities of the Confederation.

1787 The ratification of the Constitution shifted the locus of power from the individual states to an invigorated national government. Congress's authority over fiscal policy and taxation reflected this transformation. Under the requisition system of the Articles of Confederation, Congress had little recourse in revenue collection beyond the good faith of the individual states. The new Constitution, however, granted the national legislature exclusive power to impose tariffs and coin money, along with the flexibility to collect excises and levy taxes directly on individual citizens.

A satirical drawing touching on a variety of major issues -- including taxation -- surrounding ratification of the Constitution. (larger version)

These innovations, however, were hardly foregone conclusions. By the time the delegates met in Philadelphia, the specter of Shay’s Rebellion in Massachusetts had convinced most of the necessity of fortifying the national government, if the Confederation’s revenue problems had not done so already. But no consensus existed on the details or the scope of the necessary changes. And even if the convention managed to agree on a plan, there was no guarantee that the individual states would ratify a constitution designed to diminish their influence

Taxation and Representation James Madison Questions of taxation were inexorably bound with issues of representation. Although the Constitution sanctioned an executive branch of unprecedented capacity, the legacy of the Revolution insured that the tax power would not stray from legislative control. Much of the debate centered on how representation in Congress was to be apportioned. The design of James Madison's "Virginia Plan" clearly meant to correct the inequities of the "one state-one vote" Confederation system that had frustrated active government by granting all states, regardless of size, an equal vote (and equal veto power). Madison proposed a bicameral legislature in which representation in both houses depended on the size of the member states; larger states would be afforded more representatives, and thus more influence. In response, delegates from smaller states rallied around William Patterson's "New Jersey Plan." Like Madison, Patterson meant to strengthen the powers of the national government, but he sought to preserve the equity among states that had existed under the Articles. Ultimately, the delegates voted to amend the Virginia plan, creating an upper House with equal state representation and a lower House where seats would be apportioned on the basis of population, determined every decade by a national census. The authority to initiate money and tax bills, however, resided exclusively with the lower House, although the Senate did reserve the right to revise such bills. Since the people would vote for House legislators directly, the federal government, in theory, derived its authority to tax from the sovereignty of the people, not the states.

Taxation and Slavery State-based representational conflicts, however, coexisted with regionally-based conflicts. In fact, the struggle to reconcile the place of slavery in the new republic had more influence on the enumeration of federal tax authority in the Constitution than any other issue. The perplexing approach adopted with respect to direct taxation attested to slavery's impact. Article I, Section 2 provided that "representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective numbers, which shall be determined by adding to the whole number of free persons . . . and excluding Indians not taxed, three-fifths of all other persons." Similarly, Article I, Section 9 stated that "no capitation or other direct tax shall be laid, unless in proportion to the census or enumeration herinbefore directed to be taken." The insertion of the direct tax clauses was not designed to protect the taxing power of states against the Federal government, or that of richer against poorer states. The delegates sought this compromise, rather, as a means to account for slaves when determining the number of southern congressional representatives. Depiction of a tobacco plantation, used as frontpage for an early edition of the Federalist Papers. (larger version) If bondsmen were considered persons for census purposes, their numbers would entitle slave states to proportional increases in representation. Northern states objected to this southern windfall. They preferred to exclude slaves from the census entirely to prevent slave states from marshaling too much influence in Congress. In an effort to impose a price on southern intentions, Governeur Morris suggested that taxation be in proportion to representation. The addition of slaves to the census rolls would then cost southerners a larger proportion of the tax burden as well. Slave owners objected, already suspecting that northerners might seize on federal power to tax slavery out of existence. Eventually, the delegates altered Morris’s original suggestion so that it applied only to "direct" taxes. They established that both representation and direct taxation would be proportional to population, with African-American slaves counting as three-fifths of a person in census tabulations. This compromise induced southerners to accept fewer representatives than they would have been entitled to had slaves counted fully. In return, any tax on slaves would be assessed as part of a proportional direct tax on other kinds of property in all the states. Slaves would be shielded from targeted taxes, and the 3/5 clause would diminish the southern burden somewhat. Northerners, on the other hand, could be satisfied they had reduced the representational influence of slave states, while forcing them to assume a small tax burden, at least, for African bondage. If not for the question of slavery, the term "direct tax" would not have entered the constitutional lexicon. Unfortunately, the delegates themselves never truly understood what the term was meant to connote. When Rufus King queried the convention on this point, James Madison noted that "no one answered." Some distinguished between direct taxes on land or personal property, as opposed to indirect taxes on imports, exports, or consumption. The meaning varied from state to state, however. Direct taxes might include excise taxes, or not. They could conceivably cover poll taxes or taxes on income, while indirect taxes covered expenditures. No precise definition existed, since the term "direct tax" was not widely used before 1787. George Mason had inserted the word "direct" to modify Governeur Morris's original proposal for "taxation in proportion to representation." Mason feared that tying all kinds of taxes (tariffs and excises, for example) to congressional representation would only reestablish the ineffective requisition system that had operated under the Articles of Confederation. Signing of the Constitution by the delegates at Philadelphia. Ironically, one holdover from the Confederation requisition system did survive: the 3/5 clause. In 1783, population replaced wealth as the basis for assessing state revenue quotas, and Congress adopted a 3/5 clause (with little fanfare) to account for slaves. The framers of the Constitution eventually adopted the same convention. The compromise proved to be a good deal for the south. Direct taxes were rarely enacted, so the region's slave-enhanced liability did not amount to much of a penalty. And three-fifths of all southern slaves still provided the south with many more representatives than they would otherwise have been entitled. It is no coincidence that four out of the first five American presidents came from the state of Virginia (the electoral college was also tied to congressional representation). Jefferson's election in 1800, in fact, owed much to the windfall of the 3/5 clause. Article I, section 8 of the Constitution also provided slavery a measure of protection. While delegating to Congress the power to "lay and collect taxes, duties, imposts and excises, [and] to pay the debts . . . of the United States," it specified that "all duties, imposts and excises shall be uniform throughout the United States." The delegates meant this "uniformity clause" to pertain to geographical uniformity; a tax on slaves, for example, would tend to affect the South to a significantly greater extent than the North. Having shielded servitude through direct tax provisions and the uniformity clause, southerners sought to head off another potential assault. Fearful that representatives of populous northern states would target slavery by taxing the products of a slave economy (particularly tobacco, rice, indigo, and cotton), southern delegates insisted that the Constitution prohibit export taxes. Such duties, they argued, furnished the central government with a means to oppress the states. Governeur Morris objected to the exclusion of so profitable a source of revenue, realizing the take from direct taxes would be negligible. In eliminating export duties, proponents of slavery virtually ensured that tariffs would comprise the bulk of federal revenue. The question remained whether slaves were commodities subject to import duties. Many delegates were loathe to overlook such a lucrative a source of revenue. Others, like James Madison, recoiled at the notion of including so overt a reference to persons as property within the actual text of the Constitution. But there were also those who saw the tariff as a means to render the importation of slaves prohibitively expensive. The final compromise resolved the issue in favor of revenue at the expense of morality. Article I, Section 9 prohibited any ban on the "migration or importation of such Persons as any of the States now existing shall think proper to admit" until 1808, allowing a duty on such importations "not exceeding ten dollars for each person." The duty was not enough to discourage the slave trade, but designed instead to contribute to the Treasury’s coffers.

The Anti-Federalist Critique Patrick Henry, renowned Anti-federalist. Proponents of the new Constitution had their work cut out for them. Critics of the pending document, known as the Anti-federalists, were numerous and active in a number of states, such as New York, Virginia, and Massachusetts, where a vote against ratification could sink the proposed Federal system. In both the press and the ratifying conventions, Anti-federalists railed against what they perceived as an unlimited, unchecked taxation power vested in a distant, unaccountable central government. Virginia's George Mason argued that "the assumption of this power of laying direct taxes, does of itself, entirely change the confederation of the States into one consolidated government." He, like many Anti-federalists, feared that this arrangement was "calculated to annihilate entirely the state governments." They worried that national taxes would supersede state taxes, drawing limited funds away from a small local base. The Constitution also circumscribed the potential sources of state revenue; Article I, Section 10 prohibited individual states from turning to their favorite revenue source, coining money or emitting bills of credit, and declared import tariffs an exclusive instrument of the national government. Anti-federalists insisted that control over direct taxes be retained by the states. Specifically, they preferred the requisition system employed under the Articles of Confederation. Patrick Henry argued passionately that "the oppression arising from taxation, is not from the amount but, from the mode — a thorough acquaintance with the condition of the people, is necessary to a just distribution of taxes. The whole wisdom of the science of Government, with respect to taxation, consists in selecting the mode of collection which will best accommodate to the convenience of the people."

The Federalist Response Advocates for the Constitution scrambled to rebut Anti-federalist criticisms. Adopting the guise of Publius and addressing the people of the State of New York, the authors of the Federalist Papers delivered the most renowned and lucid response. In no fewer than eight separate essays, Alexander Hamilton took the lead addressing questions of taxation. "A nation cannot long exist without revenues," he insisted. "Destitute of this essential support, it must resign its independence, and sink into the degraded condition of a province. This is an extremity to which no government will of choice accede." Hamilton attempted to assuage fears about the potential abuses of a direct tax by insisting that such a tax would rarely, if ever, be used. "It is evident," he noted, "from the state of the country, from the habits of the people, from the experience we have had . . . that it is impractical to raise very considerable funds by direct taxation." Alexander Hamilton, often referred to as America's greatest Secretary of the Treasury. Instead, tariff duties would constitute the bulk of federal revenue. In Federalist 30, however, Hamilton warned that, despite the tariff windfall, the national government should not surrender the power of direct (or internal) taxation to the states; it needed to retain a flexible set of options in the event of emergencies. Hamilton revisited the inefficiencies of the Confederation in defending the new tax powers. The requisition system had failed to deliver the funds necessary to cover the nation’s expenses in times of war or peace. A national government, he concluded, could not rely on others to collect its taxes. He also assured doubters that the national tax powers would not usurp or supersede that of the states. Except for tariffs, "as to all other taxes the authority of the States remain[ed] undiminished." Hamilton insisted that it would "always be far more easy for the State governments to encroach upon the national authorities than for national authorities to encroach upon the State authorities." The ultimate sovereignty, he reminded his readers, rested with the people, who were more closely connected to states than to the national government. And since the national government would be assuming numerous government expenses and responsibilities, including the war debt, individual state revenue requirements would amount to little. These arguments proved persuasive. Despite close votes in New York, Massachusetts and Virginia, all the states (with the exception of Rhode Island, which held out until 1790) ratified the Constitution.

1789 Madison introduced a tariff essentially identical to Morris’s 1783 measure, reasoning that under the new constitutional regime, a handful of intractable states no longer posed an insurmountable obstacle to passage. Madison’s tariff bill included the original 5 percent ad valorem duty on all imports, along with a list of enumerated items to be taxed by duties of a specified amount (also a provision of the original 1783 act). Budding provincial manufacturing interests sought to protect themselves from an influx of cheap British products, so the list of items to be taxed inspired considerable haggling. Ultimately, the Tariff of 1789 was mildly protectionist in a token sense, but never far removed from the issue of revenue, which remained the primary consideration.

More controversial was Madison’s call for tonnage duties to be levied in three categories: American ships (lowest rate), ships belonging to nations with commercial treaties with the United States, and those of nations with no such treaties (highest rate). The intended effect of this measure was to discriminate against British shipping in favor of French shipping. As such, it represented an extension of Jefferson and Madison’s foreign policy preferences. New York and New England’s mercantile community opposed this provision, fearful it would provoke a trade war with Britain. Congress eventually removed the discriminatory clause from the act.

1790 Released in January, Alexander Hamilton’s Report on Public Credit proposed a system of debt management consisting of two essential components:

Redemption. Congress would redeem at face value the millions of dollars in securities issued by the Confederation government. Old notes would be exchanged for new government securities with an interest yield of about 4 percent. Redemption was expected to bolster the credit of the national treasury, but Hamilton also sought to provide a windfall to speculators who had invested heavily in depreciated securities. Such windfalls, along with the strong credit of the new government, would induce financiers to continue in their role as public creditors. Creating a permanent debt stood to tie the interests of wealthy Americans to the new national government. Interest was to be paid predominantly through customs revenues and excises taxes.

Pierre L'Enfant's original plan for the District of Columbia, as published in the Universal Asylum and Columbian Magazine, March 1792. Washington's relatively southern location grew out of the compromise between Federalists and Jeffersonians over Hamilton's plan for debt assumption. (larger version)

Assumption. The national government would take on all the outstanding war debts of the states. This part of the plan precipitated a flurry of speculation in state notes, fueling Jefferson’s objection to a strategy he feared would promote corruption on a grand scale. Even Madison, an inveterate nationalist, objected to the program’s inherent unfairness: Current holders of Confederation securities stood to reap considerable financial benefit, as opposed to the original bearers — shopkeepers, farmers and soldiers — who risked supporting the Confederation in the uncertain early days of the revolution. But this was precisely what Hamilton intended; he desired to concentrate national wealth in the hands of the urban merchant class, so they in turn would use the windfall to invest in manufacturing and other components of the nation’s economic infrastructure. In short, Hamilton wished to utilize the federal funded debt as source of capital revenue.

Other congressional critics of Hamilton noted that some states, like Virginia and Maryland, had already levied high taxes to pay off their war debts. Now they would be taxed to pay the debts of other states as well, mostly for the benefit of rich northern speculators. Congress ultimately implemented Hamilton’s program, rejecting Madison’s call to apportion some of the dividends to former state note holders. Economic nationalists placated the Chesapeake states by agreeing to locate the site of the new national capital along the banks of the Potomac, in exchange for support of Hamilton’s public credit plan.

1791 Hamilton released his Report on Manufactures, calling for protective tariffs to encourage fledgling industry. Federalists rejected the tariff idea at the time, worried about preserving a relatively open market for international trade. Such a protective tariff also stood to hurt Hamilton’s merchant allies, while restricting the influx of government revenue. The tariff was the only one of Hamilton’s major economic proposals to be rejected.

The Massachusetts, an American revenue cutter, 1791-1798. Forerunners to the U.S. Coast Guard, revenue cutters were introduced in 1790 to ensure collection of tonnage and import duties. (larger version)

Nevertheless, Hamilton pushed Congress for a mild upward revision of the tariff schedules. Duties were not designed to exclude foreign goods as originally conceived in the Report on Manufactures, but as a means to generate revenue. In fact, between 1789 and 1816, Congress revised the tariff schedule over two dozen times. In this period, a broad consensus existed for utilizing the tariff to raise needed funds for various federal activities, and this remained its primary function for about three decades. Receipts from customs duties continued to rise steadily, ultimately providing about 90 percent of the national government’s income from 1790 to 1820, and contributing to the financial success of Hamilton’s redemption and assumption programs. In short, tariff policy in this period was carried out with little controversy.

Also at Hamilton’s behest, Congress approved a whiskey excise tax in January. Unlike the tariff, it constituted a direct tax on a specific class of producers ­ spirit distillers. Hamilton insisted the excise was necessary to garner additional funds for his debt funding and assumption plan, and argued that domestic distilling was one of the few "mature" industries in the United States capable of bearing the tax. He also added, somewhat disingenuously, that a tax on spirits stood to serve a useful moral function if higher prices led to reduced consumption of alcohol. Opposition to the excise tax in Congress was muted, since Madison and Jefferson had agreed to compromise and support Hamilton’s funding plan; they had little choice but to back a bill purporting to pay for it. Designed to raise $800,000, the measure levied a tax on spirits ranging from 7 cents to 18 cents per gallon, and created an internal revenue service to collect it.

1792 Distillers hardly viewed themselves as members of a "mature industry." The majority were frontier farmers operating in isolated, underdeveloped economies. Spirits served more than simply recreational purposes. Specie and bank notes tended to be scarce in many areas along the trans-Appalachian frontier, so whiskey wound up functioning as an important medium of exchange, especially for eastern trade. In western Pennsylvania, where one quarter of the nation's stills were located in and around Pittsburgh, the whiskey excise acted as a currency tax, threatening farmers with economic hardship. Distillers and their representatives in Congress tended to view the excise on spirits as an odious measure imposed by easterners desperate to avoid a land tax. The latter stood to burden the east disproportionately, since that region boasted most of the nation's improved property.

Westerners generally refused to pay the tax, often resorting to acts of limited violence reminiscent of those perpetrated by the Sons of Liberty. In May, Congress acted on Hamilton's advice to reduce tax rates and liberalize payment schedules. The Legislature later altered the law so that legal suits regarding the tax could be heard in local state courts rather than distant federal courts. Despite these palliatives, districts in North Carolina and western Pennsylvania were cited for noncompliance, prompting President Washington to issue a stern public proclamation admonishing tax offenders. Although he threatened federal reprisal, the government took no action for a year and a half.

A receipt for the whiskey tax, 1798. (larger version)

1794 A writ entered in federal court in Philadelphia against unregistered distillers in western Pennsylvania provoked civil unrest in that region, as well as in parts of western Virginia and Ohio. In August, Washington ordered the governors of Pennsylvania, New Jersey, Maryland, and Virginia to call out 13,000 militiamen to quell the uprisings. An active speculator in western properties, the president had no intention of acquiescing to the forces of instability. By November, prominent members of the rebellion in Pennsylvania were arrested, and the militia occupied the area until the following spring. Organized opposition to the tax evaporated. Ultimately, Washington's administration demonstrated leniency: Few of the rebels were ultimately convicted, and the president soon pardoned those that were. In the final analysis, the Federalist regime successfully collected the excise and vindicated the authority of the federal government, although the whiskey tax proved less critical as a source of revenue than originally advertised.

Less inflammatory but still unpopular, a federal carriage tax was enacted in 1794. The graduated levy, which taxed luxurious carriages at a much heavier rate than their plainer counterparts, drew criticism as an unconstitutional direct tax. The Supreme Court, however, disagreed, eventually sustaining in Hylton v. United States the federal government's power to levy taxes on consumption.

1795 Jay’s Treaty with Britain secured the latter’s pledge to remove troops from American soil. In exchange, the United States prohibited for 10 years the anti-British commercial program championed by Jefferson and Madison. In effect, the treaty precluded the imposition of restrictive, punitive tariffs designed to coerce Britain by manipulating its access to American raw materials.

A receipt for the Federalist carriage tax, 1800. (larger version)

1797 In the midst of a naval war with England, France intensified harassment of American shipping and expelled the American envoy in an attempt to influence the United States’ trade policy with Britain. While President Adams remained sanguine that friendly relations might yet be restored, the "High Federalist" wing of his party, influenced by Alexander Hamilton, clamored for a stepped-up war footing. The call for naval vessels and fortifications would require significant expenditures and new sources of revenue.

1798 Details of the "XYZ Affair," in which French agents attempted to solicit bribes and humiliating concessions from American envoys, outraged the American public. In the wake of the scandal, Congress passed most of the High Federalists' war program. Soon after, Congress also approved a direct tax on land, slaves, and houses to cover the costs. Legislators charged Federal officials with assessing property and collecting the tax, but a local board of commissioners was convened in each state to promulgate assessment regulations that would reflect local needs and custom. Because of the looming threat of hostilities, opposition to the tax, both in Congress and the public at large, remained muted. Republicans exerted much more energy attacking the controversial Alien and Sedition Acts, which had passed along with the war program.

1800 With the assistance of his Secretary of the Treasury, Albert Gallatin, newly elected Republican President Thomas Jefferson sought to reorient the fiscal policy of the United States. Jefferson’s four main goals included: (1) a reduction in government expenditures, (2) a balanced budget; (3) a decrease in the size of the national debt, and (4) alleviation of the tax burden. The latter two objectives seemed to conflict with one another; specifically, Jefferson's desire to abrogate Hamilton's funded debt plan and retire all government obligations as judiciously as possible required a steady stream of revenue.

Albert Gallatin, Secretary of the Treasury. (larger version)

Nevertheless, Jefferson abolished all internal taxes, including the whiskey excise tax and the land tax. Meanwhile, the Napoleonic Wars in Europe, though a diplomatic minefield for American statesmen, proved a significant stimulus to the economy of the United States. Vigorous commerce enriched merchants while customs duties swelled the federal Treasury. By 1808 the national debt had been reduced from $80 million to $57 million, even though the Louisiana purchase had added an $11 million liability. By 1806, duties proved so lucrative that Gallatin and Jefferson fretted about what to do with the surplus above that required for debt retirement. Treasury reserves increased from $3 million to $14 million between 1801 and 1808.

1808 British harassment of American shipping during the continuing Napoleonic conflict forced Gallatin to contemplate preliminary war financing arrangements. Because of the surpluses generated by customs duties, the secretary of the Treasury remained confident that a war could be financed strictly through government borrowing, without resort to internal taxation of any kind. The economic consequences of Jefferson’s Embargo, however, soon altered Gallatin's sanguine outlook. In an attempt to force French and British belligerents to recognize the neutral rights of American vessels, the embargo enacted in 1807 had prohibited export of raw materials or finished merchandise to Europe. Enforcing the embargo proved costly, since many Federalist merchants attempted to circumvent it, but tariff duties also slipped precipitously as a result of interrupted trade. Income plummeted about 55 percent in one year, from $16.4 million to $7.3 million. Gallatin could no longer rely on the tariff alone, noting that "in time of peace it is almost sufficient to defray the expenses of a war; in time of war, it is hardly competent to support the expenses of a peace establishment."

1812 President Madison appealed to Congress for a Declaration of War against Britain. Anticipating this possibility, Gallatin had proposed a series of excise and direct taxes to the House Ways and Means Committee. Rancorous debate over Madison's resolution, however, revealed deep political divisions on the propriety of the war. Congress proved reluctant to approve radical fiscal measures, settling for a doubling of the tariff schedule.

1813 Because of the ensuing conflict's interruption of commerce, customs revenues actually dropped 50 percent. In August, a full year into the war, Congress approved a set of internal taxes, including a direct tax designed to collect $3 million and excise duties on carriages, sugar refining, and distilled spirits. Congress explicitly designated these taxes as war measures, and provided for their automatic appeal within a year of the war's termination. Legislators made no real effort to accommodate state revenue systems as it did with the Federalists' land tax of 1798. An assessor or collector did, however, have to be "a respectable freeholder and reside in the district." In addition, states were granted a 15 percent tax discount from the anticipated sum apportioned to their citizens if state governments collected the taxes themselves and paid the federal government directly. A majority of states took advantage of this arrangement, which spared the Madison administration the trouble of establishing an extensive bureaucratic infrastructure.

Alexander Dallas, Secretary of the Treasury. (larger version)

1815 Secretary of the Treasury Alexander Dallas contemplated the enactment of an income tax to raise up to $3 million dollars for the war effort. He modeled his idea after the income tax Britain adopted in 1799 to finance the Napoleonic Wars. Dallas assumed that such an income tax constituted an indirect tax, and would not require apportionment. The House Ways and Means Committee responded lukewarmly to the proposal, and the war ended before any income tax could be enacted.

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