Federalist No. 12

Federalist No. 12 is another Hamilton argument for the importance of maintaining Union.  In this essay, he shows how a consolidated federal government would be more able to raise revenue than separate States or confederacies.  He approaches this first from a commerce perspective and then from a logistical standpoint.  Hamilton argues that consumption taxes on imports are the most effective form of taxation.  He then points out that the most effective implementation can only be achieved through union.

There are a number of interesting things in No. 12.

• Hamilton presages his plan for taxing whiskey, even if, in the context of this essay, as an import duty.  He provides an early example of government’s predisposition for social engineering in his concept of a sin tax.
• His comments on property taxes are also interesting.
• Hamilton’s discussion on the means of protection against smuggling also gives a preview of his later establishment of the Coast Guard.

The Federalist No. 12

The Utility of the Union In Respect to Revenue

To the People of the State of New York:

THE effects of Union upon the commercial prosperity of the States have been sufficiently delineated. Its tendency to promote the interests of revenue will be the subject of our present inquiry.

We have already explained the positive effects of Union on the prosperity of the States.  This essay will focus on the beneficial impact Union will have on tax revenues.

The prosperity of commerce is now perceived and acknowledged by all enlightened statesmen to be the most useful as well as the most productive source of national wealth, and has accordingly become a primary object of their political cares. By multipying the means of gratification, by promoting the introduction and circulation of the precious metals, those darling objects of human avarice and enterprise, it serves to vivify and invigorate the channels of industry, and to make them flow with greater activity and copiousness. The assiduous merchant, the laborious husbandman, the active mechanic, and the industrious manufacturer, — all orders of men, look forward with eager expectation and growing alacrity to this pleasing reward of their toils. The often-agitated question between agriculture and commerce has, from indubitable experience, received a decision which has silenced the rivalship that once subsisted between them, and has proved, to the satisfaction of their friends, that their interests are intimately blended and interwoven. It has been found in various countries that, in proportion as commerce has flourished, land has risen in value. And how could it have happened otherwise? Could that which procures a freer vent for the products of the earth, which furnishes new incitements to the cultivation of land, which is the most powerful instrument in increasing the quantity of money in a state — could that, in fine, which is the faithful handmaid of labor and industry, in every shape, fail to augment that article, which is the prolific parent of far the greatest part of the objects upon which they are exerted? It is astonishing that so simple a truth should ever have had an adversary; and it is one, among a multitude of proofs, how apt a spirit of ill-informed jealousy, or of too great abstraction and refinement, is to lead men astray from the plainest truths of reason and conviction.

All enlightened statesmen recognize that healthy commerce is the best way to grow national wealth and consequently make increasing trade the main focus of their political careers.   The more money and hard specie are in circulation, the more industry is stimulated and the more it grows.   Regardless of their profession, merchants, farmers, and laborers, and manufacturers all look forward to receiving the just rewards of their labors.  There is no longer rivalry between agriculture and commerce, their interests are now interwoven.   It has been shown in various countries that increased commerce corresponds with increases in the price of land.  How could it be otherwise?   Providing an avenue to open markets for agricultural produce could hardly help but stimulate production and provide motivation for further cultivation to satisfy demand.   It is astonishing to think that so simple a truth could ever be disputed.  It just shows how a spirit of ill-informed jealousy can lead men astray from even the most obvious truth.

The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury. The hereditary dominions of the Emperor of Germany contain a great extent of fertile, cultivated, and populous territory, a large proportion of which is situated in mild and luxuriant climates. In some parts of this territory are to be found the best gold and silver mines in Europe. And yet, from the want of the fostering influence of commerce, that monarch can boast but slender revenues. He has several times been compelled to owe obligations to the pecuniary succors of other nations for the preservation of his essential interests, and is unable, upon the strength of his own resources, to sustain a long or continued war.

The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the speed with which it circulates.  Trade provides the impetus both for having money in circulation and its easy transfer from place to place.  Consequently, collecting taxes becomes easier and facilitates filling the treasury.  The territory of Germany contains much fertile, cultivated and populous land, a large proportion of which benefits from a mild climate.  Some of the best gold and silver mines in Europe are located within this territory.  In spite of all of this, there is still a problem raising revenues, because of a lack of commerce.   Germany’s monarch has been forced to borrow from other nations on several occasions and has been unable to sustain a long war on the strength of his own resources.

But it is not in this aspect of the subject alone that Union will be seen to conduce to the purpose of revenue. There are other points of view, in which its influence will appear more immediate and decisive. It is evident from the state of the country, from the habits of the people, from the experience we have had on the point itself, that it is impracticable to raise any very considerable sums by direct taxation. Tax laws have in vain been multiplied; new methods to enforce the collection have in vain been tried; the public expectation has been uniformly disappointed, and the treasuries of the States have remained empty. The popular system of administration inherent in the nature of popular government, coinciding with the real scarcity of money incident to a languid and mutilated state of trade, has hitherto defeated every experiment for extensive collections, and has at length taught the different legislatures the folly of attempting them.

But it is not only through commerce that Union aids in providing revenue for the state.  There are other factors as well which we will show have an even more immediate impact.  Looking at the current state of affairs in the country, it should be obvious  that it is not practical to raise large amounts of revenue through direct taxation.  The habits of the people and our experience have proven this point.  In spite of numerous tax laws and new methods of collection, the treasuries of the States have remained empty.  The bureaucratic nature of democratic governments, coupled with the real scarcity of money (due to the insipid state of commerce), have made every attempt to collect significant revenues a failure.  The various States’ legislatures have learned the folly of attempting them.

No person acquainted with what happens in other countries will be surprised at this circumstance. In so opulent a nation as that of Britain, where direct taxes from superior wealth must be much more tolerable, and, from the vigor of the government, much more practicable, than in America, far the greatest part of the national revenue is derived from taxes of the indirect kind, from imposts, and from excises. Duties on imported articles form a large branch of this latter description.

Nobody familiar with what happens in other countries could be surprised at this.  Even in wealthy Britain, where direct taxes on the rich would seem to be more practical than in America, most of the national revenue is derived from indirect taxation – imposts and excises.  Import duties make up the majority of the latter.

In America, it is evident that we must a long time depend for the means of revenue chiefly on such duties. In most parts of it, excises must be confined within a narrow compass. The genius of the people will ill brook the inquisitive and peremptory spirit of excise laws. The pockets of the farmers, on the other hand, will reluctantly yield but scanty supplies, in the unwelcome shape of impositions on their houses and lands; and personal property is too precarious and invisible a fund to be laid hold of in any other way than by the inperceptible agency of taxes on consumption.

Here in America, it is evident that we will need to depend on such duties for a long time as our primary source of revenue.  For the most part such excises will remain limited to specific areas.  The people won’t stand for intrusive excise laws.  Farmers will be loathe to pay much if approached through property taxes on their houses and lands.  Personal property is to precarious and invisible a fund to be laid hold of in any other way than through the seemingly invisible means of taxes on consumption.

If these remarks have any foundation, that state of things which will best enable us to improve and extend so valuable a resource must be best adapted to our political welfare. And it cannot admit of a serious doubt, that this state of things must rest on the basis of a general Union. As far as this would be conducive to the interests of commerce, so far it must tend to the extension of the revenue to be drawn from that source. As far as it would contribute to rendering regulations for the collection of the duties more simple and efficacious, so far it must serve to answer the purposes of making the same rate of duties more productive, and of putting it into the power of the government to increase the rate without prejudice to trade.

If what I am saying has merit, then we need to arrange things in the best way to suit our political welfare.  There is no real argument against the Union being the best way of accomplishing this.  It is the best way of improving commerce and consequently deriving revenue from it.  A Union will simplify the regulations needed for collection of duties, and will increase revenue as a result.  It will do this by putting the power of a central government to use fairly and consistently with regard to trade.

The relative situation of these States; the number of rivers with which they are intersected, and of bays that wash there shores; the facility of communication in every direction; the affinity of language and manners; the familiar habits of intercourse; — all these are circumstances that would conspire to render an illicit trade between them a matter of little difficulty, and would insure frequent evasions of the commercial regulations of each other. The separate States or confederacies would be necessitated by mutual jealousy to avoid the temptations to that kind of trade by the lowness of their duties. The temper of our governments, for a long time to come, would not permit those rigorous precautions by which the European nations guard the avenues into their respective countries, as well by land as by water; and which, even there, are found insufficient obstacles to the adventurous stratagems of avarice.

Considering the relative situation of the States, if each tried to implement its own commercial regulations, they would fail.  The fact that there is a shared language and culture between the peoples of the States (communication barriers don’t exist) coupled with there being so many rivers, bays, and borders, ensures a thriving black market to avoid taxation.   The only way the States could counteract this would be to make their duties so low as to make such illicit activity unprofitable.  Our people would not stand for the kind of draconian measures that European nations use to inhibit smuggling and protect their borders and seaboards.

In France, there is an army of patrols (as they are called) constantly employed to secure their fiscal regulations against the inroads of the dealers in contraband trade. Mr. Neckar computes the number of these patrols at upwards of twenty thousand. This shows the immense difficulty in preventing that species of traffic, where there is an inland communication, and places in a strong light the disadvantages with which the collection of duties in this country would be encumbered, if by disunion the States should be placed in a situation, with respect to each other, resembling that of France with respect to her neighbors. The arbitrary and vexatious powers with which the patrols are necessarily armed, would be intolerable in a free country.

France uses an army of what they call “patrols” to guard against smuggling and contraband trade.  Mr. Necker (French Finance Minister) estimates that there are upwards of twenty thousand such “patrols”.  This shows just how hard it is to prevent smuggling across shared borders.  It provides a clear example of the difficulties that the States would face if they tried to enforce trade regulations between themselves in the event of disunion.   Furthermore, the arbitrary and distressing powers government would need to enforce such regulations are incompatible with a free society.

If, on the contrary, there be but one government pervading all the States, there will be, as to the principal part of our commerce, but ONE SIDE to guard — the ATLANTIC COAST. Vessels arriving directly from foreign countries, laden with valuable cargoes, would rarely choose to hazard themselves to the complicated and critical perils which would attend attempts to unlade prior to their coming into port. They would have to dread both the dangers of the coast, and of detection, as well after as before their arrival at the places of their final destination. An ordinary degree of vigilance would be competent to the prevention of any material infractions upon the rights of the revenue. A few armed vessels, judiciously stationed at the entrances of our ports, might at a small expense be made useful sentinels of the laws. And the government having the same interest to provide against violations everywhere, the co-operation of its measures in each State would have a powerful tendency to render them effectual. Here also we should preserve by Union, an advantage which nature holds out to us, and which would be relinquished by separation. The United States lie at a great distance from Europe, and at a considerable distance from all other places with which they would have extensive connections of foreign trade. The passage from them to us, in a few hours, or in a single night, as between the coasts of France and Britain, and of other neighboring nations, would be impracticable. This is a prodigious security against a direct contraband with foreign countries; but a circuitous contraband to one State, through the medium of another, would be both easy and safe. The difference between a direct importation from abroad, and an indirect importation through the channel of a neighboring State, in small parcels, according to time and opportunity, with the additional facilities of inland communication, must be palpable to every man of discernment.

If, on the other hand, there is but one government for all of the States, there will be but one side to guard – the ATLANTIC COAST.  Vessels arriving from foreign countries, carrying valuable cargoes would rarely risk trying to unload at sea in order to avoid duties.  They would be subject to the dangers of the coast as well as to detection, adding risk both before and after arrival at their final destination.  Only an ordinary degree of vigilance would be necessary to prevent smuggling.  A few armed vessels, judiciously stationed at the entrances of our ports, could be maintained at small expense.   They would be sufficient guardians of our trade laws.  And, since the government would have the same motivation to protect our interests everywhere, the cooperative efforts of the States would make them highly effective. This is yet another reason why we should maintain the Union; it is yet another advantage which would be lost if we separate.   The United States is far from Europe and also far from all other places with which the States have foreign trade.  It is not like with Britain and France, where only a few hours travel separate the coasts.  This fact provides considerable security against direct contraband from foreign nations.   However, if separate states it would be much easier to bring in contraband indirectly, from one State to another.    This would be both easy and safe.   Anyone can see the difference between direct importation from abroad and indirect importation from a neighboring State.  The latter can be easily achieved in small increments based on time and opportunity.  Crossing State borders provides no difficulty.

It is therefore evident, that one national government would be able, at much less expense, to extend the duties on imports, beyond comparison, further than would be practicable to the States separately, or to any partial confederacies. Hitherto, I believe, it may safely be asserted, that these duties have not upon an average exceeded in any State three per cent. In France they are estimated to be about fifteen per cent., and in Britain they exceed this proportion.¹ There seems to be nothing to hinder their being increased in this country to at least treble their present amount. The single article of ardent spirits, under federal regulation, might be made to furnish a considerable revenue. Upon a ratio to the importation into this State, the whole quantity imported into the United States may be estimated at four millions of gallons; which, at a shilling per gallon, would produce two hundred thousand pounds. That article would well bear this rate of duty; and if it should tend to diminish the consumption of it, such an effect would be equally favorable to the agriculture, to the economy, to the morals, and to the health of the society. There is, perhaps, nothing so much a subject of national extravagance as these spirits.

It is evident that one national government would be much more efficient at levying duties on imports and enforcing them than the States would separately, or as partial confederacies.  It is obvious that it would be much cheaper too.  Up until this point, I think it’s safe to say that no State has been able to get more than three per cent from these duties.   In France they are estimated to be about fifteen per cent, while in Britain they are even more.  There should be reason why we cannot at least triple the amount that is currently being collected here.  Even just a single commodity, alcohol, under federal regulation, might provide considerable revenue.   Extrapolating, based on what is imported into this State, four million gallons of alcohol are imported into the United States.  At a shilling per gallon, this would produce two hundred thousand pounds.  This good would easily bear such a rate of taxation.  Even if it should diminish consumption, the side effect would be positive to the agriculture, economy, morals and to the health of society.  There is nothing that symbolizes extravagance so much as these spirits.

What will be the consequence, if we are not able to avail ourselves of the resource in question in its full extent? A nation cannot long exist without revenues. 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. Revenue, therefore, must be had at all events. In this country, if the principal part be not drawn from commerce, it must fall with oppressive weight upon land. It has been already intimated that excises, in their true signification, are too little in unison with the feelings of the people, to admit of great use being made of that mode of taxation; nor, indeed, in the States where almost the sole employment is agriculture, are the objects proper for excise sufficiently numerous to permit very ample collections in that way. Personal estate (as has been before remarked), from the difficulty in tracing it, cannot be subjected to large contributions, by any other means than by taxes on consumption. In populous cities, it may be enough the subject of conjecture, to occasion the oppression of individuals, without much aggregate benefit to the State; but beyond these circles, it must, in a great measure, escape the eye and the hand of the tax-gatherer. As the necessities of the State, nevertheless, must be satisfied in some mode or other, the defect of other resources must throw the principal weight of public burdens on the possessors of land. And as, on the other hand, the wants of the government can never obtain an adequate supply, unless all the sources of revenue are open to its demands, the finances of the community, under such embarrassments, cannot be put into a situation consistent with its respectability or its security. Thus we shall not even have the consolations of a full treasury, to atone for the oppression of that valuable class of the citizens who are employed in the cultivation of the soil. But public and private distress will keep pace with each other in gloomy concert; and unite in deploring the infatuation of those counsels which led to disunion.

What will be the consequence if we don’t fix our revenue issues?  A nation cannot long exist without revenue.  Without money, a nation cannot maintain its independence, it will devolve into no better than a province.  No government will willingly choose such a fate.  Revenue is essential.  If it cannot be had through commerce, it will be had through property taxes.  It has already been suggested that excise taxes are too unpopular to be applied in a significant enough proportion to make them effective.  They haven’t even been successful in the States where they are applied to agriculture, which is the most suitable arena for their use.  It is very difficult to assess personal property for taxation purposes, and therefore, it can’t be a significant source of revenue either.   It might be one thing to enforce assessments in populous cities, but it would be very difficult to do so in rural areas.  No other means than consumption appears to be the only practical for collecting taxes.   Without that, since the State will meet its needs in one way or another, the burden of taxation will fall to land-holders.  Considering that the wants of government are never satisfied unless it is able to leverage all sources of revenue,  the country’s finances will not prosper in such a situation.   Thus we won’t even have the consolation of a full treasury in exchange for the oppression of the land-holders, the valuable farmers.  Instead public and private finances will both suffer in gloomy companionship, uniting in the their lament of the decision for disunion.

PUBLIUS
^1.If my memory be right they amount to twenty per cent.