Federalist No. 35

In Federalist No 35, the sixth of seven essays on the topic of taxation, Hamilton argues that the federal government should not be limited to taxes on imports.  He also goes off on a bit of a tangent about who should be elected to the House of Representatives (the Constitution as proposed and first implemented, specified that the State legislatures were to appoint senators.)
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Concerning the General Power of Taxation (continued)

To the People of the State of New York:

BEFORE we proceed to examine any other objections to an indefinite power of taxation in the Union, I shall make one general remark; which is, that if the jurisdiction of the national government, in the article of revenue, should be restricted to particular objects, it would naturally occasion an undue proportion of the public burdens to fall upon those objects. Two evils would spring from this source: the oppression of particular branches of industry; and an unequal distribution of the taxes, as well among the several States as among the citizens of the same State.

Before we look at other objections to providing an indefinite power of taxation, I have one general observation to make.  If the jurisdiction of the national government, with respect to revenue, were to be restricted only to particular things, this would result in an undue proportion of the public obligation on those things.  This has the effect of creating two problems, it causes the oppression of particular branches of industry and the unequal distribution of taxes on not only the Several States but even between the citizens of the same State.

Suppose, as has been contended for, the federal power of taxation were to be confined to duties on imports, it is evident that the government, for want of being able to command other resources, would frequently be tempted to extend these duties to an injurious excess. There are persons who imagine that they can never be carried to too great a length; since the higher they are, the more it is alleged they will tend to discourage an extravagant consumption, to produce a favorable balance of trade, and to promote domestic manufactures. But all extremes are pernicious in various ways. Exorbitant duties on imported articles would beget a general spirit of smuggling; which is always prejudicial to the fair trader, and eventually to the revenue itself: they tend to render other classes of the community tributary, in an improper degree, to the manufacturing classes, to whom they give a premature monopoly of the markets; they sometimes force industry out of its more natural channels into others in which it flows with less advantage; and in the last place, they oppress the merchant, who is often obliged to pay them himself without any retribution from the consumer. When the demand is equal to the quantity of goods at market, the consumer generally pays the duty; but when the markets happen to be overstocked, a great proportion falls upon the merchant, and sometimes not only exhausts his profits, but breaks in upon his capital. I am apt to think that a division of the duty, between the seller and the buyer, more often happens than is commonly imagined. It is not always possible to raise the price of a commodity in exact proportion to every additional imposition laid upon it. The merchant, especially in a country of small commercial capital, is often under a necessity of keeping prices down in order to a more expeditious sale.

Some have argued that the federal power of taxation should be limited to duties on imports.  Were that to be the case, it’s obvious that in not having access to other resources, the government would be sorely tempted to extend these duties to an injurious excess.  Some people claim that import duties can never be too high, since the higher they are, the more they supposedly help discourage extravagant production, and promote a favorable balance of trade for domestic manufacturers.  But all extremes are harmful in various ways.  Placing exorbitant duties on imports would encourage smuggling, which always puts fair trade at a disadvantage, and has a harmful effect on revenue.  Additionally, high duties give unfair advantage and create class distinctions between manufacturers and customers by giving the former an unearned monopoly of the markets.  This situation sometimes causes industries to concentrate in areas for which they are naturally less suited.   Finally, high duties often oppress the poor merchant who is forced to pay them without passing them on to his customer because the market will not bear the increase in the final price.   When supply and demand are balanced, the consumer generally pays the duty.  but when supply exceeds demand, the merchant ends up paying the bulk of the duty, cutting in on not only his profits, but frequently on his very capital.  I believe that this situation occurs more often than one might think, with the seller bearing the brunt of the burden.  Merchants, especially in a country of small commercial capital, are often forced to keep prices down in order to make sales and convert inventory back to dollars.

The maxim that the consumer is the payer, is so much oftener true than the reverse of the proposition, that it is far more equitable that the duties on imports should go into a common stock, than that they should redound to the exclusive benefit of the importing States. But it is not so generally true as to render it equitable, that those duties should form the only national fund. When they are paid by the merchant they operate as an additional tax upon the importing State, whose citizens pay their proportion of them in the character of consumers. In this view they are productive of inequality among the States; which inequality would be increased with the increased extent of the duties. The confinement of the national revenues to this species of imposts would be attended with inequality, from a different cause, between the manufacturing and the non-manufacturing States. The States which can go farthest towards the supply of their own wants, by their own manufactures, will not, according to their numbers or wealth, consume so great a proportion of imported articles as those States which are not in the same favorable situation. They would not, therefore, in this mode alone contribute to the public treasury in a ratio to their abilities. To make them do this it is necessary that recourse be had to excises, the proper objects of which are particular kinds of manufactures. New York is more deeply interested in these considerations than such of her citizens as contend for limiting the power of the Union to external taxation may be aware of. New York is an importing State, and is not likely speedily to be, to any great extent, a manufacturing State. She would, of course, suffer in a double light from restraining the jurisdiction of the Union to commercial imposts.

It is largely true that the consumer foots the bill for import duties, and that it is only reasonable therefore, that duties on imports should go into federal coffers, rather than State ones.  However, that fact does not imply that this should be the only form of revenue available to the federal government.  When the merchant pays his taxes, they assume the character of a tax upon the consumers buying his goods.  Those consumers do the actual paying of their portion on behalf of the States in which they reside.  This results in an imbalance which will only be magnified as duties proliferate.  Limiting national revenue to this form of taxation increases the imbalance between manufacturing and non-manufacturing States.  States which are able to produce more goods to supply their own wants will consume fewer imports than States which are unable to do so.  In a system reliant solely on import duties for revenue, these States would not contribute their fair share to the national treasury.  In order to ensure that they do contribute their just portion, it would be necessary to extend revenue to excise taxes to certain forms of manufacturing as well.  New York would be affected by this more than some of her citizens realize.  These very citizens of whom I speak argue for limiting the power of the union to import taxes only.  New York is a net importer, and would consequently suffer a great deal as she is unlikely to become a manufacturing State any time soon.

So far as these observations tend to inculcate a danger of the import duties being extended to an injurious extreme it may be observed, conformably to a remark made in another part of these papers, that the interest of the revenue itself would be a sufficient guard against such an extreme. I readily admit that this would be the case, as long as other resources were open; but if the avenues to them were closed, HOPE, stimulated by necessity, would beget experiments, fortified by rigorous precautions and additional penalties, which, for a time, would have the intended effect, till there had been leisure to contrive expedients to elude these new precautions. The first success would be apt to inspire false opinions, which it might require a long course of subsequent experience to correct. Necessity, especially in politics, often occasions false hopes, false reasonings, and a system of measures correspondingly erroneous. But even if this supposed excess should not be a consequence of the limitation of the federal power of taxation, the inequalities spoken of would still ensue, though not in the same degree, from the other causes that have been noticed. Let us now return to the examination of objections.

In as much as these observations point to the danger of import duties being extended to unreasonable extremes, we refer to something stated in an earlier essay – if duties get too high it is counter productive to gathering revenue as people stop buying the taxed goods.  Thus, there is an implicit check on this potentiality.    But this check only works if there are other means of gathering revenues.  If not, then necessity would prevail.  In HOPE of raising sufficient revenue, the tax-code would be subject to more and more experiment and new penalties would be invented.  For a short time they would have the desired effect, but only until people figured out ways to get around these precautions.  This would in turn, foster new measures, based on false assumptions, which would require a lot of hard-won experience to recover from.   But, even if such excesses in import duty policy did not transpire as a result of limiting revenue to this form of taxation, the inequality referred to above would still happen, although perhaps not the same degree as from other causes.  Let us now return to the examination of objections.

One which, if we may judge from the frequency of its repetition, seems most to be relied on, is, that the House of Representatives is not sufficiently numerous for the reception of all the different classes of citizens, in order to combine the interests and feelings of every part of the community, and to produce a due sympathy between the representative body and its constituents. This argument presents itself under a very specious and seducing form; and is well calculated to lay hold of the prejudices of those to whom it is addressed. But when we come to dissect it with attention, it will appear to be made up of nothing but fair-sounding words. The object it seems to aim at is, in the first place, impracticable, and in the sense in which it is contended for, is unnecessary. I reserve for another place the discussion of the question which relates to the sufficiency of the representative body in respect to numbers, and shall content myself with examining here the particular use which has been made of a contrary supposition, in reference to the immediate subject of our inquiries.

Perhaps the most significant of these objections, if judging by how often it is repeated, is that the House of Representatives will not be able to adequately represent the interests and feelings of every part of the community.  It is claimed that the House is simply too small to represent all of its constituents.  This argument is as seductive as it is specious.  It is calculated to appeal to the prejudices of those to whom it is addressed.  But, if we disassemble the argument, we will find that is merely a collection of fine-sounding words with no substance.  The goal it espouses is impractical, and what’s more, unnecessary.  For now, I will set aside for later address, the portion of the argument that pertains to the effectiveness vis a vis the relative size of the representative body.  Here I will examine how this contrary supposition is applied to the subject of taxation.

The idea of an actual representation of all classes of the people, by persons of each class, is altogether visionary. Unless it were expressly provided in the Constitution, that each different occupation should send one or more members, the thing would never take place in practice. Mechanics and manufacturers will always be inclined, with few exceptions, to give their votes to merchants, in preference to persons of their own professions or trades. Those discerning citizens are well aware that the mechanic and manufacturing arts furnish the materials of mercantile enterprise and industry. Many of them, indeed, are immediately connected with the operations of commerce. They know that the merchant is their natural patron and friend; and they are aware, that however great the confidence they may justly feel in their own good sense, their interests can be more effectually promoted by the merchant than by themselves. They are sensible that their habits in life have not been such as to give them those acquired endowments, without which, in a deliberative assembly, the greatest natural abilities are for the most part useless; and that the influence and weight, and superior acquirements of the merchants render them more equal to a contest with any spirit which might happen to infuse itself into the public councils, unfriendly to the manufacturing and trading interests. These considerations, and many others that might be mentioned prove, and experience confirms it, that artisans and manufacturers will commonly be disposed to bestow their votes upon merchants and those whom they recommend. We must therefore consider merchants as the natural representatives of all these classes of the community.

The idea that all classes of people would be represented by persons of their class is a panacea.  Unless the Constitution specified that each occupation should send one or more members for representation, the thing would never take place in practice.  Factory workers and tradesmen will always be inclined, with few exceptions, to give their votes to merchants, rather than to member of their professions or trades.  These discerning citizens well-know that the skills of workers and tradesmen furnish the materials of mercantile enterprise and industry. Many of them are directly involved in commerce.  They know where their bread is buttered.  They know that their interests will be better promoted by the merchant than by themselves.  They know that their life experience has not given them the abilities needed to work effectively in a deliberative assembly.  Their skills are useless in this realm.  Whereas those of the merchant are better suited for legislative combat with those who oppose the interests of manufacturing and trade.   These considerations, and many others which history and experience confirm, prove that tradesmen and factory workers will generally be inclined to give their votes to merchants and those who merchants recommend.  We must therefore consider merchants as the natural representatives of all these classes of the community.
With regard to the learned professions, little need be observed; they truly form no distinct interest in society, and according to their situation and talents, will be indiscriminately the objects of the confidence and choice of each other, and of other parts of the community.
We don’t need to say much about the learned professions. They do not have distinct interests in society.  They will, according to their situation and talents, choose representation from amongst themselves and other parts of the community.

Nothing remains but the landed interest; and this, in a political view, and particularly in relation to taxes, I take to be perfectly united, from the wealthiest landlord down to the poorest tenant. No tax can be laid on land which will not affect the proprietor of millions of acres as well as the proprietor of a single acre. Every landholder will therefore have a common interest to keep the taxes on land as low as possible; and common interest may always be reckoned upon as the surest bond of sympathy. But if we even could suppose a distinction of interest between the opulent landholder and the middling farmer, what reason is there to conclude, that the first would stand a better chance of being deputed to the national legislature than the last? If we take fact as our guide, and look into our own senate and assembly, we shall find that moderate proprietors of land prevail in both; nor is this less the case in the senate, which consists of a smaller number, than in the assembly, which is composed of a greater number. Where the qualifications of the electors are the same, whether they have to choose a small or a large number, their votes will fall upon those in whom they have most confidence; whether these happen to be men of large fortunes, or of moderate property, or of no property at all.

This leaves us with landed interests.  Politically speaking this group is completely unified from the wealthiest landlord to the poorest tenant.  No tax can be laid on land which will not affect the proprietor of millions of acres as well as the proprietor of a single acre.  It is in the best interest of every landholder to keep taxes on land as low as possible.  This common interest may be considered the surest bond of sympathy between members of this group.  But suppose we imagine that there is a difference between the largest landholder and the middling farmer?  Why would we think that the first would have a better chance of being elected to the national legislature than the last?  If we base our analysis on fact, we have only to look at the NY senate and assembly.  Moderate proprietors of land prevail in both.  The senate is just as broadly represented as the assembly – which has more members.  Qualifications are what matter.   Regardless of the size of the legislature, votes will fall to those in whom there is the most confidence, whether they are men of large fortune, moderate property, or men of no property at all.

It is said to be necessary, that all classes of citizens should have some of their own number in the representative body, in order that their feelings and interests may be the better understood and attended to. But we have seen that this will never happen under any arrangement that leaves the votes of the people free. Where this is the case, the representative body, with too few exceptions to have any influence on the spirit of the government, will be composed of landholders, merchants, and men of the learned professions. But where is the danger that the interests and feelings of the different classes of citizens will not be understood or attended to by these three descriptions of men? Will not the landholder know and feel whatever will promote or insure the interest of landed property? And will he not, from his own interest in that species of property, be sufficiently prone to resist every attempt to prejudice or encumber it? Will not the merchant understand and be disposed to cultivate, as far as may be proper, the interests of the mechanic and manufacturing arts, to which his commerce is so nearly allied? Will not the man of the learned profession, who will feel a neutrality to the rivalships between the different branches of industry, be likely to prove an impartial arbiter between them, ready to promote either, so far as it shall appear to him conducive to the general interests of the society?

Some say that it is necessary that all the classes of citizens should have some of their own number in the representative body, in order that their feelings and interests may be the better understood and attended to.  But we know that this can never happen in a society where people are free to vote for whom they choose.  Where freedom prevails, the representative body is mostly comprised of landholders, merchants, and men of the learned professions.  Where is the danger in this, that the interests and feelings of the different classes of citizens won’t be adequately considered by such representatives?  Won’t the landholder relate to the interests of landed property?  Won’t he seek to protect its interests?  Won’t the merchant be disposed to look after the interests of the worker and tradesmen, whose interests are so intrinsically tied to his own?  Won’t the man of the learned profession, naturally neutral to the interests of the various branches of industry, be likely to prove an impartial arbiter between them on behalf of society as a whole?

If we take into the account the momentary humors or dispositions which may happen to prevail in particular parts of the society, and to which a wise administration will never be inattentive, is the man whose situation leads to extensive inquiry and information less likely to be a competent judge of their nature, extent, and foundation than one whose observation does not travel beyond the circle of his neighbors and acquaintances? Is it not natural that a man who is a candidate for the favor of the people, and who is dependent on the suffrages of his fellow-citizens for the continuance of his public honors, should take care to inform himself of their dispositions and inclinations, and should be willing to allow them their proper degree of influence upon his conduct? This dependence, and the necessity of being bound himself, and his posterity, by the laws to which he gives his assent, are the true, and they are the strong chords of sympathy between the representative and the constituent.

If we take into account the temporary issues of the moment – issues to which a wise administration will not be inattentive – we must ask ourselves who is best suited to be a competent judge of their significance.  Is the man who’s education and situation permit him to gather information and think upon it, not better suited for the legislature than one who’s circle does not extend beyond his neighbors and acquaintances?  Is it not in the best interests of those running for the House to inform themselves about the dispositions and inclinations of those to whom he is dependent for election?  Will he not allow them the proper degree of influence on his conduct?  This dependence, and the fact that he and his offspring will have to live under the laws he passes, ensures that there is a strong tie between the representative and the constituent.

There is no part of the administration of government that requires extensive information and a thorough knowledge of the principles of political economy, so much as the business of taxation. The man who understands those principles best will be least likely to resort to oppressive expedients, or sacrifice any particular class of citizens to the procurement of revenue. It might be demonstrated that the most productive system of finance will always be the least burdensome. There can be no doubt that in order to a judicious exercise of the power of taxation, it is necessary that the person in whose hands it should be acquainted with the general genius, habits, and modes of thinking of the people at large, and with the resources of the country. And this is all that can be reasonably meant by a knowledge of the interests and feelings of the people. In any other sense the proposition has either no meaning, or an absurd one. And in that sense let every considerate citizen judge for himself where the requisite qualification is most likely to be found.

Taxation is the most complex aspect of government.  The man who understands those principles best will be least likely to resort to oppressive expedients, or sacrifice any particular class of citizens to the procurement of revenue.   It is a provable fact that the most productive system of taxation will always be the last burdensome.  The person responsible for imposing taxes has to understand the situation of the people at large and the state of the country’s resources.  This is all that can be reasonably meant by the phrase “a knowledge of the interests and feelings of the people.”  In any other sense, the phrase is meaningless.  In this sense, then, let every thinking citizen decide for himself where the requisite qualification is most likely to be found.

PUBLIUS