by Ray Raphael
Who, then, did pay for the Revolutionary War? Apart from France, our helpful ally, and Dutch bankers willing to invest in American securities, farmers and others who sold supplies to the government bore the war’s expense, although they did so unwittingly and indirectly. During the war years, suppliers had accepted Continental currency in exchange for goods and services, but when that currency lost the lion’s share of its value, they had little hope of recompense. The losses, therefore, were distributed through the population as suppliers spent the depreciating money. As Benjamin Franklin commented wryly in 1779, “This currency, as we manage it, is a wonderful machine. It performs its office when we issue it; it pays and clothes troops, and provides victuals and ammunition; and when we are obliged to issue a quantity excessive, it pays itself off by depreciation.”8
Although paper currency did finance the war effort for the first few years, running a nation with a continually depreciating currency was hardly sustainable. By 1781 nobody accepted Congress’s paper in payment, suppliers refused to offer goods on credit, and investors shied from lending more funds. The army faced severe shortages of food and military wares. Congress told states to send supplies if they couldn’t send money, but the returns were minimal. Meanwhile, soldiers threatened to return to their homes if they didn’t get paid.
Flat broke, Congress urged the merchant-prince Robert Morris, reputedly the wealthiest man in America, to assume a newly created office, superintendent of finance. His assigned task was to shore up the nation’s credit rating. “The Financier,” as Morris was called, accepted the position in exchange for unprecedented powers: he could fire government employees at will, import or export goods on the nation’s tab, and deal directly with foreign ministers, thereby running his own department of foreign affairs. Embracing the role, Morris created a national bank empowered to issue bills of credit, and beyond that, he offered his own personal credit, which was solid, to back the nation’s credit, which had collapsed. He countersigned government notes, called “Morris Notes,” which the public was willing to accept. People might not trust Congress, but they knew that Robert Morris would make good on his word.
These stopgap measures, however, were all “in anticipation of taxes,” Morris informed Congress and the public. “It is possible the public credit might be restored,” he said, but only if the states granted Congress authority to raise its own money. The problem, though, was that the Articles of Confederation prohibited Congress from levying taxes, and all thirteen states had to ratify any amendment revising that ban. In 1781, when Congress tried to amend the Articles to permit a 5 percent impost on imported goods, most states agreed, but tiny Rhode Island, a commercial state that preferred to levy its own imposts, refused. Two years later, in 1783, Congress tried again to amend the Articles of Confederation in order to levy an impost, and this time New York, another commercial state that taxed goods coming into its port, would not go along with the program except under conditions that Congress found unacceptable. The failure to grant Congress the power of taxation, Morris contended, would convince the nation’s enemies “that we are unworthy of confidence” and “that our Union is a rope of sand.”9
Unable to tax, Congress had to send requisitions to each state to pay its proportional share first of the war’s expenses and then, after the fighting was over, of the accumulated wartime debt. The states responded unevenly and with diminishing payments. They came through with two-thirds of the requisitions of October 1781 and April 1784 but only one-third of the September 1782 requisition and one-fifth of the amount Congress requested in September 1785.
Those were the good times. After that, with a recession in full swing and memories of the war fading, the states lost the ability and the incentive to make good on the public debt. New Jersey and Connecticut announced boldly that they would not pay. (New Jersey later rescinded its defiant stance, but it still didn’t offer any payment.) In February 1786, a committee of Congress bemoaned the lack of compliance: “The requisitions of Congress, for eight years past, have been so irregular in their operation, so uncertain in their collection, and so evidently unproductive, that a reliance on them in future as a source from whence moneys are to be drawn to discharge the engagements of the Confederacy … would be dangerous to the welfare and peace of the Union.” If this was meant to instill fear and generate compliance, it failed. The August 1786 requisition generated a mere 2 percent return. From October 1786 through March 1787, the states turned over a grand total of $663 to the federal treasury to keep the Confederacy afloat. To use a modern idiom, the federal government, such as it was, had been shrunk to the size where it could drown in a bathtub.10
James Madison, among many others, thought he saw the handwriting on the wall. Unless the system of public finance was radically altered, “the United States, in Congress assembled” would soon go under, just as Robert Morris had predicted it would. In April 1787, when Madison compiled a memorandum listing the “Vices of the Political System of the United States,” his very first item addressed the heart of the problem: “1. Failure of the States to comply with the Constitutional requisition.” He elaborated: “This evil has been so fully experienced both during the war and since the peace, results so naturally from the number and independent authority of the States, and has been so uniformly exemplified in every similar Confederacy, that it may be considered … fatal to the object of the present system.”11
What was to be done? That’s what the delegates to the Federal Convention in Philadelphia had to figure out. They all wanted to authorize Congress to raise its own funds by levying imposts—that was a major reason they were there—but they disagreed on two overlapping issues. Should federal taxes be exclusively indirect (imposts and excises), or could they also be direct (poll and property taxes)? And if direct taxes were permitted, before they went into effect, should Congress give the states the opportunity to come up with the money themselves?12
The delegates resolved both issues. On July 3, when Roger Sherman suggested that Congress be granted “the power of levying taxes on trade, but not the power of direct taxation,” he was voted down, two states to eight. Direct taxes would be permitted. And on August 21, when Luther Martin moved that Congress not be allowed to collect taxes from citizens unless the states had tried to do so but failed, he too was voted down, one state to eight with one divided. Congress could bypass the states by levying its own taxes, whether direct or indirect, on individuals and their economic activities.
Overwhelmingly, the framers determined not to limit Congress’s ability to raise funds any more than was necessary. In the final draft of the Constitution, when listing congressional powers in the first clause of Article I, Section 8, they started with the most basic one, without which all else would be meaningless: “The Congress shall have Power To lay and Collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties and Imposts and Excises shall be uniform throughout the United States.” Here, the generic term “taxes” neither included nor excluded direct taxation. The fourth clause of Article I, Section 9, clarified that point: “No Capitation [poll], or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” This revealed that taxes on individuals (capitation or poll taxes) and other direct taxes (the most common being on land) were to be included in Congress’s revenue-raising arsenal, but only if they were apportioned among the states according to population—a stipulation that would prove unworkable and be overturned in 1913 by the Sixteenth Amendment, as shown below.
The framers did build two other qualifications into the Constitution. As stated in the first clause of Section 8, they insisted on keeping taxes “uniform” from state to state and from region to region. Some delegates worried that Congress might impose property taxes on slaves, for instance, which would burden the South more than the North. Also, in the fifth clause of Article I, Section 9, they declared, “No Tax or Duty sh
all be laid on Articles exported from any State.” Again, their intention was to prevent taxes from falling unduly on one region; a federal export tax on tobacco, for instance, would affect Virginians but not New Englanders.
Beyond these caveats intended to ensure regional fairness, the framers gave Congress broad powers to tax as it saw fit. Although they assumed that Congress would prefer import taxes, the least intrusive means of raising revenue, they refused to place other measures off limits. The best way to put the new government on a firm financial footing was to grant Congress across-the-board powers of taxation, and they did so.
But would the public buy it?
Many Americans, perhaps most, did not. Capitalizing on the antitax sentiment that had triggered the Revolution, opponents of the Constitution painted horrific images of tax collectors fanning out across the land, commanding citizens to relinquish some of their treasure. These were the types of intrusions people could expect from a large, centralized government, critics warned. They had no problem with import duties that could be collected at a handful of seaports, but giving Congress the authority to tax as it pleased was simply too risky, they contended. They worried, too, that congressional taxing power would preempt or even preclude state taxing power, and without revenue state governments would wither.
The issue was hotly contested in the first major state to vote on ratification, Pennsylvania. Although supporters of the Constitution, calling themselves Federalists, prevailed at the state convention, opponents, who became known against their will as Anti-Federalists, issued a scathing dissent that highlighted Congress’s sweeping powers of taxation. “By virtue of their power of taxation, Congress may command the whole, or any part of the property of the people,” the dissenters wrote. “They may impose what imposts upon commerce; they may impose what land taxes, poll taxes, excises, duties of all written instruments, and duties on every other article that they may judge proper; in short, every species of taxation.” To remedy this, they proposed an amendment that would have restricted national taxation to imposts, duties, and postage on letters. Although the ratifying convention rejected the dissenters’ list of amendments, the naysaying delegates published their amendments, complete with explanatory statements, and circulated them widely throughout the nation.13
Resistance to federal powers of taxation continued at the Massachusetts ratifying convention, which officially proposed a different yet related amendment to the Constitution. Congress still would be able to levy direct taxes, the amendment said, but only after “the moneys arising from the impost and excise” proved “insufficient for the public exigencies.” After that, Congress would have to requisition the states, asking them to come up with their apportioned quotas “in such way and manner as the legislatures of the states shall think best.” Only if imposts proved insufficient and states did not come through with some or all of their requisitions could Congress “assess and levy” direct taxes to make up the difference. This amendment, as contorted as it was, served as a model for other states. Subsequently, all six ratification conventions that suggested amendments included tax overhauls similar to that of Massachusetts. On the ground, the vote was in: Congress should levy taxes only as a last resort.14
Federalist leaders like Madison believed that this multistep process was seriously flawed. No potential lender would trust such a time-consuming and unwieldy system to produce revenue. On paper, the proposed amendments did not strip Congress of any real power, since in the end it still could levy the taxes it needed. In real life, though, the national government once again would have to beg from the states, and if the states failed to come through, as appeared likely judging from past experience, much time would elapse before funds were raised. This was no way to run a government.
At the Virginia ratifying convention, Madison noted correctly that “the issue of direct taxation is most generally objected to,” but he insisted that taxes were the key to a strong and energetic government. The Constitution’s opponents countered that direct national taxation would lead inevitably to a government that was too strong and energetic. Patrick Henry led the crusade with flaming oratory. “Must I give my soul—my lungs—to Congress?” he demanded. “What powerful check is there here to prevent the most extravagant and profligate squandering of the public money?” To bring his argument home, Henry got more graphic yet:
In this scheme of energetic government, the people will find two sets of tax-gatherers—the state and the federal sheriffs. This, it seems to me, will produce such dreadful oppression as the people cannot possibly bear. The federal sheriff may commit what oppression, make what distresses, he pleases, and ruin you with impunity; for how are you to tie his hands? Have you any sufficiently decided means of preventing him from sucking your blood by speculations, commissions, and fees? Thus thousands of your people will be most shamefully robbed.15
Less flamboyantly, but perhaps more persuasively, George Mason read aloud Robert Morris’s proposal for national taxation: “six shillings on every hundred acres of land, six shillings per poll, and ninepence per gallon on all spirituous liquors distilled in the country.” Such taxes would be manifestly unjust, Mason contended. An acre of land near Philadelphia or Boston might be worth one hundred pounds, compared with twenty shillings for an acre in Virginia—yet both landowners would be forced to pay the same amount in taxes. The poll tax was even more “grievous” because “it falls light on the rich and heavy on the poor.” Virginia’s poll tax was so “generally disliked in this state,” Mason said, “that we were obliged to abolish it last year.” The liquor tax, meanwhile, would “carry the exciseman to every farmer’s house, who distils a little brandy, where he may search and ransack as he pleases.” Such injustices would be inevitable if taxes were levied by “a government where the representatives will have no communication with the people.” That is why Mason proposed an amendment similar to the one passed in Massachusetts, requiring Congress to requisition the states before passing any direct taxes. State governments, being closer to the people, were in a better position to tax fairly.16
Governor Edmund Randolph of Virginia, who had refused to sign the Constitution at the convention but who now supported it, argued vigorously on the other side. “Money is the nerve—the life and soul of a government,” he began. “It is the utmost folly to say that a government could be carried on without this great agent of human affairs. Wars cannot be carried on without a full and uncontrolled discretionary power to raise money in an eligible manner.” If the United States were suddenly attacked, where could Congress get the money to defend America? It would have to “divert the revenues, from the usual appropriations, to the defence of the Union,” and that would destroy whatever remained of the public credit. “The interest on the public debt could not be paid; foreign and domestic creditors would be disappointed and irritated; and the displeasure of the former might lead to the most serious consequences. What could the general government do, in such a situation, without the power of providing money by taxation?” Granting Congress sweeping powers of immediate taxation was therefore necessary for national security, the foundation of liberty. Withholding or even delaying Congress’s power to tax, Randolph concluded, would be “laying a train [of gunpowder] by which liberty is to be blown up.”17
In the end, both sides of the Virginia debate got some of what they wanted. Henry, Mason, and their allies convinced the ratifying convention to approve a twenty-item “declaration of rights” that included the principle of no taxation without representation: “No aid, charge, tax, or fee, can be set, rated, or levied, upon the people without their own consent, or that of their representatives.” In addition, among the twenty amendments it proposed for the body of the Constitution was this: “When Congress shall lay direct taxes or excises, they shall immediately inform the Executive power of each State of the quota of such state according to the Census herein directed, which is proposed to be thereby raised; And if the Legislature of any State shall pass a law which shall be effectual for raising suc
h quota at the time required by Congress, the taxes and excises laid by Congress shall not be collected, in such State.” The convention had spoken; these were the delegates’ wishes.18
But they were wishes only, for the ratifying convention had no power to make any actual changes in the Constitution. Randolph, Madison, and their backers might have lost the battle over proposed amendments, but they won the war over ratification. The Virginia convention voted to approve the new Constitution by 89 to 79—and it was the tenth state to do so, one over the required minimum of nine. The Constitution would take effect, no matter what its critics did. Henceforth, Congress would possess the authority to levy whatever taxes it pleased, direct or indirect, except direct taxes not apportioned according to the census or taxes on exports. That was “the supreme Law of the Land,” as the Constitution declared unequivocally in Article VI.
The hopes of the Constitution’s opponents did not end there, however. In addition to the amendments that would qualify national powers of taxation, state ratifying conventions had proposed a variety of other amendments, and they pushed for a second constitutional convention to consider them. James Madison, though, feared that such a convention might undermine key features of the Constitution, including Congress’s broad powers of taxation, and with the blessing of President George Washington he introduced in the First Federal Congress a list of amendments that presented no real threat to the structure of the Constitution. Madison reasoned that his amendments, which evolved into what we now call the Bill of Rights, would quell the movement for a full convention (see chapter 7).