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Alexander Hamilton: Star of the Musical and Father of U.S. Taxation

My wife recently introduced me to the Alexander Hamilton soundtrack, the Broadway musical featuring hip hop lyrics and cabinet debates played as mic-dropping rap battles among the founding fathers.  It is an entertaining summary of American history told through Hamilton’s life story.  Contrary to any reasonable expectation, it’s been at the top my playlist for a couple of weeks. 

The narrative revolves around Hamilton and Jefferson.  Hamilton is fundamentally a federalist who believed in a strong centralized government.  Jefferson, on the other hand, thought that too much authority risks an accumulation of power which could lead to tyranny.  Instead, he wanted a republic that vested authority to the states, with the states then ‘united’ under a federal agreement.  The federal government, in turn, would be primarily responsible for handling the states’ common interests.   

Despite the philosophical differences, both federalists and democratic republicans were students of the Enlightenment and believed that government is, at best, a necessary evil.  It’s fundamental purpose and sole justification is to protect the people’s liberty and property.  Too much tax and the government steals the fruits of labor from its citizens.

Federal revenue under the first Continental Congress was therefore little more than an appeal to the states for voluntary contributions.  It’s not surprising that this was unsuccessful. 

The first United States Congress then granted taxing and spending authority to Congress “for the common defense and general welfare of the United States”.  This vests spending control to the representative branch of government.  By controlling spending, it was argued, the representatives would control taxation. 

Hamilton agreed, as least in theory.  However, in his Report on Public Credit in 1790, Hamilton proposed a federal bank that would assume the state’s debts.  This required a financial system that simultaneously created and justified increasing government spending that could not be supported by tariff revenues alone. 

The Whiskey Tax was enacted in 1791 to raise the revenue needed to service the new national debt.  At the time, foreign sourced tariffs made up 95% of the federal receipts.  The Whiskey Tax was the first domestic tax and arguably the nation’s first income tax.  

Establishing the federal bank and levying the Whiskey Tax both irrevocably altered the American experiment.  Among other things, Hamilton called into being the devices that would eventually turn into our current tax system: collecting the Whiskey Tax created the forerunner to our current Internal Revenue Service; and today, the federal government collects 90% of its revenue internally through income tax and payroll tax. 

The Internal Revenue Code is hopelessly complex and taxes touch nearly every aspect of our lives.  It’s not surprising, then, when Americans are interested in the tax policies of our presidential candidates.  I’ll explain these in my next post. 

Next: Comparing the Candidates’ Tax Policies.

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