FEDERALIST 30–36: Federal Taxation 

Federalist 30: The Federal Government Must Be Well-Funded  

THE FEDERAL GOVERNMENT WILL POSSESS THE POWER of providing for the support of the national forces, and with it the obligation to make expenditures for raising troops, building and equipping fleets, and any other expense in any way connected with military arrangements and operations.

   The Federal taxing power must also embrace a provision for the support of the operation of the national civil list, the payment of the national debts contracted, and in general for all those matters which will call for disbursements out of the national treasury.  In one shape or another, a general power of taxation must be interwoven into the frame of the Federal government.

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If revenue is deficient, one of two evils must ensue: either the People must be subjected to continual plunder to supply the public wants, or the government must sink into a fatal atrophy and perish.

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Federal Sources of Revenue Are Essential

Money is the vital principle of the body politic. It sustains its life and motion, which in turn enables it to perform its most essential functions. Thus an indispensable ingredient in every constitution must be the complete power to procure a regular and adequate supply of money so far as the resources of the community will permit.  

If revenue is deficient, one of two evils must ensue: either the People must be subjected to continual plunder to supply the public wants, or the government must sink into a fatal atrophy and perish.

The first evil is visible in the Ottoman empire, based in Turkey, where the sovereign – though in other respects absolute master of the lives and fortunes of his subjects – has no right to impose a new tax. To fund the government, the sovereign permits the leaders of provinces to pillage the people without mercy, and then squeezes out of these leaders the sums he needs to satisfy his own exigencies and those of the state.  

Likewise in America, under the Articles of Confederation, the national government gradually dwindled into a state of decay and near annihilation. No one can doubt the happiness of the People in both countries would be promoted by competent authorities in the proper hands to secure the revenues which the necessities of the public might require. 

It is true that the national government existing prior to ratification of the Constitution possessed an unlimited power of providing for its pecuniary wants.  But that government proceeded on an erroneous principle that entirely frustrated this intention. Congress was authorized to ascertain and call for any sums of money it deemed necessary to the service of the United States. Its requisitions – if conformable to the rule of apportionment – were in every constitutional sense obligatory upon the States.  In addition, the States had no right to question the propriety of the demand.  But the States thereafter exercised discretion – contrary to the tenor of the Articles of Confederation – in devising the ways and means of furnishing the sums demanded. Although this discretion was almost never avowedly claimed, in practice it was constantly exercised.  The untoward consequences of this system caused mortification to ourselves and triumph to our enemies, as I explained in Federalist 15 through Federalist 22.  So long as the revenues of the Federal government depend on the intermediate agency of State governments, nothing would change.   

The only remedy was to replace the fallacious system of quotas and requisitions. The Federal government must be allowed to raise its own revenues by the ordinary methods of taxation authorized in every well-ordered constitution of civil government.  No human ingenuity can identify any other expedient to rescue us from the inconveniences and embarrassments naturally resulting from defective supplies to the public treasury.

Sources of Federal Revenue Must Be Both Internal and External 

The more intelligent adversaries of the new Constitution admit the force of this reasoning, but they qualify their admission by a distinction between what they call internal and external taxation. External taxation – duties on imported articles – would be conceded to the Federal government. The remaining taxing power – internal taxation – would repose with the individual State governments.  

The distinction between internal and external taxes violates the maxim of good sense and sound policy which dictates every power ought to be in proportion to its object. Limiting the Federal government to external taxation would leave it in a kind of tutelage to the State governments, and be inconsistent with every idea of vigor or efficiency. No one can pretend that commercial imposts would equal the present and future exigencies of the United States.  Taking into the account the existing foreign and domestic debt, as well as the Federal establishments – which everyone agrees are necessary – we cannot flatter ourselves that external taxes alone would even suffice the current Federal necessities. As future necessities of the Federal government admit not of calculation or limitation, the power of making provision for them as they arise must be equally unconfined, since the history of mankind establishes the necessities of a nation will normally equal or exceed its resources at every stage of its existence. 

Relying Only on External Taxes Gives States Excessive Control 

If we limit the revenue of the Federal government to external taxes only, we will necessarily require it to rely upon State governments for any shortfall. The Federal government would again depend upon the failed system of requisitions from State governments. The inevitable tendency of such an approach would enfeeble the United States and sow the seeds of discord and contention between the Federal and State governments, and between the States themselves. 

The proponents of limiting the Federal taxing power to external taxes presumably believe there is a point in the economy of national affairs where one could safely stop and say:  We have given the Federal government all it needs to supply its wants and thereby advance the public happiness of the People, and all beyond this is unworthy of our care or anxiety.  

But how can a government that is always half-supplied and necessitous fulfill its purposes of providing for the security, advancing the prosperity, and supporting the reputation of the United States?  Can it ever possess energy and stability, dignity and credit, or confidence at home and respectability abroad? Its administration would be nothing else than a succession of temporizing, impotent and disgraceful expedients. It would make a frequent sacrifice of its engagements to immediate necessity.  It could not undertake or execute any liberal or enlarged plans of public good.  

And what would happen to such a government when it became engaged in its first war?  Prior to hostilities, it is fair to assume its revenues – limited to impost duties – would be sufficient to keep current payments on the public debt and to maintain peace establishments.  We will next assume the government would have learned from experience the futility of requisitions from the States. If the Federal government is limited in its power to tax – and thus unable by its own authority to lay hold of fresh resources – would not the government, fueled by considerations of national danger, be driven to the expedient of diverting the funds already appropriated from their proper objects to the defense of the United States?  

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The Federal power of creating new funds upon new objects of taxation would enable the Federal government to borrow as far as its necessities might require.  

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It would be difficult to avoid a step of this kind. Once taken, it would prove the destruction of the public credit. One must be deluded to imagine that at such a crisis the nation could dispense with credit. It would be the extreme of infatuation.  In the modern system of war, even the wealthiest nations are obliged to have recourse to large loans. A smaller country must feel this necessity in a much stronger degree. But who would lend to a government that prefaced its overtures for borrowing with an act demonstrating the unsteadiness of its revenue stream for repayment? What loans it might be able to procure would be as limited in their extent as burdensome in their conditions? They would be made upon the same principles that usurers commonly lend to bankrupt and fraudulent debtors:  with a sparing hand but at enormous premiums.

Due to the presently limited resources of the United States, it might seem impossible to avoid diverting established funds in the case of war, notwithstanding the Federal government’s unrestrained power of taxation. But two considerations will serve to quiet all apprehension on this head. First, I am sure the full resources of the community will be brought into activity for the benefit of the United States.  Second, any deficiency can without difficulty be supplied by loans.

The Federal power of creating new funds upon new objects of taxation would enable the Federal government to borrow as far as its necessities might require.  Foreigners – as well as the citizens of the United States – could then reasonably repose confidence in its engagements.  But the situation would be reversed if the Federal government were dependent upon the State governments for the means to fulfill its contracts. To believe otherwise would require a degree of credulity not often found in the pecuniary transactions of mankind, and little reconcilable with the usual sharp-sightedness of avarice.

We Must Act on the Assumption that the United States Will Suffer Its Fair Share of Reversals

The preceding reflections may have trifling weight with individuals who hope to see realized in the United States the halcyon scenes of a poetic or fabulous age. But to those who believe we are likely to experience a common portion of the vicissitudes and calamities which have fallen to the lot of other nations, my reflections are entitled to serious attention.  We must behold the actual situation of their country with painful solicitude, and deprecate the evils which ambition or revenge might, with too much facility, inflict upon it.

Hamiltonoriginal Federalist 30