Andrii Yalanskyi/Shutterstock
Posted on 01/31/2025 5:09:05 PM PST by SeekAndFind
There was a time, before 1913, when you could keep every penny you earned. You did not have to file with the federal government, telling them what you earned and giving the feds their cut. Your finances were your business and no one else’s. You had the right to earn, own, and keep property, and it was sacrosanct, guaranteed by U.S. law and tradition.
Andrii Yalanskyi/Shutterstock
There were no audits, investigations, account freezes, withholdings, or any other forms of payment. There was your productivity and you and that’s all.
How was the government funded? It earned revenue through tariffs. These are paid directly by importers and indirectly by producers and consumers if the costs can be passed through. As strategies for gaining revenue, this approach is relatively noninvasive. It left the population alone.
Back in those days, however, the federal government barely existed as compared with today. More precisely, in real terms, the federal government in 1885 spent in inflation-adjusted dollars about 0.05 percent of what it spends today. Even then, people believed that it was too big and wanted it cut back to size.
Donald Trump has recently been schooling people in the history of revenue strategies and he is teaching something that people have not known. He has explained how this period of American history saw the greatest amount of economic growth we’ve ever seen. He is correct about that and he is also correct that this was the period of the tariff.
The cause and effect, however, is murky. The main themes of this period were freedom and sound money. The dollar was governed by the gold standard and there was no central bank. The federal government itself had no presence in the life of the American family or typical American business. Those facts more than tariffs account for the difference between then and now.
As an aside, I cannot remember another U.S. president having as clear an opinion on 19th-century economic history. Most comments by presidents have been limited to pieties about the Founding Fathers or Lincoln but skip over details concerning revenue sources or controversies concerning national banks and the like. Trump is clearly different, highly confident in these details of history that are lost even on most economists.
Trump has explained that the income tax came along in 1913 as a replacement for the tariff. That is correct in design but the historical reality was slightly different. Tariffs were not abolished entirely. The income tax just became a second and additional source of revenue. Then the Great War came, financed in large part by the central bank (the Federal Reserve) that was created the same year.
The income tax and the Fed became the financial source of Leviathan power. Both came about in 1913, along with the direct election of Senators that blew up the bicameral structure of Congress and put the big cities in charge of America’s equivalent of the House of Lords.
Trump’s history lesson opens up the opportunity to examine all of this more closely. In 19th-century terms, he seems to be siding with the Hamilton faction inherited by Henry Clay, the Senator from Virginia who advocated what came to be called “the American System.” This was a policy of protective tariffs, a national bank, and federal subsidies for internal improvements to promote economic growth and national cohesion.
That’s a pretty good summary of what seems to be Trump’s position. In historical terms, the Clay view contrasted with the Jeffersonian view, which favored a tiny government, free trade, no national bank, no industrial subsidies, and a society of small farmers to serve as the economic engine.
These days, the debates between the Jeffersonians and Hamiltonians seem far less relevant to the current situation. Both Hamilton and Clay would be appalled by the size and scope of government power, and would happily link arms with Jefferson and John Randolph of Roanoke to cut the beast down to size. That seems to be the actual ambition of Trump, to be an agent of change that makes the federal government manageable again.
As part of this, Trump has floated the idea of abolishing the income tax. And all the people said: yes! But of course that would end in denying vast amounts of revenue to the federal government. No matter how you do the math, there is simply no way that the tariff can make up the difference. The only solution, then, is massive cuts in government spending, which people like Elon Musk have promised but we are waiting to see the plans.
Again, the last time government was funded entirely by tariffs, government spending was a mere 0.05 percent of what it is today. If we are going to cut it back that much, fantastic, but nothing like that has happened in American history, nothing even close to that. Usually what Washington calls cuts are really just cuts in the rate of increase of spending.
Without real cuts, and with a curbing or elimination of the income tax, the United States merely ends up with more debt that will be financed by the Federal Reserve and that results in more inflation. Inflation is nothing but a different and more surreptitious form of taxation. Instead of taking money out of your bank account directly, government simply reduces the purchasing power of the dollar itself.
Let’s return to this idea of abolishing the income tax. The best case for that idea ever made was written by a great journalist named Frank Chodorov (1887–1966) and his wonderful book “The Income Tax: Root of All Evil.” He wrote about the 16th Amendment to the Constitution:
“[It] puts no limit on governmental confiscation. The government can, under the law, take everything the citizen earns, even to the extent of depriving him of all above mere subsistence, which it must allow him in order that he may produce something to be confiscated. Whichever way you turn this amendment, you come up with the fact that it gives the government a prior lien on all the property produced by its subjects. In short, when this amendment became part of the Constitution, in 1913, the absolute right of property in the United States was violated.”
Further: “In name, it was a tax reform. In point of fact, it was a revolution. For the Sixteenth Amendment corroded the American concept of natural rights; ultimately reduced the American citizen to a status of subject, so much so that he is not aware of it; enhanced Executive power to the point of reducing Congress to innocuity; and enabled the central government to bribe the states, once independent units, into subservience. No kingship in the history of the world ever exercised more power than our Presidency, or had more of the people’s wealth at its disposal. We have retained the forms and phrases of a republic, but in reality we are living under an oligarchy, not of courtesans, but of bureaucrats.”
The abolition of the income tax would restore property rights, restore rights to enterprise, and restore the privacy of American citizens not to be spied on and pillaged by arbitrary government power.
The constituency that would favor such a thing in America is practically everyone. Why, then, has no president ever promoted such an idea? Precisely because doing so is incredibly enlightening and consciousness-raising. It forces the realization on the part of the American people that the government is living at their expense. For any political establishment, lording over a population that is newly aware of this is a dangerous proposition.
There is no getting around the math. If we really are talking about getting rid of income taxes, there is no tariff high enough to make up the difference. There is no choice but to cut spending dramatically. The budget freeze, the freeze on new hires, the freeze on outgoing grants—all of this point in the right direction. We cannot rule out the possibility that the Trump administration will take us to where we need to go.
One of the worst things President Roosevelt did was re-invigorating the popularity of progressive taxation using his Bully Pulpit during his time as President from 1900-1908
Then he sent his henchman veep Taft out there to get it done. We didn’t stand a chance.
It would be lower if spending were cut wouldn’t you say?
RE: It would be lower if spending were cut wouldn’t you say?
That’s in the article.
It is NOT a one-for one economic trade-off. Any calculations from this this point are vaporous. Trump, himself likely has a better idea of where things will go than any of us. One consideration is that sharp and , it is hoped-short, recession is already baked into the economic cake whatever measures are taken. Given that, it is the best move to make whatever drastic measures are deemed appropriate for future boom and prosperity right now.
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Initially, the federal government only taxed income from investments, not wages. That changed in WWII when wages were taxed to pay for the war. So, if a person wasn’t paying wage tax, he was unpatriotic. Once the government starts taxing something, it doesn’t stop.
All projections that posit a cutting the deficit over a period of years will, at best only increase the debt a little bit in the first year or two because no Congress can bind a future congress or president. The only really successful move would require a dictator to simply fire 2 million federal workers and dismantle the agencies and bureaus in which they work and nullify all their regulations that were not explicitly passed by Congress while repealing the income tax and reverting to a gold standard. That could well occasion a hard recession or short depression but it would release business from the shackles that have driven so much of our production overseas and in perhaps 4 to 6 quarters the boom would lift the economy like a rocket.
problem is medicare medicade consumes trillions.
tariffs and excise taxes. much better than an income tax.
And cut, baby, cut!
Cut spending dramatically?
I'm in!
Yep.
It would be impossible to fund the fedgov as it exists today through tariffs.
Impossible.
The reason is that tariffs are self-limiting. It would be a bumpy transition, but tariffs would almost immediately be driven so high that people would do without imported discretionary purchases and substitute domestic products — even extremely expensive ones — for the imported product.
Imports would collapse, and revenues would collapse with them.
So sure: we can mine our own rare earth minerals, go back to manufacturing all our cars, computers and sneakers in the U.S., and do without fresh fruits and vegetables out of season. (I remember canned asparagus — so I would do without asparagus.) Eventually we would approach autarky. We would be poorer but self-sufficient.
But we couldn’t fund Social Security, Medicare and Medicaid, food stamps, the National Park Service, air traffic control, and 1001 other things with tariffs.
Good graph.
Tariffs are about getting more producers and their production back in the US, than replacing other federal tax revenues.
We’ve become reliant on foreigners in every aspect of national life & commerce.
This has to change, or we won’t maintain our status as a Great Power Nation.
Tariffs are sort of sales tax.
The problem, now, in rising enough money through tariffs, would be that if tariffs are too big, they would not rise enough - people would just stop buying any imports.
But, I believe, tariffs with some kind of national sales tax would be enough. I remember Sen Lugar running on national sales tax in 2000. I guess, they made the calculations.
But, in any way the government gets our money, they spend too much of it!
Income tax is immoral.
The government has no right to tax anybody’s income.
“people would just stop buying any imports.”
They will most likely discontinue the purchasing of American merchandise on Amazon and Ebay as well
In modern factories, there are not that many low skill manufacturing jobs. There are robots and automation to do much of what low skill workers used to do.
There might be a lot of low skill, landscaping jobs available soon, however
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