The Federalist #21: Hamilton and Taxation

Alexander Hamilton
Alexander Hamilton (Photo credit: Wikipedia)

Continuing with my review of The Federalist Papers, I’m going to move to a couple of short excerpts from #21 from Alexander Hamilton (did you know his political career was nearly capsized by a sex scandal?). I love this first line:

The wealth of nations depends upon an infinite variety of causes. Situation, soil, climate, the nature of the productions, the nature of the government, the genius of the citizens, the degree of information they possess, the state of commerce, of arts, of industry, these circumstances and many more, too complex, minute, or adventitious to admit of a particular specification, occasion differences hardly conceivable in the relative opulence and riches of different countries. The consequence clearly is that there can be no common measure of national wealth, and, of course, no general or stationary rule by which the ability of a state to pay taxes can be determined. . .

This is an interesting declaration that I will admit I don’t fully understand. His argument seems to be essentially that there are too many intangibles in determining the true wealth of a nation, which lesson he then turns and applies to the impracticability of imposing a just tax on states. This quick dismissal of any attempt to quantify national wealth seems suspect to me, which is why I think I don’t fully understand this. It may be possible that there are political obstacles to a state tax which Hamilton doesn’t want to address here. He then goes on to examine taxation more carefully:

Imposts, excises, and, in general, all duties upon articles of consumption, may be compared to a fluid, which will, in time, find its level with the means of paying them. The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions. If inequalities should arise in some States from duties on particular objects, these will, in all probability, be counterbalanced by proportional inequalities in other States, from the duties on other objects. . .

I also found this interesting. This sounds like an awful lot like a description of the ideals of a free market–that imbalances will organically be corrected, without requiring the constricting oversight of regulation. I suppose this philosophical underpinning in capitalism is unsurprising–Hamilton did become the Secretary of the Treasury, after all. However, my understanding is that Hamilton’s running of said office resulted in more central planning than otherwise.


Author: manderson

I live in NYC.

3 thoughts on “The Federalist #21: Hamilton and Taxation”

  1. I agree that the conclusion reached in his opening paragraph arises only tangentially from his initial observation. But, to understand where Hamilton is coming from we must consider the circumstances: In the minds of the Founding Fathers, any taxes imposed on the people was to be in an infinitesimal amount; they had just fought a war to avoid paying ANY taxes or suffer any regulation of trade. They were free market advocates who abhorred government regulation. Yet, Hamilton was in the camp favoring a strong national government, that would need taxes to support itself.

    The Articles of Confederation proved too loose to empower the central government and in the Federalist Papers the authors had to justify the need for a stronger central authority–treading very lightly about the resulting limited regulation and taxation–while maintaining a healthy respect for States Rights. Madison may have found a better way to explain this.

    Many of the other Ferderalist Papers make it very clear that the Founders scoured 3,000 years of historical examples to glean the best governmental structures of successful nations to ensure that the Constituion would provide such features for their posterity. Thus, they were very aware that the genius of the citizenry, unhampered by an oppressive government, would capitalize on the New World’s abundant resources, and make America strong and wealthy. Even the most ardent “federalist” among them would be horrified to see the extraordinary layers of taxation and regulation imposed on their descendants.

    Hamilton could never conceive of the extent that future taxes and regs could “be compared to a fluid, which will, in time, find its level with the means of paying them.” The government just started with one, then added another, and another, and another. There is nothing that has escaped taxation and regulation. Of course, for the first 300 years after 1620, those impositions were relatively minor and the citizenry, operating in a relatively free market, made America Number One in Wealth, power and prosperity. It remains to be seen whether the nation can survive the onslaught in governmental restrictions that have occurred in the last, 4th century since the Pilgrims landed.

    My opinion is that the wealth of nations depends simply on a couple things, not on “an infinite variety of causes.” When the people of a land are given the Security granted by the Common Law and the related legal protection of private property handed down by the English, and subjected to minimal Oppression by government and religion, they will fashion an economic success story for all. I have referred to this as “The Radzewicz Rule” which can be expressed as CM + S – O = P.
    Thus the Common Man, if Secure, and not Oppressed, will create the Prosperity that makes the Wealth of a Nation. The Founders all knew this and fashioned a Constitution that provided for the Rights and Security of the people while limiting the oppression of Kings and Priests. Unfortunately, they did not foresee the eventaul encroachments made by our Presidents and Congresses that even our Supreme Court has failed to slow down. But, for 350 years, their vision proved wise and created a wide-spread prosperity never before seen in any society in history.

  2. Bill,

    Thank you for the reminder of context here. Yes, a general distaste for taxation would have definitely been fresh on people’s minds at that time, so that could explain his unusually quick withdrawal in his analysis to a laissez-faire summation.

    In your formula, there seems to be missing a critically important component: the natural resources available on said land. Efficient and equitable rules of governance alone won’t ensure great national wealth unless there’s enough natural wealth available to draw upon. Another issue that can be raised here is the problem of the commons: without well developed regulation, the incentive is to deplete such resources completely, rather than work collectively to maintain those resources for all.

    1. M,

      As Jared Diamond has claimed, there are some societies in history that failed to advance due to a fundamental disadvantage of geography, natural resources, or climate. But his examples are limited to a few isolated places like Easter Island, sub-Sahara Africa, some islands in the Pacific, etc. Much more significantly, vast areas of the earth supported successful societies from Japan, accross Asia, into the Middle East, North Africa, and most all of Europe and parts of South America. In fact, 3,000 years ago there were over ten large civilizations with a fairly high level of organization, language, writing, trade, and prosperity. Some, like Japan, had very limited natural resources; and they all had by history’s standards, are quite different long-term evolution. It is from their record of actual results that we can best see what are the causes of national wealth. In a race with nine athletes and a cripple, one would not examine the cripple to see what determioned the winner–rather one would look for differences among the nine relatively able athletes.

      Thus, while bad geography can play a part in retarding a nation’s progress, and has done so in a minority of cases, the possession of great natural resources or geographical blessings does not make for a wealthy nation. As Julian Simon has observed, the Ultimate Resource is a nation’s people–nothing gets done, no resources are availed of, without purposeful action of the citizenry. And they only have to be secure and unencumbered to be purposeful. That is why The Radzewicz Rule is limited to the two “S” and “O” factors. There are too many successful nations with limited reources to include what is really a very minor factor–Israelites have made their desert bloom, Japan imports everything, Hong Kong and Singapore prosper on a small island and penninsular, Switzerland succeeds with very little natural resources and a harsh geography, the Basques have done well in their mountainous home, and more recently,the Sheik of the UAE, in Dubai, created a vibrant economy on his small barren desert of an enclave after he had a vision from Allah to remove all restraints on business activity.

      Your point about “the commons” is well taken, and an honest citizenry, ennobled by high standards of community, patriotism, and a long-tern view, will probably outperform a valueless or materialistic society. The major economic advances that came from the Industrial Revolution occurred mostly in areas influenced by the Reformation and its Puritan/Calvinist attitude concerning work, thrift, cooperation, and adherence to the precepts in the Golden Rule. This huge advance in productivity and wealth was virtually confined to Northern Europe and then the United States, where this positive attitude prevailed. I have written in “Common Genius” that the Radzewicz Rule will work most effectively where the people have such positive constructive attitudes, and that would include respect for the prudent use of resources and conservation of natural assets. However, for the record, the great societies of the past such as Egypt, Greece, Rome, Incans, Cambodia, et. al., did not decline due to a destruction of natural resources–it always had more to do with the natures and attitude of the people and the extent that they were not oppressed by their culture or government.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s