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You Can't Tax a Nation into Prosperity--The US Actually Did
Churchill's Famous Quote
Every time that someone in America talks of raising taxes on basically anything, a certain segment of the population mentions the famous quote by Winston Churchill about not being able to tax a nation into prosperity. Cutting out tax loopholes is considered a tax increase. Allowing tax cuts to expire is considered a tax increase. No one likes to pay taxes, but they are a necessary evil.
The question arises, however, can a nation tax itself into prosperity. Surprisingly, to a certain extent, this is what the United States did during the nineteenth century. "How can this be the case?" you might ask. There is actually a fairly easy answer to the question.
The Protective Tariff
The answer to the question of how the United States taxed itself into prosperity is simply the protective tariff. Nationalists such as Alexander Hamilton and later the National Republicans like Henry Clay (and even John C. Calhoun until he became a states' rights fire-eating kind of guy) supported protective tariffs. The Whigs who arose out of the National Republicans because of their dislike of King Andrew I (Andrew Jackson) also supported high tariffs on imports.
"What is a protective tariff?" you might ask. A tariff is a direct tax on items being brought into a country, usually paid at a customs office at the port at which the items are unloaded. A protective tariff is a tax on imports that is high enough to discourage people from buying foreign goods.
In the eighteenth and nineteenth centuries, the British were ahead of the Americans in many ways. They were the most wealthy nation in the world. They had the biggest empire in the world. They had the world's strongest navy. They were the first nation to undergo the Industrial Revolution. You get the picture.
While the Industrial Revolution created certain social problems with its "dark satanic mills," it did provide for lots and lots of cheap goods. Since England was the first nation to figure out that many goods made cheaply could make more money than a few goods sold to the wealthy, they were able to flood any market they wanted with cheap goods. Because of this ability to undercut the competition, the British wanted free trade.
Would Protective Tariffs Help?
Would protective tariffs improve American manufacturing today and help the economy?
Doesn't Free Trade Help the Economy?
The answer is yes and no. There are benefits to free trade, although it's easy to argue that this is a creature that has never truly existed. There are also detrimental effects that arise from free trade. Hamilton understood the problems, as did the later National Republicans, Whigs, and even Republicans--now the leading proponents of free trade.
Hamilton and his intellectual heirs understood that a nation dependent upon other countries for their manufactured goods would never develop domestic industries. This could be especially detrimental during a time of war. The goal was to develop domestic manufacturers that would be able to produce war materials.
The problem is that people tend to pay the least possible price when quality is comparable. With the British being able to undercut American competition because of their advantage of the emerging factory system, American manufacturers would have trouble selling their wares, with the exception of certain natural resources and agricultural goods. Enter the protective tariff in an attempt to equalize the price point, which would foster American manufacturing.
This idea was not without its detractors. Both the Jeffersonians and the Jacksonians opposed tariffs for protection. Southerners hated tariffs because they tended to be a neo-colonial region that produced mainly staple crops for sale, rather than manufactured goods. The goods that they bought from abroad had high taxes, while those bought from the North were just as expensive.
Northerners tended to support the tariffs because they kept out foreign competition. The lack of foreign competition for profits helped Northern manufacturers grow and develop a diversified economy. This fact became important during that little conflict known as the American Civil War.
So, How High Were These Protective Tariffs?
Tariffs for much of the period between the ratification of the Constitution and the Civil War provided between 80 and 97% of federal revenue. With the exception of the Civil War era, the tariff provided about 50% even up until 1900. The advent of the income tax led to the importance of the tariffs.
Taxes on imports reached a high around 1870. The average tariff on imported goods in 1870 amounted to 44.6%, which meant that a good coming from a foreign nation with a price tag of $1.00 to merchants would actually come to $1.45 when the tariff was added at the customs office.
The interesting point about this date is that it is generally considered the period in which the Second Industrial Revolution began the Gilded Age. American industry really began to flex its muscles to a degree that had never been seen before, and this growth would continue well into the middle of the twentieth century. By the post-WWII era, it could be said of the United States what had been said of Britain just a century before.
Today, the tariff produces around 1% of federal revenue. The average tariff on imported goods in 2010 was a meager 1.3%, and the number has declined steadily since 1970. While the lack of an import tax provides cheaper goods, it makes it more difficult for American manufacturers to compete in the domestic market.
So, it can be argued that the US taxed its way into prosperity. Whether the cuts in these taxes is a good thing is debated. What cannot be debated is the decrease in American manufacturing capacity and a propensity of foreign dumping of cheap goods on American shores.
Today, some libertarian-leaning people like Ron Paul favor utilizing tariffs as a more constitutional means of raising revenue. It's not likely that they will get a hearing, but it can be argued that the United States did, in fact, tax its way to prosperity.