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.
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.
“[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.
