Federalist Nos. 11 – 12

Federalist Nos. 11 – 12 follow the same overarching argument that many of their predecessors followed. It can be boiled down to the truths concerning economies of scale. A larger union has great advantages over a smaller nation in many aspects of government. Number 12, which deals with government revenue, reminded me of a few issues related to taxes that I had not remembered and a few that I had never considered.

One of the things that has always been a pet peeve of mine is the incessant focus on the necessity of an ever expanding economy. I was reminded of why that would be when I read:

The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity (speed) with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury.

Money is only valuable because of the fact that it acts as a lubricant in the mechanisms of commerce. Because of our ever expanding demands for government services and intervention the government has an ever increasing need to generate more and more revenue through taxation and that is best done by faster and faster monetary circulation – although they are not above inserting more otherwise worthless paper into the system to increase their revenue when they feel it is necessary.

What I had never considered was the following:

It is evident from the state of the country, from the habits of the people, from the experience we have had on the point itself, that it is impracticable to raise any very considerable sums by direct taxation. Tax laws have in vain been multiplied; new methods to enforce the collection have in vain been tried; the public expectation has been uniformly disappointed, and the treasuries of the States have remained empty. . . . No person acquainted with what happens in other countries will be surprised at this circumstance. In so opulent a nation as that of Britain, where direct taxes from superior wealth must be much more tolerable, and, from the vigor of the government, much more practicable, than in America, far the greatest part of the national revenue is derived from taxes of the indirect kind, from imposts, and from excises.

It is that understanding about the difficulty of collecting direct taxes (such as income tax) that led our founders to codify in the constitution that the federal government should not have the power to levy an income tax. Indeed, reading that statement makes the FairTax proposal look all the more enticing since it rests on indirect taxation.

If anyone doubts the reality of the assertion that direct taxes are harder to collect consider the amount of money and time that Americans spend each year in tax preparation in an effort to pay as little income tax as they can and then combine that with the amount of money and time the IRS spends trying to ensure that nobody failed to pay their allotted share of income tax. Now compare that vast sum with the amount of time and money that people spend trying to avoid indirect taxes like a sales tax.

That explains why the only patriotic thing to do with our stimulus checks is to spend them the day we get them if not before.