Explaining Property Taxes Then and Now

Critical listeners to recent remarks I made here on The Newsmaker Show with Kevin Doran will have wished that I had done a better job of explaining property taxes in the late 19th century and how their burden on property owners helped create the conditions which led to the tax reform which gave us the Income Tax in 1913.

So do I. Regrettably one can't say everything one needs to when trying to explain something else, especially like Herman Cain's 999 Plan.

If anyone gets the impression that I intended to say that the federal government routinely and directly taxed homeowners then, for example, in the same way homeowners are so taxed today on their property, that would be a mistake, but one which could easily be inferred. The federal government did do that sort of thing three times in the 19th century, but only for very brief periods and only to fund wars: in 1798, 1812 and 1861. Which is not to say there weren't other attempts, notable in the Pollock decision in 1895.

To a considerable extent, however, I have found that the terms "property tax," "excise," "tariff," "ad valorem" and the like get used interchangeably, and confusingly, in discussions about taxes both then and now. We would be better served if we were all more precise in these matters, but even supposed experts talk about this period with such imprecision sometimes that it is difficult to know exactly what people really do mean.

For example, "ad valorem" today gets used, as at usgovernmentrevenue.com, as a category under which to list excise taxes, tariffs, property taxes, etc., as opposed to income taxes, corporate taxes and social insurance taxes. In truth, however, its specific meaning has been more complicated than that.

From that characterization would not know that tax historians often distinguish personal property taxes in the first half of the 19th century as "in rem" from real property taxes in the second half as "ad valorem."

In the case of the former, as in 1798, slaves, for example, were taxed for war preparations with France as personal property. It didn't matter, however, how much one had invested to purchase the slave. Each one was simply taxed at 50 cents. Similarly a tax assessor would count the windows on your house, your horses, your cows, chickens etc. (unless you hid them well) and total them up by kind and assess the appropriate tax, which inhered in the thing, "in rem," not in the value, "ad valorem."

The latter is how the federal government in the 19th century was able to get around the onerous requirements of apportioning direct taxation of property equally according to state population. Instead of the arduous task of trying to tax the whole general sum of an individual's wealth in every state on an equal basis, the value of beer, wine and liquor, for example, produced anywhere could thereby be taxed everywhere the same, proportionally according to its value. In this way there was no need to divide the necessary revenue to be raised according to the population of the individual state, since the basis was the same everywhere beer was sold.

Such taxation is often called an excise, generally understood to fall on domestic produce. We still pay excises to this day, for example everytime we fill up the gas tank, 18 cents on the gallon to the feds. In truth excises are just a special kind of sales tax. A tariff is similar, but taxes foreign imports.

When it comes to the problems of farmers in the late 19th century, who eventually made league with Prohibitionists to install the Income Tax in 1913, theirs was a two-fold problem. Not only did the cost of financing state government fall heavily on them because of property taxation in the state in which they lived, federal excises on their produce represented a double "property tax" whammy. Think tobacco excises.

Viewed from this perspective, government at all levels, it seemed, got them coming and going.

To his credit, Herman Cain is trying to imagine a world in which government gets it for a change, instead of the taxpayer. His way of trying to make that happen is to play human desire to consume off of human desire to avoid paying taxes, by making what we consume each and every day the scene of a skirmish in the battle for limited government, which cannot exist without self-restraint.

The 1913 Income Tax Enabled Stark Increases to Government Revenues to Pay for WWI

Revenues went up by a factor of 6 in three short years, and dramatically reversed federal reliance on tariffs, excises and other taxes of one kind or another to finance the preponderance of government spending. Note the overnight reversal between 1917 and 1918 in the income tax share of the federal revenue. The analogy today would be like going from $3 trillion in revenues to $18 trillion.

Excises on alcohol started disappearing in 1920 with enactment of Prohibition. Such taxes had routinely accounted for 20-40 percent of all federal revenues from the War Between The States until that time. Over the course of a decade from 1920 through 1932 alcohol excises dropped in the end by a factor of 10, but instantly surpassed their 1920 levels with Repeal in 1933, a year in which everyone desperately needed a drink.

By 1875 One Third of Federal Revenues Came From Taxes on Alcohol

According to Daniel Okrent's Last Call: The Rise and Fall of Prohibition:

After lapsing in 1802, the alcohol excise was reimposed under James Madison to pay for the War of 1812, suspended in 1817, and then brought back by Abraham Lincoln in 1862 to finance the Civil War. This time the tax did not fade away . . . For most of the next thirty years the impost on alcohol annually provided at least 20 percent of all federal revenue, and in some years more than 40 percent. By the time the excise was doubled to cover the cost of the Spanish-American War, the brewers had finally realized that the tax they had once so strongly opposed might be their salvation, and they patriotically (and shamelessly) declared that they had financed 40 percent of the war's cost.

By way of comparison, tariffs in 1875 funded 55 percent of the federal budget. Seven years after the passage of the Income Tax, tariffs in 1920 funded barely 13 percent of the federal budget.

The significance of Daniel Okrent's recent history of Prohibition is not in the least that it shows how much federal government had depended on liquor taxes in addition to tariffs and property taxes to fund itself.

The perfidy of Prohibition is that it was brought to us by the same folks who gave us the Income Tax in the first place. They knew something would be needed to replace the federal revenue which would be lost when alcohol sales were finally banned. But when Prohibition got the boot, the Income Tax did not.

So the flipside to the Temperance movement is its Intemperance toward the original intent of the constitution, which was to prohibit direct taxation without apportionment by population in favor of tariffs, excises and ad valorem taxes.

Before The Income Tax, Federal Tariffs and Real Estate Taxes Punished Farmers

From a helpful history of the estate tax from the IRS, here (emphases added), which is unaware of the significant federal revenue contributed by alcohol taxes (between 30 and 40 percent):

The War Revenue Act of 1898

Throughout the last half of the 19th century, the industrial revolution brought about profound changes in the U.S. economy. Industry replaced agriculture as the primary source of wealth and political power in the United States. Tariffs and real estate taxes had traditionally been the primary sources of Federal revenue, both of which fell disproportionately on farmers, leaving the wealth of industrialists relatively untouched. Many social reformers advocated taxes on the wealthy as a way of forcing the wealthy to pay their fair share, while opponents argued that such taxes would destroy incentives to accumulate wealth and stunt the growth of capital markets.

Against this backdrop, a Federal legacy tax was proposed in 1898 as a means to raise revenue for the Spanish-American War. Unlike the two previous Federal death taxes levied in times of war, the 1898 tax proposal provoked heated debate. Despite strong opposition, the legacy tax was made law. Although called a legacy tax, it was a duty on the estate itself, not on its beneficiaries, and served as a precursor to the present Federal estate tax. Tax rates ranged from 0.75 percent to 15 percent, depending both on the size of the estate and on the relationship of a legatee to the decedent. Only personal property was subject to taxation. A $10,000 exemption was provided to exclude small estates from the tax; bequests to the surviving spouse also were excluded. In 1901, certain gifts were exempted from tax, including gifts to charitable, religious, literary, and educational organizations and gifts to organizations dedicated to the encouragement of the arts and the prevention of cruelty to children. The end of the Spanish-American War came in 1902, and the tax was repealed later that year. Although short-lived, the tax raised about $14.1 million. [About 2.5 percent of the federal budget].

Recalculating Herman Cain's 999 Plan For Calendar Year 2008

Herman Cain's 999 Plan continues to get tweaked by none other than Herman Cain himself, in response to criticisms and questions about it in the media in the wake of recent Republican presidential debates.

Some of the additional information he is supplying looks to have been latent and just previously unexplained, while other information has the feel of modification. In any event, the unsettling thing about this is that the 999 Plan appears to be something of a work in progress, not a finished, fully vetted proposal, which makes it less sellable politically.

One question which seems so important to the left, for obvious reasons, has been the plan's ability to fund the Leviathan State's appetite.

Previously it seemed to me that the plan was woefully inadequate to the task. But some of the additional information that has come out makes me more sanguine, if that's the right word as the taxpayer stares into the maw of the bloodthirsty Beast.

For example, with respect to the 9 percent corporate tax, it turns out that, for reasons which I still do not understand, business' cost of labor is no longer deductible for tax purposes under the plan. So for 2008 when corporate profits posted as $1.25 trillion, you theoretically must add back in net compensation of nearly $6.2 trillion. I think. A 9 percent tax on $7.45 trillion now yields a much higher corporate contribution to federal revenue for 2008 of $671 billion.

Combine that with a 9 percent tax on adjusted gross income of $8.5 trillion equaling $765 billion and with a 9 percent tax on personal consumption expenditures of approximately $10.5 trillion equaling $945 billion, the resulting sum is $2.38 trillion, just shy of the actual collected in 2008 under the current system, which was $2.5 trillion.

And if I read the language of the 999 Plan correctly, there will also be substantial tariff revenue from imports designed to level the playing field between them and our own exports. Imports in 2008 of $2.5 trillion taxed at 9 percent would yield an additional $225 billion in revenue, more than enough to cover the $120 billion shortfall. Presumably some imports would not be so taxed due to pre-existing trade agreements, but the potential is obviously there for far more revenue from tariffs than America presently collects.

Mr. Cain is also now stating that his plan is undecided about how to remove the regressivity of the sales tax on the poorest Americans, but that it will. This will, of course, reduce the revenue described above, as will the income tax deduction for charitable contributions.

Herman Cain's Little Noticed 718 Percent Tariff Increase on Foreign Imports

Most of us have been fixated on income, sales and business taxes in Herman Cain's 999 Plan, but there is a little noticed line which I think adds considerable government revenue in the form of increased tariffs on foreign imports, and considerable American competitiveness by exempting our own exports from the plan's 9 percent business tax and the 9 percent sales tax:

Exports leave our shores without the Business Tax or the Sales Tax embedded in their cost, making them world class competitive. Imports are subject to the same taxation as domestically produced goods, leveling the playing field.

In 2010, imports to this country came to $2.3 trillion, on which a paltry $25.3 billion was collected in tariffs. If I understand Cain's plan correctly, that tariff would balloon to $207 billion to match tax burdens born by domestically manufactured and sold goods and services which are subject to the 9 percent business tax.

The last time tariffs on foreign goods similarly accounted for 9.6 percent of federal revenue occurred sometime between 1930 and 1935.

Herman Cain is thereby defying free-trade ideology in the name of a level playing field, which message should win him considerable support among American patriots, regardless of party.

Tariffs on Imports at 100 Percent Wouldn't Be Enough to Cover Federal Spending

Here are the import numbers (rounded) for the last three years for all goods and services, according to the latest revision from the US Census Bureau, here:

2008 = $2.5 trillion

2009 = $2.0 trillion

2010 = $2.3 trillion.

Federal revenues in 2008 equaled $2.5 trillion, coming mostly from income and social insurance taxes, as well as a more modest contribution from corporate and excise taxes.

To completely replace that income from tariffs would imply a 100 percent tariff, which is unimaginable.

Presumably at least some of our trade with the world is reciprocally fair, excluding it from such a punishing rate.

At some point along the tariff scale as you rise toward that extreme level, otherwise off-setting import revenues will fall as retaliatory tariffs are imposed by the global marketplace.

A 25 percent tariff on Chinese imports, as The Donald recommends, in 2010 could have generated only in our dreams something around $91 billion in revenues.

At a minimum, a vigorous reliance on tariffs for federal revenues today implies a much reduced size of the federal state.

High Tariffs Allowed Domestic Producers To Get Really Rich Off Captive Consumers

So says John Steele Gordon, who provides a short history of taxation for The Wall Street Journal, here:

After the Civil War, nearly all the wartime taxes—including the nation's first income tax—were repealed and the federal government relied mostly on the tariff for revenues. It provided the government with more than ample peacetime income. In 1882, the government had revenues of $403 million, but expenses were only $257 million, a staggering budget surplus of nearly 36%. The reason the tariff was so high was, ostensibly, to protect America's burgeoning industries from foreign competition.

Of course, the owners of those burgeoning industries—i.e., the rich—were greatly helped by the protection, which enabled them to charge higher prices and make greater profits than if they had had to face unbridled foreign competition.

But the tariff is a consumption tax, which is simply added to the price of the goods sold. And consumption taxes are inherently regressive.

Which ought to get more attention on the right when one considers that liberals like Paul Krugman, Nancy Pelosi and Barack Obama and so-called conservatives like Herman Cain, Rick Perry and Mitt Romney all seem to like consumption taxes in one form or another.

The move would raise more revenues off the rank and file, and preserve the fortunes of the rich, which is why so many politicians support them. The better to eat you with, my dear.

Rush Limbaugh Can't Think Before 1913

"Look, in a classic sense, Trump's not a conservative, folks.  You don't promise to raise tariffs on the ChiComs 25%.  That's not conservative.  (interruption) People understand this, Snerdley.  You remember when George W. Bush threatened to raise tariffs on imported steel, there was an outcry.  No, you don't raise taxes, period.  That's not the way to deal with it.  That's protectionism.  Smoot-Hawley.  It's a death wish.  This is why I'm always worried about populism.  Populism is not conservatism."

-- Rush Limbaugh, 27 April 2011 (here)

"Tariffs were the largest source of federal revenue from the 1790s to the eve of World War I, until it was surpassed by income taxes."

-- "Tariffs in United States History" (here)

"The magnitude of the tariff shock in the Smoot-Hawley legislation . . . was simply not large enough to trigger the kind of economic contraction experienced after 1930."

-- Douglas A. Irwin (quoted here)

The baneful influence of doctrinaire libertarianism on conservatism continues . . . in the voice of Rush Limbaugh.

The Tariff: Workhorse of the US Treasury Until 1913

James Grant reviews "Peddling Protectionism" by Douglas A. Irwin here for The Wall Street Journal and concludes that Ben Bernanke was already alive and hard at work wrecking the economy in 1914.

The money line of the book:

"The magnitude of the tariff shock in the Smoot-Hawley legislation, which increased the domestic price of imports by 5% at a time when dutiable imports were just 1.4% of GDP, was simply not large enough to trigger the kind of economic contraction experienced after 1930."

The money line of the review:

Here is a model of the economic tract. Lavishly illustrated with political cartoons, it contains but one algebraic equation, and that probably unavoidable.