The vast majority of the American populace perceive that taxation on wages/income is a usual and regular phenomenon within the history of the United States. The general reason for this is that people wonder how we can pay for our roads, medical healthcare programs, and many other so called “socially beneficial” programs if personal and corporate taxes did not exist. It was not until 1909 when the United States implemented the Business/Corporation Tax, and 1913 when the income tax came into full effect. However, before both the income tax and corporation tax, most of the United States did not have such public welfare programs that exist today. 19th century welfare programs were so limited as to be non-existent.
How Was the US Government Funded, & What Did It Purchase?
Throughout the 20th century, the majority of revenue originated from ad valorem taxes which were in the form of tariffs. Tariffs were generally put onto imports; no ad valorem taxes (or any significant ones) had been put onto exports. Below is a breakdown of taxes throughout the 19th century.
What did the tax revenue the government collected put in place throughout the 19th century? Was it for the statist roads? Attempts of universal health coverage? Public transportation? In fact it was not used for any of what can be described as modern day “utilities” provided by the government; the vast majority was used only for defense and military spending.
As a resulrom the inception of the United States, all the way to the advent of income and corporate taxes (from 1789 to 1912), the United States government had accrued a debt of 15.28 billion dollars by running average annual deficits of 125 million USD. The vast majority of such deficits originated from times of war, most notably the American Civil War, when US government spending had reached as high as 15% of GDP! When taking out the crazy amount of spending throughout the Civil War, the sizes of deficit which the US had ran would’ve been lower on many occasions.
As a result, the percentage of revenue obtained by the government over GDP average at 3% prior towards the income tax of 1913.
This can also be noticed with spending as a percentage of GDP.
How Tariffs Did Not Protect US Manufacturers & Had No Effect on Imports
A common misconception is that tariffs had a huge impact on importers throughout the 19th century, that thanks to tariffs, US manufacturers had the ability to compete against other already established nations. This is far from the truth; tariffs did not hurt foreign exporters, but burdened domestic importers, and domestic exporters.
Let’s take for example, the tariffs of abomination. If we look at changes in imports and exports during the tariff of abomination, we can see that before such a tariff was passed, they barely had any effect.
|Year||Imports (USD Million)||Exports (USD Million)|
From above, we can see that imports and exports remained virtually unchanged within the periods of 1828 to 1831. The reason for this is because the US economy was in a business slowdown in this time, and thus all together, imports and exports would have reduced in order to reflect the actual business cycle which had taken place.
Below is a change in GDP and CPI which indicate that the US was already heading into a business slowdown.
This reduction in GDP indicates that an economic slowdown was taking place within the years of 1828 up to 1830. This is also accompanied with deflation, which is the usual trend when during an economic slowdown.
This shows all together that, because imports and exports had virtually remained the same during the slowdown, and that GDP and CPI also showed an indication of an economic slowdown, it further shows that the tariffs of abomination did not protect US manufacturers at all, but rather just increased the price of goods all together. However, who felt the effect of higher import prices the most?
During a slowdown of economic activity, CPI would dramatically decrease. During the 1822/1823 recession, this was noticed with deflation being recorded as -10.00%. However, why was it during the economic slowdown of 1828/1829 that deflation was not as dramatic? The reason for this is because of tariffs affecting consumer goods. Essentially this had hurt consumers more than anyone else by not allowing for the proper adjustment of prices, which furthermore, had most likely prolonged the economic recovery which had happened in 1830/1831. It was most likely that import volume had decreased, however, the value of such imports had increased, which all together had hurt domestic businesses and consumers.
From this we can observe the following:
- Tariffs had no effect on imports, but business cycles and economic preferences is what determines imports
- Due to economic preferences being the main dominant factor towards imports and exports, tariffs do not help exports, but rather just hurt consumers and domestic businesses by making them pay higher prices for imports.
- Imports are vital for trade as domestic manufacturers and industry cannot service all domestic needs, hence why there is a preference to import from abroad to fill in the remainder needs of the economy.
The majority of pre-1913 government revenue was funded by tariffs. Tariffs had little to no impact towards business and imports in the United States, while helping the US government to receive funds, for what can be called, primary services towards the general public (national defense as an example). We can observe that tariffs did not discourage imports and help exports, as economic preferences dominate over what prices are paid for imports, and how much exports are produced by a nation, while at the same-time tariffs in the most extreme case hurt consumers, and domestic businesses rather than helping exports all together.
This post was written by Baland Rabayah.
The views expressed here belong to the author and do not necessarily reflect our views and opinions.
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