A Better Way

by David Trumbull

April 21, 2006

Two weeks ago in this space we asked how $23 billion in annual tariff revenue will be made up once the U.S. completes our current drive toward abolition of import duties. Well, I think we have our answer. The final days of this tax season witnessed a flurry of newspaper, radio and television reports on the Alternative Minimum Tax (ATM). The ATM was introduced over thirty years ago to punish the "super rich" who weren't paying their fair share of taxes. The IRS now defines "super rich" as household income of $75,000.

A better way.

Through the nineteenth and the early twentieth centuries the U.S. operated on a very different system. It was called the American System, to distinguish it from Adam Smith's British System and the various right- and left-wing statist systems advocated in continental Europe.

With direct taxation of citizens proscribed by the Constitution, the government was financed largely by import duties. Tariffs on imported goods spurred development of domestic industries --textile mills in Massachusetts, steel mill in West Virginia. Flourishing industries provided jobs. And a job is the best anti-poverty program every known. With jobs you don't need a huge budget for social programs. That was the policy of great Republican Presidents such as Lincoln, McKinley, and Roosevelt.

Sadly neglected today is nineteenth century American economist Henry C. Carey. Rejecting the elaborate and unworkable theories of European economists and philosophers, he embraced a practical, and wildly successful, American system of high tariffs and encouragement of domestic industry and education. He wrote:

Why is protection needed? Why cannot trade with foreign nations be carried on without the intervention of customs-house officers? Why is it that that intervention should be needed to enable the loom and the anvil to take their natural places by the side of the plough and the harrow?...Of the advantage of perfect freedom of trade, theoretically considered, there could be no doubt.... Nevertheless, every attempt at so doing that failed.

The title of the work quoted above, Harmony of Interests, highlights another great difference between the American and European systems. Carey and other advocates of the American System utterly rejected the theory of class struggle in favor of seeking harmony between capitalist and worker.

This, of course, changed with the ratification of the 16th Amendment in 1913. The income tax enshrined envy and malice in our law codes. According to the U.S. Department of Treasury when the income tax first went into effect it had "rates beginning at 1 percent and rising to 7 percent...Less than 1 percent of the population paid income tax at the time." Ah yes, it sounded so noble to soak the richest 1 percent. The rates now range from 15 percent to 35 percent and everyone pays. Such is the new American system which preaches thou shalt covet thy neighbor's goods.

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