Wednesday, September 29, 2010

The Un-Constitutional Tax On American Exports

From Lew

The Unconstitutional Tax on American Exports

(Or, James McPherson Shoots Himself in the Foot)

by Thomas J. DiLorenzo

by Thomas J. DiLorenzo

The January 2004 issue of North & South magazine features a debate on the topic, "Lincoln: Savior or Tyrant?" between myself and Professor Gerald Prokopowicz of East Carolina University. The debate occurred online between the two of us, and was then published in North and South. The unscrupulous editor of the magazine, one Keith Poulter, apparently couldn’t resist the cheap shot of inviting Princeton historian James McPherson to add an additional critique of one sentence of my contribution, without offering me the opportunity to respond or without treating my debating partner in the same way by asking someone to critique some of his more dubious statements.

The sentence that McPherson was asked to criticize was one in which I cite Charles Adams who, in When in the Course of Human Events, estimated that in 1860 Southerners were paying a disproportionate share of the federal import tariff, which at the time accounted for 95 percent of all federal revenues (See U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970).

Southerners had been complaining about such an injustice since the 1824 tariff act, which received only 3 votes out of 107 from Southern congressmen and 2 out of 25 U.S. senators who voted on the bill. South Carolina nullified the even more heavily protectionist 1828 "Tariff of Abominations," after which tariff rates were gradually reduced. By the late 1850s, however, the protectionist Republican Party regained the upper hand and more than doubled the average tariff rate with the Morrill Tariff (named after Vermont congressman and steel manufacturer Justin Morrill). Only 1 "yes" vote on the Morrill Tariff (out of 105) came from a secessionist state (Tennessee) during the 1859–60 session in the U.S. House of Representatives.

North and South editor Keith Poulter labeled McPherson’s comments "The Truth About Tariffs" and promised they would "set the record straight." It is easy to prove, however, that McPherson’s comments are misleading, a-historical, and contrary to standard economic theory.

McPherson relied on his "authority" as the "dean" of "Civil War" historians to make a "fair guess" that Northerners paid 70 percent of the tariff in 1860. But in the next sentence he essentially admits that his guess is completely useless by admitting that "there is no way to measure this precisely" since no statistics were kept on the final destination of dutiable products.

McPherson’s comments are worse than "data mining" – he merely speculates and fumbles around without the benefit of any data at all. But the more fundamental problem is that his comments are completely uninformed by even elementary economic theory. Commenting on the incidence of tariffs without the benefit of economic theory is like trying to find one’s way around a foreign city without the benefit of street signs.

Southern congressmen were not being stupid or delusional in voting almost unanimously against protectionist tariffs in 1824, 1828, and 1860, or in outlawing protectionist tariffs altogether in the Confederate Constitution – as McPherson and Poulter imply. They were voting their economic self-interest, and the basic economics of international trade – something that McPherson and Keith Poulter seem completely oblivious to – bear this out.

It has long been understood by economists that import tariffs impose a disproportionate burden on export-dependent regions. And even McPherson admits that the South in 1860 exported about 60 percent of what it produced (others have estimated it as being closer to 75 percent). As Wilson Brown and Jan Hogendorn explain in their popular textbook, International Economics (p. 121), a tax on imports is effectively a tax on exports as well. This is because after a tariff causes the price of certain goods to rise,

. . . consumers . . . include the . . . price increases in their wage and salary demands. Everybody tries to pass the tax to someone else. The only group that is powerless to pass the costs on further are the exporters, who have to sell at world prices and swallow these costs. In essence, a tax on imports becomes a tax on exports (emphasis added).

International trade economists call this the "pass-through effect" of a tariff. Unlike McPherson and Poulter, early nineteenth century Southerners understood this perfectly well because they observed how their incomes fell whenever tariff rates rose. As John C. Calhoun explained in a September 1, 1828 letter to Micah Sterling of Watertown, New York regarding his opposition to the Tariff of Abominations, a protectionist tariff "gives to one section [the North] the power of recharging . . . the duty, while to the other [the South] it is a pure unmitigated burden." This is so, wrote Calhoun, because the South "was engaged in cultivating the great staples of the country for a foreign market, in a market where we can receive no protection, and where we cannot receive one cent more to indemnify us for the heavy duties we have to pay as consumers" (Clyde Wilson, ed., The Essential Calhoun, p. 190).

There is a second, more roundabout way in which import tariffs impose a disproportionate burden on exporters. As Wilson and Hogendorn further explain:

As tariffs cause imports to fall, less foreign exchange is needed to purchase them and the demand for foreign currency declines. The domestic currency will thus rise in value on the foreign exchange market. Exporters find that their foreign-currency earnings purchase less domestic currency and therefore they suffer.

Milton and Rose Friedman explain how tariffs discriminate against exporters and export-dependent regions on an even more fundamental level in their bestseller, Free to Choose (Avon paperback, 1980, p. 38):

If tariffs are imposed on, say, textiles, that will add to output and employment in the domestic textile industry. However, foreign producers who no longer can sell their textiles in the United States earn fewer dollars. They will have less to spend in the United States. Exports will go down to balance decreased imports. Employment will go up in the textile industry, down in the export industries. And the shift of employment to less productive uses will reduce total output.

This again is exactly how the export-dependent South viewed all the protectionist tariff bills promoted by the likes of Abraham Lincoln, a lifelong protectionist, and his Republican Party. Apply the Friedmans’ example to 1861, and one can easily see how higher tariffs on textile imports benefited the New England textile manufacturers and workers but harmed the export-dependent South. This is exactly how protectionist tariffs are always and everywhere a tool of political plunder. To make matters worse, as the Friedmans point out, they also cause an overall reduction in total output in an economy, making everyone poorer in an aggregate sense.

It wasn’t just the antebellum South that was victimized by Republican Party protectionism. By 1863, with the Southern Democrats out of Congress, the Republican Party increased the average tariff rate to nearly 50 percent. It remained at such lofty levels until the income tax was adopted in 1913. In a classic bait-and-switch con game, the federal government temporarily reduced the average tariff rate to gain support for the income tax, and then once the income tax was adopted tariff rates rose sharply once again.

During this time of Republican Party protectionist hegemony the farmers of the American West and the Midwest, who also depended quite heavily on foreign markets, were similarly plundered by tariffs. This led to a political movement for lower tariffs on the part of the "Populists." As explained by Frank Chodorov in his classic book, The Income Tax (pp. 36–37):

The plight of these farmers was made worse by the protective-tariff policy of the government. The best they could get for their products was the competitive world price, while the manufactures they bought, from the East, were loaded down with duties. Next to their demand for more money, the Populists clamored for lower tariffs.

Finally, the great mid-nineteenth century British champion of free trade, Richard Cobden, understood that 1) the South had a constitutional right to secede; and 2) the North was waging a war of economic plunder, not of humanitarianism. (Along with William Bright, Cobden was responsible for getting the British government to abolish almost all tariffs by the early 1850s). In a June 22, 1861 letter to one W. Hargreaves, Cobden wrote:

I have been reading Tocqueville’s Democracy in America . . . he takes the Southern view of the right of secession. He says, ‘The Union was formed by the voluntary agreement of the States; and in uniting together they have not forfeited their nationality, nor have they been reduced to one and the same people. If one of the States chose to withdraw its name from the contract, it would be difficult to disprove its right of doing so; and the Federal Government would have no means of maintaining its claims either by force or by right.’ He then goes on to argue that among the States united by the Federal tie there may be some which have a great interest in maintaining the Union on which their prosperity depends; and then he remarks – ‘Great things may then be done in the name of the Federal Government, but in reality that Government will have ceased to exist.’ Has he not accurately anticipated both the fact and the motive of the present attitude of the State of New York? Is it not commercial gain and mercantile ascendancy which prompt their warlike zeal for the Federal Government? At all events, it is a little unreasonable in the New York politicians to require us to treat the South as rebels, in the face of the opinion of our highest European authority [Tocqueville] as to the right of secession (John Morley, The Life of Richard Cobden (London: T. Fischer Unwin, 1905), pp. 849–50).

Thus, the nineteenth century’s greatest European champion of free trade, a British counterpart to John C. Calhoun, interpreted the War to Prevent Southern Independence as being motivated primarily by a lust for commercial gain on the part of the North, with the protectionist tariff as one of its chief weapons.

Regardless of what the exact percentage of tariffs that were ultimately paid by North versus South in 1861 was, it is not debatable that Southern secession and the creation of free trade in all the Southern ports would have been a huge drain on federal revenues, fully 95 percent of which came from tariff revenues. That is why, in his First Inaugural Address, Lincoln stated that it was his duty "to collect the duties and imposts," but beyond that "there will be no invasion of any state." That is, fail to collect the newly-doubled tariff rate, as the South Carolinians did with respect to the 1828 Tariff of Abominations, and there will be an invasion. He was true to his word.

The founders wisely made taxes on exports unconstitutional because they are so obviously harmful to American interests. What they failed to understand, however, is the basic economics of tariffs, which shows how a tax on imports is also effectively a tax on exports as well. As with all forms of tax incidence, what matters is who ultimately actually pays the tax, not who the law says should (in theory) be paying. John C. Calhoun understood this, as did most of his fellow Southerners since they were so burdened by protectionism. Northern steel manufacturers like Congressmen Justin Morrill of Vermont and Thaddeus Stevens of Pennsylvania understood it as well, for the opposite reason: They were on the receiving end of the plunder that was extracted by the Morrill Tariff.

If taxes on exports are unconstitutional, then so are taxes on imports, or tariffs. Anyone who claims to believe in the U.S. Constitution should therefore be in favor of one hundred percent free trade with no tariffs, quotas, or trade barriers of any kind.

January 15, 2004

Thomas J. DiLorenzo [send him mail] is the author of The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War, which was just re-released in paperback with a new chapter by Three Rivers Press/Random House.

Copyright © 2004

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