Taxation was an essential aspect of the Colonists disagreements with the British Crown. A long list of taxes imposed upon colonists was one factor leading to the United Colonies declaring independence and separating from Britain.
The federal government is one of specific limited powers delegated by the people through their states by ratifying the Constitution. Below are the relevant sections of the Constitution related to money and the government’s taxing authority.
Article 1, Section 2, Clause 3
Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons. Note this was modified by the 14th amendment.
Article 1, Section 8 (General purpose of the section, Clause 1, and Clause 4)
Introduction to Section 8:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
To borrow Money on the credit of the United States;
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standards of Weights and Measures;
Article I, Section 9, Clause 4
No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.
Taxing Authority under the Constitution
One of the shortcomings of the Articles of Confederation was the federal government’s lack of any taxing authority. Under the AoC, the federal government had to request funds from the several states. In some cases states would comply and in other cases states would not comply. The federal government was entirely dependent upon each state to contribute to the federal government.
To address the AoC shortcoming the states delegated powers to the federal government to lay taxes in the form of duties, imposts, and excises. This was the primary method the federal government used to raise revenue. The introduction to Article 1, Section 8 is one of the most abused and misunderstood parts of the Constitution.
The introduction provides a description as to the purpose of the section. At a high level it describes the taxing authority and the limitations on which those taxes may be used. “Congress shall have Power To lay and collect Taxes, Duties, Imposts, and Excises” is used to introduce the reader to the powers the section contains regarding taxing authority. Also, when a power is granted in the Constitution the word “To” is capitalized.
It then goes on to describe the limitations of the taxing authority “to pay the Debts and provide for the common Defence and general welfare of the United States”. These are restrictions on how taxes could be used. Note, the word “to” is in lowercase because it’s not a power rather it is the object on which the power would operate. Also noteworthy, this section of this clause is what is referred to as the “general welfare” clause and is often cited by living-breathing constitutionalists as a plenary grant of power to spend on anything that may be considered general welfare. While it’s beyond the purpose of this article to explain the purpose of the general welfare clause, you can read a detailed article here. Briefly, I’ll say this is a restrictive clause meant to ensure that any of the enumerated powers in Article 1, Section 8 are not used to benefit one person, group of people, a specific geographical area, etc. In other words, it must benefit all of the United States.
Lastly, what is known as a provision (provisio) is included as well. The provision reads “but all Duties, Imposts and Excises shall be uniform throughout the United States;”. The provision requires that any taxes laid and collected as a Duty, Impost, or Excise must be uniform throughout the United States. The provision prevents Congress from indiscriminately laying a tax. For example, the federal government collects an excise tax on every gallon of gasoline. The provision prohibits Congress from collecting an excise tax of 20 cents per gallon of gasoline from those in the Northeast and a tax of 40 cents per gallon of gasoline from those on the West Coast.
Besides duties, imposts, and excises the federal government was delegated the power to lay direct taxes under Article 1, Section 2, Clause 3. In this section, both representation and taxation are tightly coupled for reasons that should be obvious. Article I, Section 9, Clause 4 requires all direct taxes to be laid according to census or enumeration. Direct taxes were not imposed on the people directly. Instead, direct taxes were determined based upon representation (which is based on the census) and the states were levied the direct tax. If one state had 10% of the representation that state would be assessed 10% of the direct tax. Likewise, if another state had 1% of the representation that state would be assessed 1% of the direct tax. Every state retained the autonomy to determine how to collect that tax from the citizens of the state and then remit payment to the Treasury. Throughout the history of the United States direct taxes were levied on the states on five occasions.
At the time of ratification the state conventions and the framers intended to use duties, imposts, and excises to raise revenues to support the government. Direct taxes were generally understood to be necessary in special circumstances. In both cases, the Constitution limited the power of Congress to lay these taxes uniformly.
Money (currency) under the Constitution
An understanding of how the founding generation viewed and understood money is necessary to better understand how money is viewed today and the relationship with the taxing authority. During the revolutionary period the Continental Congress was the operating authority amongst the United Colonies. While there was an Articles of Association, a government wasn’t actually formalized until the ratification of the Articles of Confederation in 1781. The Continental Congress had no taxing authority and could not borrow money. The Continental Congress printed money called Continentals.
The Revolutionary War was funded by the printing of Continentals which was done frequently throughout the war. The value of the Continentals declined in value because they were being printed out of thin air. In 1779, George Washington wrote a letter to John Jay, president of the Continental Congress, saying: “In the last place, though first in importance, I shall ask, is there anything doing, or that can be done, to restore the credit of our currency? The depreciation of it is got to so alarming a point that a wagon-load of money will scarcely purchase a wagon-load of provisions.” The continual debasement of the currency led to the saying, “it’s not worth a continental”.
Under the Articles of Confederation states did emit their own money. There were competing currencies in each of the states whether these were struck coins or paper money. Some states debased their currency while others acted more responsibly. For instance, Rhode Island debased their currency to the point where creditors would not accept it. The state passed debt-currency laws requiring creditors to accept Rhode Island currency under penalty of the law. These issues with debt, payment, currency debasement, etc. were the primary drivers behind the powers delegated to the federal government under the Constitution.
The three primary money related issues were; borrowing money, emitting paper money, and striking coins (coined money). Under the Constitution, the Congress was delegated powers to borrow money against the credit of the United States and to strike coins. The states did not delegate powers to Congress to print money. Fresh in their minds were the experiences with the Continental and with state issued paper money. In fact, in Madison’s notes on the constitutional convention there was debate on this very issue. In the original draft the power to print money was included. Debates on this topic happened on August 16, 1787.
The vote at the convention on the issue to strike out the words “and emit bills” was 10 for and 2 against. Madison was opposed to this change initially but acquiesced. The reason Madison acquiesced was “Mr. Madison was satisfied that striking out the words would not disable the Govt. from the use of public notes as far as they could be safe & proper; & would only cut off the pretext for a paper currency, and particularly for making the bills a tender either for public or private debts.”
It is important what Madison said: This would cut off the pretext of a paper currency and for making the paper a tender either for public or private debts.
In fact, currency debasement was a vitally important issue to the founding generation. So much so, that the first Congress under the Constitution passed the Coinage Act of 1792. A link to the full text of the act can be found here. The act established the grains of gold and silver in coin, the value of gold and silver and the ratio between the two metals (bimetallism) and the punishment for debasing coins. This is from the actual law itself “every such officer or person who shall commit any or either of the said offenses, shall be deemed guilty of felony, and shall suffer death.” The punishment for debasing the currency was death. The Coinage Act of 1792 was repealed under the Johnson administration in 1964. The next year’s coins (think silver dimes, dollars, etc.) no longer contained all silver to the specified weights in the coinage act of 1792.
If the Constitution prohibited paper currency, how do we have paper currency today and how did paper money become legal tender? The Legal Tender Act of 1862 was passed to meet currency needs during the civil war. The law authorized the issue of $150 million Greenbacks that was not backed by any specie. The currency was backed by government bonds. Overall, roughly $450 million of Greenbacks were issued. The currency depreciated over the course of the war and after the war debts could be paid with this cheaper currency. A case reached the Supreme Court which ruled the Legal Tender Act unconstitutional as it violated the 5th amendment. President Ulysses S. Grant was angered by this and increased the size of the Supreme Court from 7 justices to 9 justices and appointed two justices to the court to overturn the earlier case.
The entire concept of money and taxation has been turned inside out by the Supreme Court in the legal tender cases, the Federal Reserve Act of 1913, the sixteenth amendment, and the removal of gold as backing of the federal reserve note (domestically in 1933, and internationally in 1971). The very reason the states delegated powers to the federal government to coin money and to regulate the value thereof, and prohibited the federal government from printing paper money was to ensure the currency wouldn’t be debased like it was with the Continental or by various states of the Union.
The ultimate contradiction comes into play when you consider the government’s new found authority to print paper money without the backing of specie and the government’s taxing authority. If you recall, the intent of the original taxing authority was to raise revenues through duties, imposts, and excise taxes. Direct taxes were generally understood to be necessary in cases of emergency (i.e. to pay off debts or fund wars). Why does the government need the power to tax, to borrow, and to print? Inquiring minds want to know.
Why does the government need the authority to tax citizens if it can simply print money at will? Why does the government need to tax and print? There is an answer to this question that is not obvious to most people. Pay attention to The Forgotten Men’s Facebook page as this will be a topic of discussion and we’ll see if you know the answer.
If we remove the ability to tax then the government can only print which is merely the situation under the Continental Congress in 1776 when they had no taxing authority and could only print money. We know that was a failure. We know the states printing money was a failure. So, why does anyone believe the currency can survive if the government prints money? The only reason why the Constitution granted the authority to tax and to prohibit paper money was to ensure the government could raise revenue not just create money out of thin air. Remember the slogan, “it’s not worth a Continental”. Well today’s slogan should be “it’s not worth a dollar”.
The country is worse off now because not only can the government tax anything, they can borrow money, and they can print money at will. The very government instituted by the Constitution to eliminate certain pitfalls is empowered to partake in all these destructive acts. A system that allows the government to create $16 trillion of debt, print money at will, and tax the people for everything and anything is a government that was not instituted by the consent of the governed nor is it a government that protects life, liberty, and property.