There was a time, before 1913, when you could keep every penny you earned. You did not have to file with the federal government, telling them what you earned and giving the feds their cut. Your finances were your business and no one else’s. You had the right to earn, own, and keep property, and it was sacrosanct, guaranteed by U.S. law and tradition.
There were no audits, investigations, account freezes, withholdings, or any other forms of payment. There was your productivity and you and that’s all.
How was the government funded? It earned revenue through tariffs. These are paid directly by importers and indirectly by producers and consumers if the costs can be passed through. As strategies for gaining revenue, this approach is relatively noninvasive. It left the population alone.
Back in those days, however, the federal government barely existed as compared with today. More precisely, in real terms, the federal government in 1885 spent in inflation-adjusted dollars about 0.05 percent of what it spends today. Even then, people believed that it was too big and wanted it cut back to size.
Donald Trump has recently been schooling people in the history of revenue strategies and he is teaching something that people have not known. He has explained how this period of American history saw the greatest amount of economic growth we’ve ever seen. He is correct about that and he is also correct that this was the period of the tariff.
The cause and effect, however, is murky. The main themes of this period were freedom and sound money. The dollar was governed by the gold standard and there was no central bank. The federal government itself had no presence in the life of the American family or typical American business. Those facts more than tariffs account for the difference between then and now.
As an aside, I cannot remember another U.S. president having as clear an opinion on 19th-century economic history. Most comments by presidents have been limited to pieties about the Founding Fathers or Lincoln but skip over details concerning revenue sources or controversies concerning national banks and the like. Trump is clearly different, highly confident in these details of history that are lost even on most economists.
Trump has explained that the income tax came along in 1913 as a replacement for the tariff. That is correct in design but the historical reality was slightly different. Tariffs were not abolished entirely. The income tax just became a second and additional source of revenue. Then the Great War came, financed in large part by the central bank (the Federal Reserve) that was created the same year.
The income tax and the Fed became the financial source of Leviathan power. Both came about in 1913, along with the direct election of Senators that blew up the bicameral structure of Congress and put the big cities in charge of America’s equivalent of the House of Lords.
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