1 - The formative tax regimes, 1789–1916

Summary

Modern American tax regimes began with the ratification of the U.S. Constitution in 1788. The new Constitution established powers and requirements that have had an enduring influence on the nation's tax regimes. The Constitution gave the new federal government clear and broad powers to impose “indirect” taxes—taxes on commerce that consumers would pay only indirectly, through intermediaries—as well as the power to borrow and the exclusive power to create money. But the Constitution restricted the ability to levy “direct” taxes—taxes levied directly on individuals. This restriction had a major impact on the form of future federal tax regimes and on the division of tax effort between the federal government and the governments of states and localities.

The framers of the Constitution provided only the skeleton of a state. It was up to the leaders of the new republic to develop the central instruments of government, including government finance. These leaders experimented with many of the specific taxing instruments allowed by the Constitution, but they made extensive use only of the taxation of imports. They discovered that import taxes met most of their needs for tax revenues while minimizing political discord. Therefore, the tax regime that followed the creation of the new constitutional order was based on customs duties; it lasted until the Civil War, making it the longest in American history.

Only during the Civil War did politicians begin to exercise in earnest the wide range of tax instruments possible under the Constitution.