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2018 | OriginalPaper | Buchkapitel

4. Why Is There a Ratchet Effect? Evidence from Civil War Income Taxes

verfasst von : David Mitchell

Erschienen in: Public Choice Analyses of American Economic History

Verlag: Springer International Publishing

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Abstract

The ratchet effect in public finance refers to the historical phenomena that the size of government increases during a crisis but does not return to its previous level when the crisis ends. The traditional explanation is that voters change their views on the appropriate size of government during the crisis. But change in taste is an explanation of last resort: it should not be accepted without examining alternatives. This paper looks Civil War taxes as an illuminating case of the ratchet effect. Both the observed political process and the resulting mix of taxes suggest that interest groups, not voters, led to the ratchet effect in this case. During the Civil War both tariffs and income taxes increased, but only the higher tariff stayed. This paper uses an analytical narrative to show that this was because the new interest groups only wanted the higher tariff and not the income tax.

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Vorheriges Kapitel A Paradox of Secessionism: The Political Economy of Slave Enforcement and the Union

Nächstes Kapitel Who Did Protective Legislation Protect? Evidence from 1880

Tabarrok and Spector (1999) analyze the 1860 election and Lincoln’s popularity.

During his tenure Lincoln carefully allowed certain issues to appear to be the work of Congress alone. These included increased tariffs and the national banking system. These issues were sectionally divisive, and Lincoln did not want them to break up his coalition. Copperheads were conciliatory Democrats.

A fourth important group was the Radical Republicans, which overlapped the other three groups but the loyalty of the Radical Republicans was never questioned. Radicals were inelastic demanders of Republican leadership.

Secretary of the Treasury Salmon P. Chase proposed that uninhibited lands in the northwest and west could be sold, but such sales would not bring revenue to the Union for quite some time.

Banks were also having difficulty selling bonds in part because of the Trent Affair. The Trent Affair occurred in Nov. 8, 1861 when the U.S.S. San Jacinto boarded the British mail carrier Trent and took two Confederate emissaries by force. Britain was understandably upset by the incident. The U.S. was forced to apologize and return the prisoners. Bondholders were afraid that if war with Great Britain broke out, the chances of the U.S. ever repaying debt would be dramatically reduced.

There are several accounts of Chase’s difficulty in selling the bonds, including Sharkey (1959). The Independent Treasury Act of August 1846, which stated that the Treasury could pay out and accept payment only in coin, proved a major impediment. Chase was able to get this law amended in August of 1861, but the delay made raising revenue quite difficult. Chase met with representatives of thirty-nine New York banks as well as representatives of Boston and Philadelphia banks. These bankers would later be an important interest group within the Republican Party. Chase focused on eastern banks because western banks lacked the resources to purchase or underwrite bonds in any great quantity (Dewey 1903).

States collected direct taxes for the U.S. government in 1813, 1815, and 1816 (Smith 1914, pp. 24–25).

Congressional Globe, 1st Sess., 37th Cong. 1861, p. 252.

Congressional Globe, 1st Sess., 37th Cong. 1861, p. 306. Colfax would become Speaker of the House in 1863.

Great Britain enacted the first income tax in 1798 under Pitt the Younger and abolished it in 1816. Sir Robert Peel instituted a second temporary income tax in 1842. However, due to the Crimean War it was not abolished as planned. The Confederacy also used the income tax both at the national and state level. For more on the history of income taxes, see Kinsman (1903) and Seligman (1895).

All writers on the subject note how little attention the income tax received at the time. Tariff schedules and property taxes account for much more of the debates for two reasons. First, tariff revenues would come in sooner. Second, representatives of organized manufacturing groups tended to hold leadership positions with agenda control. This is particularly true of the iron men.

The rate on coffee received the most attention. Chase suggested that coffee and tea be removed from the free list and that the low tariff on sugar be raised.

The finance capitalists were an organized group within the Republican Party. There are a variety of letters to both Houses from organized groups of finance capitalists. These can be accessed electronically at The Journal of Senate of the United States of America and The Congressional Globe. The interested reader can also look at Sharkey (1959, p. 250), Bensel (1991), McPherson (1988, p. 599), and Unger (1959).

On April 6 and 7, 1862 there were 23,746 estimated total casualties.

Because they were expected to be (and were) eventually redeemed in gold, the greenbacks were technically a credit money and not a fiat money.

Both New York City and Boston had draft riots.

The anti-war movement was probably strongest in Ohio, but Ohio also contributed great numbers of soldiers. This appears to be one of the reasons that Senator John Sherman (R-OH, later Secretary of the Treasury) was such a staunch supporter of the income tax. Sherman felt that Ohio could do much for the Union if its people were staunchly behind it (Bensel 1991, p. 329; McPherson 1988, p. 560.)

Stanley (1993) paints John Sherman as a centrist, but other writers including (McPherson 1988, p. 329 and 594) tell a story of Sherman as a staunch Republican. My view is that Sherman was a staunch Republican who was willing to make sacrifices to get the things he wanted. During the Civil War and Reconstruction about 75% of the Vermont vote went to the Republican Party. Congressmen like Morrill could certainly have taken very strong positions on a variety of issues, but as chair of the House Ways and Means Committee, Morrill was concerned about Republican fortunes in places beyond Vermont. At this time he was chair of the Subcommittee on Taxation.

Luxuries were also taxed. These included gold plate, carriages valued over 50, yachts, and pool tables (Smith 1914).

In the 1860 election, Pennsylvania sent 10 Democrats to Congress and 12 Republicans. Campbell of the 11th Congressional District (PA) was a Whig.

The House Bill had a 7.5% tax on incomes over 50,000, but this was removed in the joint conference.

George S. Boutwell was appointed the first Commissioner of Internal Revenue.

Report of the Secretary of the Treasury, 1863, p. 12. Originally found in Mitchell (1899). Chase also inflated the currency. Prior to the war, he was a hard money man. After the war he was again a hard money man, but during the war he was for inflation.

Neither Peacock and Wiseman nor Higgs mention any outright tax repeals.

Banking interests are typically associated with New England and New York. These areas also represented traders opposed to the income tax because they were going to be paying it, yet favored the income tax because it might replace high tariffs, which weakened trade.

Paul (1954) offers a slightly different perspective, arguing that banking and manufacturing interests were the force behind the movement to repeal the income tax, while merchants and importers were in favor of keeping the income tax and lowering tariffs. He does not split the country into the same three groups that I use.

This is not to say that Radical Republicans’ constituents were not also in favor of increased voting rights and punishing the South. However, it appears that during and immediately following the Civil War some Congressmen were elected who were more radical than the median voter in their districts.

In some western states, Republicans split off from the main party because of the party’s stance on gold. In some eastern states, some Democrats split off from the main party because of its stance on silver.

Pennsylvania iron manufacturers were the most ardent advocates of this.

The most contentious deduction was the fact that farmers who “ate” their profits did not pay taxes on them.

Western Republicans eventually left the party. Progressives and Populists from the West sided with the Democratic Party (Bensel 1991; Galloway and Wise 1976).

During the election of the Speaker of the House in 1859, John Farnsworth (R IL) argued that if a Southern Democrat was elected to the Speakership, “the committees shall be so stocked and constituted that the rivers and harbors of the West shall have no protection whatever.” Congressional Globe, 36:1:230, December 23, 1859. 87.7% of Free State Congressmen voted for the Rivers and Harbors bill in 1860, while only 20% of slave state Congressmen did so (Bensel 1991, p. 70).

Democrats reminded Midwestern protectionists that other nations would match protectionism for protectionism. A tariff on wool would mean reduced markets for other agricultural products. For example, see the remarks made by Fernando Wood, Chairman of the Ways and Means Committee, on April 9, 1878.

It should be mentioned that after the Civil War the income tax was not raising tremendous amounts of money. It was not the main card that Republicans were playing but rather one small piece of their win set. However, until other matters were taken care of, it could not be removed completely.

In addition, a high tariff on lead appeased certain states that feared Mexican competition.

“When the Civil War ended the interests of finance capitalists and the American state were probably more closely linked that at any other point in the nineteenth century” (Bensel 1991, p. 238).

The northeast includes not only finance capitalists but also manufacturers and international traders. Following Bensel (1991), at least some districts finance capitalists were extraordinarily strong. Furthermore, while international traders faced increased risk when they had to purchase their goods in gold but sell them for fiat money. While they could hedge their risk by buying options, they greatly preferred the gold standard. Moreover, chambers of commerce regularly lobbied the federal government for an end to the Greenback.

It might be argued that specie resumption was a payoff for the risky loans that finance capitalists took during the Civil War, but a more likely explanation points to their relative power. Mayer (1964) suggests a close association between Northeast financiers and a wide variety of Republican interests, including state parties in Ohio and Indiana. Mayer cites one Republican manager from Indiana who sent a letter to Jay Gould asking for 10,000 in 1876 to spend getting Indiana to vote hard money and Republican. Mayer also cites the close association with financiers when it came to defeating the Greenback party in the Midwest (Mayer 1964, p. 199).

Kindahl argues that species resumption would not have occurred if there hadn’t been major deflation as a result of currency contraction and recessions.

The “American state and the Republican Party were essentially the same” from 1861 to 1877 (Bensel 1991, p. 3). At the end of the Civil War, the Republican Party leadership consisted mostly of wealthy Northeasterners (Bensel 1991).

Interestingly, the Republicans and Democrats switched their stances on strong currency during the Civil War.

By 1884 veterans benefits would account for 29% of all federal expenditures.

Of course, the famous Spanish-American War telephone tax that lasted for one hundred years, but that is a different question. In 1898 the U.S. instituted a telephone tax to pay for the Spanish-American War. That tax was repealed in 1998. Since no organized constituent group opposed the small tax, it lasted. The Civil War income tax was small compared to some other taxes, but organized groups wanted it removed.

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Titel: Why Is There a Ratchet Effect? Evidence from Civil War Income Taxes
verfasst von: David Mitchell
Verlag: Springer International Publishing
Buch: Public Choice Analyses of American Economic History
Print ISBN: 978-3-319-77591-3

Electronic ISBN: 978-3-319-77592-0

Copyright-Jahr: 2018
DOI: https://doi.org/10.1007/978-3-319-77592-0_4