Alexander Hamilton’s Economic Strategy: Tax and Borrow

The Founding Father most responsible for authoring our original economic policies and establishing our central banking system thought federal taxation was not meant to be exempted, cut, lowered or salvaged. To the contrary, Alexander Hamilton believed federal taxation should increase with increased income. Working-class Americans were supposed to pay taxes within their means, and wealthy Americans were supposed to pay higher taxes. “Means” meant something used for survival. Anything additional was a luxury subject to taxation.

Currently, those debating taxes often ignore the quotes of our Founding Fathers in such an out-of-context manner that The Federalist essays written by Hamilton, James Madison and John Jay aren’t even brought into the argument, specifically those written by Hamilton on the topic of taxation. The Federalist essays argued for the ratification of the Constitution and were used as a major part of the new draft. On taxation, Hamilton asked the State of New York,

How is it possible that a government half supplied and always necessitous, can fulfill the purposes of its institution, can provide for the security, advance the prosperity, or support the reputation of the commonwealth? How can it ever possess either energy or stability, dignity or credit, confidence at home or respectability abroad? [How can it undertake or execute any liberal or enlarged plans of public good?]

Hamilton’s solution to these rhetorical queries was to tax, of course. He proposed federal freedom to tax the occupants of all states without objection. Through a smooth argumentative blend of realism and analogy, he persuaded his audience to believe there was no other way for the denizens of a new country to survive and prosper through the support of the state alone.

(Credit: Wikipedia)

In the absence of sufficient taxes at the time, another strategy needed to be implemented to keep the country from withering at inception. Hamilton’s proposed 1787 backup plan? Loans from other nations allied to U.S. interests because America needed to be known as a country whose people were aligned with and contributing to the cause of prosperity. In Hamilton’s eyes, “IN THE USUAL PROGRESS OF THINGS, THE NECESSITIES OF A NATION, IN EVERY STAGE OF ITS EXISTENCE, WILL BE FOUND AT LEAST EQUAL TO ITS RESOURCES.'”

This quote from The Federalist was the only passage typed in all capitals throughout the entire document because Hamilton considered it perhaps the most important consideration regarding America’s future. As one might suspect, his proposed taxation was so wildly opposed in some states that a number of powerful policymakers nearly overlooked his visionary genius. Nevertheless, Hamilton’s policies were passed in relatively short order, and he moved on to become the first United States Secretary of the Treasury. In this office, he wrote all of Washington’s financial policies granting the federal government the right to tax everyone who earns income in this nation. This stands true even if the state is already taxing that same income earner.

As events leading up to every presidential election intensify, a constellation of politicians and pundits continue to overlook or ignore Hamilton’s policies. In a cynical maneuver, many Democrats and Republicans propose to cut federal taxes and put more responsibility back on the state merely to earn votes and keep the investors of their campaigns eager to assist. Were he alive today, Hamilton would probably suggest that this undermines the strategy to keep our nation afloat, ahead of our global competitors, and out of harm’s way. To Hamilton, taxes were not the enemy.