America’s War of 1812

I am anti-war, but if war there must be, then the people should be honest about its financing, and pay for the war while it goes on rather than pushing the finance to future generations.  The War in Iraq was fiscally dishonest in that the costs were not in the official federal budget, and it was paid for by borrowing.  The World Wars and Civil War were also paid for in large part by with war bonds and money creation.  As this year is its bicentennial, it is worth looking at how the War of 1812 was financed.

At first, Congress doubled the tariff to pay for the war, but since trade shrunk during the war, tariff revenue shrank rather than grew.  The US Constitution empowers Congress to levy a direct tax if it is apportioned by state population.  So Congress levied a direct tax on property, mostly on real estate.  The states could take a 15 percent discount if they collected the taxes themselves and transferred the revenues to the federal government.  Most states took advantage of this, which spared the federal government the expense of assessing the real estate and taxing the landowners.  Another federal tax was levied in 1815 to pay for the war of 1812, and then the federal property tax terminated.

Adam Smith wrote that wars should be paid for by taxes rather than borrowing, so that the people would not favor a war unless it was needed such as to defend against foreign aggression.  If the War in Iraq had been finance by taxes, it would most likely not have started!

The use of real estate taxes for the War of 1812 is a lesson for public finance.  If taxes there must be, then instead of a national sales tax or flat-rate income tax, the federal government could tax the states rather than the people.  Let the states pay, at their option, their share of the budget based on their share of population.  This works best if there is a federal tax on land value rather than on income or goods.  If all states did this, there would not have to be any federal tax bureaucracy.

Unfortunately, as Hegel observed, people and governments do not learn the right lessons from history.  At least libertarian candidates should learn from the War of 1812.  Two hundred years ago, the federal government was able to pay for national defense without an intrusive income tax.  We don’t need stinking taxes on wages and goods.  Let the states finance the federal government.  Let the states then have whatever public finance system they want. Political power would then flow back from the federal to the state level, and this decentralization would be good for liberty.  Remember the War of 1812!