How Former President Washington Dealt With The First Real Tax Crisis In America
As the current presidential candidates debate the economy, it can be tempting to believe that spending and taxes are modern issues, that administrations in years past didn’t face shortfalls and revenue challenges. The reality, however, is very different. Our first president, George Washington, publicly grappled with tax policy in the late 18th century – putting the new nation’s ability to deal with crisis to the test.
George Washington was unanimously elected our first president and was inaugurated on April 30, 1789. Washington’s initial advisors (who would be called his Cabinet) were Secretary of State Thomas Jefferson, Secretary of Treasury Alexander Hamilton, Secretary of War Henry Knox, and Attorney General Edmund Randolph. Of the four, Hamilton took office first, besting Knox by just one day.
At the time Hamilton was appointed, the United States didn’t have a federal income tax. In the absence of an income tax, the government was largely funded by a series of tariffs (as well as a short-lived version of the estate tax). The tariffs, as initially structured, were often reactionary and used to raise revenue in response to identifiable events. Hamilton was concerned about long-term growth of the country: specifically, he worried how, in the absence of any real tax policy, the United States would continue to pay the bills. The country was still struggling to find its economic footing after the Revolutionary War: it wasn’t a fast and easy war, lasting eight years. At the end of the war, the United States found itself $43 million in debt. By 1791, the nation’s debt was estimated at $71 million (roughly $1.752 billion in today’s dollars).
To solve the country’s problems – and promote further growth – Hamilton recommended a series of progressive tariffs and other revenue proposals. One of those proposals, offered in 1791, included a tax “upon spirits distilled within the United States, and for appropriating the same” – largely, a tax on whiskey. Unlike tariffs, which were generally taxes on imports and exports, the tax on spirits was a direct tax on spirit distillers inside the country. To collect the tax, Hamilton created a federal agency (the precursor to today’s Internal Revenue Service).
Hamilton felt that the distillers could bear the tax and if it eventually led to a reduction in the consumption of alcohol in the country, all the better. In that way, it was one of the first versions of the “sin tax” (a tax meant to control social behavior) in the country. Hamilton had, however, failed to comprehend just how much the country loved their spirits.
The majority of distillers in the country were farmers who felt betrayed by the tax. Nearly a quarter of the nation’s distilleries were located in western Pennsylvania: they vowed to kill the tax. The easiest way to kill the tax was to simply not to pay it – but others went further and opposed the tax with violence, attacking tax collectors, leading to the so-called Whiskey Rebellion.
To deal with those who resisted, Washington issued a stern warning in 1792, advising the protestors to pay their taxes. It was the equivalent of shaking a finger at those who refused to pay. Washington didn’t take additional measures – and the protestors considered this a victory. With that, the protestors became emboldened and engaged in more violent protests. In 1794, the protestors set fire to the home of John Neville, a western Pennsylvania tax supervisor. Faced with threats of more violence, Washington felt he had no choice other than to call up the militia. A militia of nearly 13,000 was sent to keep the peace, staying several months.
The military presence worked and eventually, the Whiskey Rebellion came to an end. Afterward, numerous men were rounded up and tried for treason: two, John Mitchell and Philip Weigel, were found guilty though eventually pardoned.
With the relatively painless putdown of the rebellion, many declared a victory for Washington’s administration: he had proved that he could both keep the peace and exercise the authority of the federal government.
It wasn’t quite such a victory for Hamilton: in 1802, President Thomas Jefferson repealed the excise tax on whiskey.
In his farewell address to the nation, President Washington stood firm to the principles of revenue and taxation, calling public credit “a very important source of strength and security.” He warned that our country should “use it as sparingly as possible, avoiding occasions of expense by cultivating peace.” Washington went on to say that to deal with inevitable wars and other expenses, “it is essential that you should practically bear in mind that towards the payment of debts there must be revenue; that to have revenue there must be taxes.” However, he reminded his country that tax policy should be thoughtful, declaring, “no taxes can be devised which are not more or less inconvenient and unpleasant.” He urged taxpayers to be accepting of the need to raise revenue but cautioned that the process should be dictated according to the needs of the people.
It would be nearly 75 years after the Whiskey Rebellion before the nation would adopt an income tax – and more than 100 years before the creation of the modern income tax system we use today.
This article was written by Kelly Phillips Erb from Forbes and was legally licensed through the NewsCred publisher network.