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Constitutional tariffs, incidental protection, and the Laffer relationship in the early United States

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Abstract

This article explores an early attempt to establish a constitutional constraint on tariffs utilizing the Laffer Curve relationship. In 1842 John Calhoun suggested that the curve’s revenue maximization apex could be used to differentiate between “Revenue” and “Protective” tariffs independently from the non-judiciable question of legislative motive. When admitted that a tax must actually be collected to remain constitutionally valid, the apex functions as a de facto upper tariff rate constraint. Despite subsequently falling in disfavor, Calhoun’s argument illustrates the importance of political economy on the constitutional level by recognizing conditions that induce policymakers to rationally raise tax rates at the expense.

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Notes

  1. Canto et al. (1983). For further theoretical work and empirical testing on the Laffer Curve see Buchanan and Lee (1982), Stuart (1981), Fullerton (1982), Swenson (1988), and Sutter and Weck-Hannemann (2003).

  2. Blinder (1981, p. 83). Blinder also notes the curve is fundamentally a mathematical device, represented in the theorem of 17th century mathematician Michel Rolle. Rolle’s Theorem recognizes that in a continuous and differentiable function on the x-axis with two equal points, or f(x), a point must exist between them where f′(x) = 0, or essentially the Laffer Curve’s peak.

  3. McGuire and Van Cott (2002, p. 428). The list of Laffer precursors includes, among others, Alexander Hamilton in Federalist #21 (Showalter 1999) and Adam Smith in the Wealth of Nations (Irwin 1998). It should be noted that Laffer himself does not claim credit for discovering the relationship, although conventional usage has come to associate it with his name. Laffer (2004) traces the principle to the 14th century philosopher Ibn Khaldun.

  4. DiLorenzo (2002) and Saxton (2003). McGuire and Van Cott (2002, p. 431) acknowledge that the Confederate tariff clause “made explicit…that which Calhoun, rightly or wrongly, argued was implicit in the U.S. Constitution.”

  5. Tullock (1967) first examined the dual rent characteristic of tariffs, considering the transferred portions of the consumer surplus to be susceptible to rent seeking and thus wasteful. Unlike many modern tariffs, which are strictly for protection, the 19th century U.S. tariff system contained a sizable revenue element in addition to its protective purposes.

  6. Buchanan and Lee (1982, p. 816). An extensive literature of explanations for this critique has emerged in its wake. Buchanan and Lee suggest that the revenue maximization points of a given tax differ between the long run and short run, meaning a policymaker’s rate decision may outpace public response to a tax change. Besci (2000) argues that the curve’s shape is “shifty,” thereby limiting the ability of policymakers to determine whether existing rates are to the right or left of the revenue maximum.

  7. Hamilton (1791).

  8. Luther Martin, Genuine Information, in Storing (1981), Vol. 2.4, p. 55; Oliver Ellsworth, Speech to the Connecticut Ratification Convention, January 7, 1788, in Elliot (1888), Vol. 2, pp. 190–197.

  9. Madison to Cabell, September 18, 1828, in Hunt (1900), Vol. 9, pp. 324–325. A related discussion in Gutzman (1995) identifies the context of Madison’s letter—the emerging nullification crisis—as a troublesome part of his political philosophy due to its seeming inconsistency with his earlier conceptualization of federalism. The distance of Madison’s 1828 letter from the convention as well as his political purposes in writing it cast doubt upon his impartiality as a witness for this particular clause.

  10. This bargain is sometimes referred to as the “dirty compromise” Madison (1987).

  11. McGuire and Van Cott (2003).

  12. Ibid., p. 40.

  13. See United States vs. The William, 28 Fed. Cas. 614, No. 16, 700 (D. Mass. 1808).

  14. Taussig (1931, pp. 14–15) documents this occurrence in the Tariff of 1789, “which had aimed solely at procuring the needed revenues” and was presented by Madison “on the general principles of free trade.” Protectionist interests in Congress succeeded in attaching “a more complicated scheme” of higher duties on selected articles.

  15. Taylor (1821, pp. 103, 100).

  16. Calhoun, in Lence (1992, pp. 313–314). It is notable that Calhoun, like Taylor before him, identified the tariff’s symmetry effects on exporters and cited them as evidence of a disproportionately allocated tariff burden (pp. 316–317).

  17. Ibid.

  18. In particular, see Calhoun’s February 15, 1833 speech on the Force Bill. “The very point at issue between the two parties there is, whether nullification is a peaceable and a efficient remedy against an unconstitutional act of the General Government, and may be asserted, as such, through the State tribunals.” Lence (1992, p. 428).

  19. Story (1833) Sect. 958 in particular restates the argument in language lifted directly from the Exposition. “It is true, that the eighth section of the first article of the constitution authorizes congress to lay and collect an impost duty; but it is granted, as a tax power, for the sole purpose of revenue; a power, in its nature, essentially different from that of imposing protective, or prohibitory duties. The two are incompatible; for the prohibitory system must end in destroying the revenue from imports. It has been said, that the system is a violation of the spirit, and not of the letter of the constitution. The distinction is not material. The constitution may be as grossly violated by acting against its meaning, as against its letter….”

  20. Story (1833), Sects. 966, 968.

  21. Ibid., Sect.  1086. For a further discussion of the motive principle, see also Sects. 966, 967, and 968.

  22. Ibid., Sect. 1086. To the contrary, Story also believed that non-revenue tariffs fell within the scope of an expansive interpretation of the commerce clause. He reached this conclusion by disassociating the tariff as an instrument of policy from its assessment, leaving the matter to the question of motive. The revenue collected from a tariff, he contended, “flows from, and does not create the power” of the tariff itself. “It may constitute the motive for the exercise of the power, just as any other cause may; as for instance, the prohibition of foreign trade, or the retaliation of foreign monopoly; but it does not constitute the power.” Sect. 1084

  23. Congressional Globe, 27th Congress, 2nd Session, p. 808.

  24. See Blinder (1981, pp. 84–87), in general discussion of the tax rate, and Irwin (1998, pp. 64–65), specific to tariffs. It follows that the decline in tariff revenue after revenue maximization is determined by the taxed good’s price elasticity. Blinder (1981, p. 87) indicates that extremely high elasticity is often necessary for a low revenue maximization point. He accordingly rejects the usefulness of the Laffer Curve for broad-based tax policy. The relationship may nonetheless have greater explanatory value for specific import items, where high elasticity and extremely high tariff rates are common. Walker (1851), for example, indicated that many items on the 1842 Tariff schedule were taxed at ad valorem equivalents well in excess of 100% of their value.

  25. Calhoun, in Wilson (1992, p. 194).

  26. Though it is his clearest and most detailed articulation of the subject, the August 5 speech was not the first time Calhoun hypothesized the Laffer relationship. A week earlier he stated “Here is a rule which may be depended on, it cannot be got over: Raise the duty so high as to diminish the amount of importation, it must be for positive and direct protection, and nothing else.” Congressional Globe, 27th Congress, 2nd Session, p. 808.

  27. Calhoun, in (Wilson 1992, p. 195).

  28. McGuire and Van Cott (2002, p. 432).

  29. McGuire and Van Cott (2002, pp. 431–432) provide a description of this principle in the Confederate Constitution using a partial equilibrium diagram on a hypothetical good.

  30. Blinder (1981, p. 86) and Irwin (1998, pp. 64–65) elaborate on the calculation of a revenue maximization tax rate. Per Irwin, if import prices are fixed, t* = −1/(1+n D) where n D is the relative elasticity of demand for the import. When anticipating flexible import prices as affected by the duty assessed on them, t* = (n D − E S)/E S(1+n D) where E S is the elasticity of supply for the foreign export.

  31. Proponents of the strict constitutional construction attempted to approximate revenue-maximizing rates for specific items based on customs house returns. Calhoun offered the example of cotton bagging in the context of his argument during the 1842 debates (Congressional Globe, 27th Congress, 2nd Session, p. 808). Robert Walker, the Secretary of the Treasury for President Polk, similarly based his recommended rates for the 1846 tariff on approximations intended to maximize revenue.

  32. Walker (1851, pp. 4, 7).

  33. Walker (1851, p. 4) reported that for the 1845 fiscal year, existing ad valorem duties averaging 23.57% brought in more revenue than specific duties at an average equivalent of 41.3%, indicating “that lower duties increase the revenue.”

  34. Stanwood (1903), Vol. 1, pp. 310–332 discusses the issue at length in his two volume history of tariff legislation, written from an overtly protectionist perspective. More recent examinations are rare, among them McGuire and Van Cott (2002), and introductory commentaries to the works of Calhoun (e.g. Lence 1992) and John Taylor of Caroline (1999).

  35. Dictum from Justice McLean’s dissent in the 1841 case of Groves vs. Slaughter, 40 U.S. 449, suggested protective tariffs were an exercise of commerce clause powers, rather than a revenue clause measure. “Under the power to regulate foreign commerce Congress impose duties on importations, give drawbacks, pass embargo and non-intercourse laws, and make all other regulations necessary to navigation, to the safety of passengers, and the protection of property.” A direct hearing of the issue did not come before the court until 1928 though.

  36. J. W. Hampton, Jr., & Co. vs. United States, 276 U.S. 394 (1928).

  37. J.W. Bailey vs. Drexel Furniture Company. 259 U.S. 20 (1922). The Supreme Court has long held Congress may adopt certain taxes with the purpose of burdening the taxed entity to the effect of advantaging or disadvantaging a desired activity, e.g. “[T]he judicial cannot prescribe to the legislative departments of the government limitations upon the exercise of its acknowledged powers. The power to tax may be exercised oppressively upon persons, but the responsibility of the Legislature is not to the courts, but to the people by whom its members are elected.” Veazie Bank vs. Fenno, 8 Wall. 533 (1868); “[N]o instance is afforded from the foundation of the government where an act which was within a power conferred was declared to be repugnant to the Constitution because it appeared to the judicial mind that the particular exertion of constitutional power was either unwise or unjust.” McCray vs. United States, 195 U.S. 27 (1903). In each of these rulings the court nonetheless acknowledged limitations on taxation for non-revenue purposes: “It would undoubtedly be an abuse of the [revenue] power if so exercised as to impair the separate existence and independent self-government of the states, or if exercised for ends inconsistent with the limited grants of power in the Constitution” Veazie Bank vs. Fenno, 8 Wall. 533 (1868); “[I]f a case was presented where the abuse of the taxing power was so extreme as to be beyond the principles which we have previously stated, and where it was plain to the judicial mind that the power had been called into play not for revenue, but solely for the purpose of destroying rights which could not be rightfully destroyed consistently with the principles of freedom and justice upon which the Constitution rests, that it would be the duty of the courts to say that such an arbitrary act was not merely an abuse of a delegated power, but was the exercise of an authority not conferred.” McCray vs. United States, 195 U.S. 27 (1903).

  38. “The purpose to regulate foreign commerce permeates the entire congressional plan. The revenue resulting from the duties ‘is an incident to such an exercise of the power. It flows from, but does not create the power,’” citing Story (1833, Sect. 1084). Board of Trustees of University of Illinois vs. United States, 289 U.S. 48 (1933).

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Acknowledgments

The author would like to extend his thanks and gratitude to Professors Jack High, Kenneth A. Reinert, and Gordon Tullock for their helpful feedback and suggestions for this paper.

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Correspondence to Phillip W. Magness.

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Magness, P.W. Constitutional tariffs, incidental protection, and the Laffer relationship in the early United States. Const Polit Econ 20, 177–192 (2009). https://doi.org/10.1007/s10602-008-9060-6

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