The Confederate Constitution, Tariffs, and the Laffer Relationship

McGuire, Robert A., Cott, T. Norman Van, Economic Inquiry

I. INTRODUCTION

Documenting who understood the Laffer relationship between tax rates and tax revenues has been a cottage industry for economists for a number of years. (1) This article offers a historical antecedent of a higher order. We document the existence of a national government whose constitution effectively limited its fiscal authorities to tax rates on the Laffer relationship's lower end more than 100 years before Arthur Laffer drew on a napkin. That government was the Confederate States of America. The tax rates were Confederate import tariffs.

Constitutions are not repositories for the inconsequential. Indeed, constitutions are the paramount legal and political institutions in societies. A constitution contains a society's fundamental rules, specifying the constraints placed on governments and individuals that establish a society's incentive structure for the future. Constitutional rules are not to be taken lightly. (2) The Confederacy's constitutional "cap" on import tariffs was not explicit, however. Rather, the cap follows inescapably from juxtaposing a straightforward economist's perspective on the Confederate Constitution's tariff-enabling clause with the historical record. An intriguing byproduct of this juxtaposition is the proposition that the "tariff" might have been even more important to the Confederacy's "founding fathers" than historical economists currently acknowledge.

Short of a time machine, however, no one can discern whether the framers of the Confederate Constitution actually knew of the Laffer relationship. But what the Confederates knew is not the issue. Our interest is directed at what the Confederates did. What they did was implement a tariff clause whose wording effectively constrained their fiscal authorities to tariff rates on the lower end of the Laffer curve. Regardless of what the Confederate framers actually knew about the Laffer relationship, they acted as if they knew about it.

Just as constitutions are not inconsequential, Confederate import tariffs were not expected to be inconsequential taxes. Todd (1954, chap. 4) argues that Confederate tariffs were expected to supply substantial revenues to the Confederacy, indicating that the Confederate Secretary of the Treasury expected to raise more than $25 million in 1861 alone. Such expectations are not surprising. Except for 1836, import tariffs were the largest single source of U.S. government revenue from 1789 to 1860. The Confederacy's founding fathers obviously brought this knowledge of government revenue sources to the drafting of their constitution. (3)

Any discussion of the effects of the Confederacy's tariff rule on resource allocation is necessarily speculative. The tariff rate proscription was operative for only four years, years marked by a devastating war, which the Confederacy lost. Moreover, the Confederacy early in its history actively discouraged cotton exports-its primary export-in an attempt to coerce political and military support from England and France. Export restrictions have consequences similar to import tariffs. Also, the North's naval blockade of Confederate seaports, though obviously porous, amounted to an externally imposed import (and export) quota against the Confederacy. (4) It exacted an increasing toll on the Confederacy as the Civil War progressed, undermining the Confederacy's de facto cap on import tariff rates. (5)

II. THE CONFEDERATE CONSTITUTION'S TARIFF CLAUSE

Constitutional scholars have long noted a marked similarity between the United States and the Confederate constitutions. The Confederacy's founding fathers obviously had profound admiration for the U.S. Constitution, as they in fact modeled their constitution after it. Nevertheless, the two constitutions' tariff-enabling clauses are quite different. The Confederate clause (Article I, Section 8, Clause 1) states that:

The Congress shall have power-

To lay and collect taxes, duties, imposts and excises, for revenue necessary to pay the debts, provide for the common defense, and carry on the Government of the Confederate States; but no bounties shall be granted from the treasury; nor shall any duties or taxes on importations from foreign nations be laid to promote or foster any branch of industry, and all duties, imposts and excises shall be uniform throughout the Confederate States. [emphases added] (6)

Import duties were to be only for revenue purposes. Moreover, import duties were not to "promote or foster any branch of industry." (7)

The U.S. Constitution omits a "for revenue necessary" clause as well as a prohibition on tariffs being used to "promote or foster any branch of industry." The U.S. Constitution's taxation clause (Article I, Section 8, Clause 1, as well) states that:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.

Given that the U.S. Constitution was the model for the Confederate Constitution, the Confederate framers obviously made conscious constitutional choices to prohibit tariffs that "promote or foster" industry and include a "for revenue necessary" provision in their tariff clause. (8)

The conventional interpretation of the Confederacy's tariff-enabling clause is that it represented a compromise between southern free trade sentiment and the Confederacy's tax revenue requirements. (9) Our contention is that the clause goes beyond some vague notion of "compromise." In particular, it represents a constitutional constraint that effectively limited Confederate tariffs to the lower end of the Laffer curve. But before turning to an examination of the economic and historical basis for this interpretation of the Confederate tariff clause, we examine some of the forerunners to the clause.

III. FORERUNNERS TO THE CONFEDERATE TARIFF CLAUSE

Given the earlier noted insight of Alexander Hamilton into the Laffer relationship (in the Federalist papers), his thoughts represent a good starting point for understanding the origins of the Confederate tariff clause. As Hamilton (Hamilton et al. [1945, no. 21, 132]) observed:

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a limit, which cannot be exceeded without defeating the end proposed,--that is, an extension of the revenue when applied to this object, the saying is as just as it is witty, that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds.

The Federalist was written, of course, in support of the U.S. Constitution. Nonetheless, Hamilton used his insight in paper no. 21 to allude later in paper no. 35 …

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Publication information: Article title: The Confederate Constitution, Tariffs, and the Laffer Relationship. Contributors: McGuire, Robert A. - Author, Cott, T. Norman Van - Author. Journal title: Economic Inquiry. Volume: 40. Issue: 3 Publication date: July 2002. Page number: 428+. © 2003 Western Economic Association International. COPYRIGHT 2002 Gale Group.

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