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. …