Independence Day: Taxes Then and Now

The history of taxation in the United States is a tumultuous one. Since our country’s founding, we have witnessed marginal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates on income ranging from zero to 94 percent, and federal revenues taking up less than 5 percent of our economy to more than 20 percent. With presidential candidates proposing more sweeping changes of their own, it seems the future of U.S. taxation will continue to be just as diverse. But what if we were to wind the clock back on our tax code? What was taxation like on the day a group of men in Philadelphia released a document that would change the world, 240 years ago?

Taxation in the United States in 1776 was incredibly different than what it is today. There were no income taxes, no corporate taxes, and no payroll taxes. Instead, the American Colonies (and to a larger extent, the British Crown) were primarily funded by tariffs and excise taxes. This means taxes primarily existed on imports of goods and services to the colonies, as well as on the sale of particular products.

What sort of items were these tariffs imposed on? Primarily, they were levied on ships on a per-tonnage basis, slaves, tobacco, and alcoholic beverages. In all, the average tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. worked out to about 10 percent of the value of imports, with lower rates being imposed on goods from Britain than from elsewhere. This was part of the British Empire’s mercantilist policies, an economic system that has since been largely discredited.

Midway through the 18th century, the British Parliament began imposing excise taxes that are notorious to this day. In 1764, Parliament passed the Sugar Act, imposing a tax of one pence per gallon on molasses imports, equivalent to more than $2 a gallon today. Just a few years later, the Townshend Acts started making their way through the British government, one of which imposed a tax on tea of four pence per pound ($8 today). Opposition to these taxes culminated in the famous Boston Tea Party.

What is more, the Townshend Acts were used to pay the salaries of colonial governors and judges, a duty that previously belonged to the colonies, thus robbing the power of the purse from local governments. This added to the cries of of “no taxation without representation” – the idea that it was unfair to impose taxes on the colonies by the very parliament in which they had no representatives. This principle was central enough to the eventual Revolution that it was enshrined in the list of grievances against King George III in the Declaration of Independence:

“The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States… He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation: For imposing Taxes on us without our Consent.”

Today, our system of taxation is vastly different. In addition to having our tax policy decided by elected members of Congress, tariffs make up less than 1 percent of federal revenue today, compared to 90 percent of all revenue more than two centuries ago. However, this is mostly due to the advent of other forms of taxation, such as on individual and corporate income.

In fact, the United States still collects about $30 billion from tariffs annually. Picking randomly from the 3,629-page schedule, these include tariffs on goats, couscous, copper ore, soaps made from animal fat, fabrics made with metal thread, glass cones used for cathode-ray tubes, and fishing reels, just to name a few. There also still remains a series of excise taxes that bring in more than $70 billion annually. Besides the usual suspects of taxes on alcohol and tobacco, U.S. excise taxes also include charges on arrow shafts, certain types of truck tires, and liquid hydrogen.

Americans are incredibly passionate about the impact of taxes on their lives, and rightly so. Tax policy impacts nearly every facet of our everyday life, from our work decisions to the prices of the groceries we buy. Even 240 years ago, taxes played a critical role in contributing to this nation’s founding. While saying that the U.S. tax system changed considerably since our first Independence Day is an understatement, we should continue to honor the power of taxes on our livelihoods as we look towards future reforms of our tax code.

Share this article