Federal Taxation under Jefferson

The federal government had three sources of revenue in 1800: public land sales, customs duties, and internal taxes. Tariffs averaged only 13 percent ad valorem, although specific duties on sugar, tea, coffee, and salt ranged from 50 percent to 100 percent. The Federalists had imposed internal taxes on whiskey stills, domestic liquor sales, auction sales, carriages, and legal documents. These taxes produced $1 million in federal revenue in 1800, four-fifths of which came from the excises on whiskey and distilled spirits. When Jefferson recommended repealing these taxes, the Federalists replied that import duties on such “necessities” as coffee, tea, and sugar should be reduced instead. They argued that reducing the duties on tropical commodities would be of more benefit to the people than reducing the whiskey excise. The Federalists knew what they were about. They wanted to retain the internal revenue system with its host of revenue officers, collectors, and inspectors. They understood that a reduction in import duties could always be reversed by a future congress, but that while it would be much more difficult to re-impose internal taxes and recreate a machinery of domestic tax collection after both had been repealed and abolished. They remembered well that the first attempt in 1794 to impose an excise on whiskey produced a tax revolt in the American backcountry.[8] A future Federalist administration might face even greater domestic resistance in trying to bring back the excise than they faced in imposing it. For the same reasons, Jefferson and his Republican allies were determined to repeal altogether, not just reduce, the internal taxes and to abolish the inspectors and collectors of the revenue. They were successful. Jefferson signed the reform bill into law in March 1802. Jefferson next set his sights on repealing the duty on imported salt which brought in over $500,000 in revenue annually. Jefferson began to push for its repeal in 1806. His party abolished the salt duty early the next year.[9]

In his Second Inaugural Address, Jefferson noted with triumph and satisfaction that federal taxes were “being collected on our seaboards and frontiers only, and incorporated with the transactions of our mercantile citizens.” Thus, “it may be the pleasure and pride of an American to ask, what farmer, what mechanic, what laborer ever sees a tax-gatherer of the United States.”[10]

If federal expenditures on the whole were not reduced under President Jefferson and if taxes were twice reduced, then why did the Treasury Department run a surplus each year from 1801 to 1808? There are two reasons. First, Jefferson raised taxes. In early 1804, Gallatin and Jefferson proposed increasing the tariff duties by 2.5 percent and by adding an additional duty of 10 percent on all goods imported via foreign vessels. The change would have increased the average tariff rate to 16 percent ad valorem. Because its ostensible purpose was to finance the unexpected expenses arising from the Tripolitan war, it became known as the “Mediterranean Fund.” The Republican majority promptly passed the measure. The additional duties brought in about $1 million of increased revenue a year, thus compensating for the loss of revenue due to the repeal of the internal taxes. Both Gallatin and the Republican congressional leaders promised that the increased tariff would be only a temporary measure. Their bill required that the tariff be brought back to its previous level three months after the close of hostilities with the Barbary powers. However, the Republicans renewed the tax in 1807 despite the cessation of hostilities the previous year. The renewal was due also to the increase in the customs revenue during the 1800s. The increase was created by growing imports, the profitable carrying trade, and the acquisition of the port of New Orleans under the Louisiana treaty. Under the carrying trade, American vessels brought Spanish and French colonial goods to an American port, paid a duty, and then reexported them to Europe. The volume of this trade was enormous in 1801 and 1805–1807.[11]