The Issue of Tariffs: How U.S. Revenue Collection Was Turned Inside-Out

0:00It's going to be a lot of data, and I'm just going to keep sort of giving you tidbit after tidbit after tidbit, and I hope you don't mind my taking the lion's share of the hour. But I want you to keep in mind the reoccurring thread that's going to be in the entire lecture is how we go from tariffs being the major source of federal government revenue to what we have today under the income tax, where payroll taxes are the major source of federal government revenue. Professor Alt reminded me once that when he heard I was giving this lecture that a famous movie among students is Ferris Bueller's Day Off. I don't know if some of you have ever had the pleasure of seeing it. And supposedly when Ben Stein was being cast for the part as this boring professor, he was supposed to be giving a science lecture.

0:47And Ben Stein said, no, no, no, no, science is way too interesting. If you really want to get students bored to death, let me teach about the tariff history of the US. So, in all deference to Ben Stein, I'm going to try and make my lecture a little bit more colorful and interesting, perhaps, than a monotonic Ben Stein, and just sort of march you through the time period from 1789 to the Great Contraction or Depression. How's that for an oxymoron? It's a lot of ground to cover, so bear with me. I thought I'd start with where you can find a lot of what I'm about to discuss. Perhaps the premier author on all this stuff is Frank Tosich, whose name's adorned on the wall here, quite pleasant to see here, who wrote the Tariff History of the United States.

1:36Jonathan Hughes, who is quite responsible in his textbook, American Economic History, of actually getting under my skin and talking about the Constitution and tariffs when I was an undergraduate. Charles Adams book for good and evil and also when in the course of human events that well I guess this is a shameless plug I'm acknowledged in both of these books Charles Adams we've corresponded over time with the sort of political economic events and of course Eaklin and Thornton's book on all the tariff history stuff which I read through manuscripts a couple of times and some of my comments they actually took the heart which was pleasant to see all right a little bit of Facts Along the Way. The first one I'd like to offer to you today is in 1790, 99.9% of total federal government revenue is generated by tariffs.

2:32Now why do you think I really sort of hammer my students with that? 1790. What's special about that year? It's the first full year we operate under the United States Constitution. Now, call me funny folks, but I think maybe that's a clue, right? The folks that are running the government at that time are the ones that wrote and ratified the document. This may give you some insight on how they wanted the federal government to finance itself. Of course, those of you who are curious about that other one-tenth of one percent, it's gifts to the Treasury. I know that's hard to imagine today that anybody felt so good about their government that they gave gifts to it, but it was a young government and folks were much more kind about it. The next tidbit I'd like you to put in your notes for those of you who are doing so, in 1860 still 94% of total federal government revenue is generated by tariffs.

3:25If you're interested in where the lion's share of that other 6% comes from, it's monies coming in from land sales from the Louisiana Purchase. And this ebbs and flows over time. The Eakland and Thornton book do a very good job at showing you some of the ebbs and flows. and Flows. But for those of you who have an idea of where I'm heading, why do I stop in 1860? The following year, war between the states. And that's when we get our first federal income tax. So keeping in mind this sort of change from tariffs to payroll taxes is going to be the central theme. Now, what looms large over a lot of this discussion are maritime trade issues. So I thought I'd start with the first war for independence.

4:12And since this is a low budget film, I'm honored to be the first person that's the first brown bag to ever be on video, but pretend the snake in the writing isn't there for now and just 13 red and white stripes. The name of that flag, many folks nomenclated the Sons of Liberty flag. From my research, I believe the first nomenclature for it was the colonial merchant flag. This was the flag that colonial merchant ships flew as their ensign out on the high seas. Then when the British Navigation Acts came about, which basically favored British ships, British sailors, British merchandise, if you had all three of those in your favor and you were bringing goods into the colonies, you got much favorable or more favorable tax treatment. Sound familiar? Using the tax code to pick winners and losers.

4:58When the British Navigation Acts of 1775 came about, that's when they put the snake on there and the no lo me tangre, or don't tread on me, depending on whether it was English or in Latin. And the name of this flag is the first Navy Jack. And Jack is kind of an important thing to discuss. A Jack is the flag that you fly on the front jack spar, the jack post when you go into port. This flag was designed to do something very specific, anger the British. When those colonial merchant ships went into ports, they put up this flag to say, we really don't like this egregious stuff that you're doing with taxation and the Navigation Act with a code. Well, the first war for independence, it's full of wonderful lines.

5:44Of course, when I asked my students who Sam Adams is, they tell me some dude who brews beer, right? Sam Adams, great claim in the first war for independence was charging the British Customs House. Of course, you can get some great quotes from George Washington when he says that the Quebec Act is going to steal thousands of acres of land from him. He'll field an army on his own purse and March to Boston himself. So my next flag, and it's one of my favorites and I apologize for the condition of these back before the government took my house. I actually used to fly them on a flagpole. This, some folks call the Grand Union. I like the nomenclature of the first continental better. There's a lot of symbolism in this flag. It's the flag that George Washington used for the Continental Army.

6:32Now remember, what I'm trying to get you to think about are maritime issues. Whenever Britain goes to war, the first thing they like to do with their navy is blockade ports. Well, as unpatriotic as this sounds, I think it's a beautiful flag, it's the British Red Ensign. It's supposed to be just a completely red field with the Union Jack in the canton. Well, why do you think the colonial army was out there waving their beautiful British Red Ensign cut to red and white ribbon? It was designed to anger them. This was a symbol of saying that we're going to actually withstand your blockade. And of course, the British Navy was very good at what they did at that time. Now, red and white are the colors of secession that go all the way back to these two flags.

7:19And for those of you who have read the Declaration of Independence, which starts out, when in the course of human events, it's time to separate bonds with a tyrant, that's really what the story is about. Now, my students seem to think that Thomas Jefferson writes the Declaration of Independence in 1776 and poof, the Constitution magically appears. Of course, you folks know better. The war doesn't end until 1783 and you're still, of course, under the Articles of Confederation. It's in 1787 when you start to see the move toward a quote, more perfect union, unquote, to give us the US Constitution, which isn't ratified and put into effect until 1789. Now those of you who have the handout, this is just a page out of an old encyclopedia of American history.

8:06As a matter of fact, when I use it in class, it's so outdated I don't even have to pay copyrights to put it in my reader for my handbook. And of course, more is the pity, heaven forbid, you know, good pieces of articles that just give the facts. Nobody seems to be interested in reading anymore. It starts out with a tariff of 1789, which you'll find is pretty low with respect to modern-day tariffs and taxation. Now, some things I'd like to plug along the way. Article 1, Section 8, Clause 1 of the U.S. Constitution says, all impost duties and excises shall be uniform throughout the United States. A key word, and when we get to 1861, it will become even more apparent.

8:52They didn't want the tax code to be used to pick winners and losers. Now in that time period before the Constitution, you've got these 13 nation states that of course Britain sues for peace with individually, starting to want to retreat into their own fiefdoms and start playing games with barriers to entry and taxation, et cetera, et cetera. Now the Constitution makes a pretty good first stab is trying to stop that protectionist game that's starting to take place between the nation-states. And you'll find that some things get some preferential treatment, but the average dutyable rate is pretty low at 8.5%. Now, of course, my students always get a big kick out of there being a protective tariff on hemp, right?

9:38That gives all new meaning to grow your own. But the one that had the most protection was nails at 15%. Now when I get students to try and understand this at the principles level, I work on the ridiculous assumption that the consumer bears all the tax. So imagine a $1 pre-tariff box of nails coming in from a foreign nation would be $1.15 with a tariff imposed. Now if you're the domestic nail producer, you can either lower the quality of your nails or raise the price to $1.149 and pretty much be blanketed from any competition. Now the diagram goes as follows, it was simplified by a very good international economics teacher that I know from Auburn University.

10:23Imagine here's your equilibrium solution for price and quantity for iron under constitutional competition. What does that mean? You have a nice low uniform tariff. So you have US suppliers in here and of course if Britain, France, Germany, Sweden, whoever else also wants to supply into this market, Market, fine. Now what do you think your supply curve is going to look like with a perfectly protectionist tariff or quota? Now generally when I teach this it's easier to say a perfectly protectionist quota first because I can give them a number, right? A perfectly protectionist quota is zero. That means that nothing's coming into the nation at least legally. A perfectly protectionist tariff is one where the rate is so high that nothing is being imported at least legally. So what do you end up with? Well, you end up with just your U.S. or domestic suppliers.

11:13And lo and behold, what happens to price? Your protected price is higher, Ceteris Paribus, and your quantity protected, of course, goes down. Now, what most folks don't seem to understand when they look at this, what I affectionately call in my principles classes, the lore of protection. Why? Well, under constitutional competition, zero through quantity US, this is what your domestic producers bring, the rest are brought by non-domestic producers. Now the neat thing about protectionism for domestic producers is they get to bring more iron into the market at a higher price. What a great deal.

11:59So, this is effectively a wealth transfer from domestic consumers to domestic producers. That's the heart of understanding today's lecture. When you start playing these sort of games with a tax system, it becomes a wealth redistribution from consumers to certain producers. Now, back to the Constitution. The Constitution puts a two-year appropriations limit on the Army, which of course I think is a great deal. Why? The framers of the Constitution didn't want standing Federal Armies around for long periods of time. Do they put a similar appropriations limit on the Navy?

12:46No. Why? They knew that since this coalition was brought together to facilitate trade between member nation states and other nations and this group of member nation states, most of the trade took place via the ocean. If you want to be able to define and enforce and defend your goods out on the open sea with trade, you better have a good what? Navy. That's why there's not an appropriations limit put on the Navy as is on the Army. And of course, when I tell students this, they say, well, what about when you need ground troops on short notice? I love it when it all comes together, right? From the halls of Montezuma to the shores of Tripoli, right?

13:37For having ground troops on short notice, you're supposed to have the United States Marine What's one of the things that you have to worry about when you're engaging in trade out on the open sea? Pirates, right? And I mean, this isn't har-har, you know, Johnny Depp, Happy Days type stuff. These folks actually played hardball. If you couldn't define and enforce your flag out on the open sea, you lost your ships, you lost your stuff. Now, does that sound like a property rights issue? You bet. Now, consider the following, and once again, since this is a low budget film, imagine I had a nice pretty British Red Ensign over here to show you, and one of these.

14:32And one of these, and you're a pirate out on the high sea, looking at a nice juicy ship right there on the water line, barely seeing any red. Ceteris Paribus, which ship are you going to take, the one flying the Bessie Ross or the one flying the British Red Ensign? They went after the Betsy Ross almost every time. Why? What was true about our Navy relative to the British Red Ensign and the British Navy? No comparison. Well, back to the shores of Tripoli. Remember back when our nation actually used to try and follow the Constitution and, you know, we did things like declare wars and, you know, not make up things, etc., etc.

15:19It was very clear that the Barbary pirates were taking our stuff if we didn't pay tribute to them. Now, the Washington and Adams administration basically felt comfortable just continuing to pay the extortion money, the tribute, to the Barbary states. Then enter this hard-headed Jefferson. Basically, when the Barbary states raise the tribute, Jefferson says, no way, we'll keep paying the old extortion, but not one penny more. Well, the Barbary pirates didn't like it, so they started in taking our ships and sailors, etc, etc. And we went to war and against insurmountable odds, this little ragtag U.S. Navy kicked the Barbary states. Even the British Navy stood up and took notice when we did that and started firing ceremonial salutes when our ships would go by.

16:09Now, that was very short-lived. Why? For those of you who have a hand out in front of you, let me pass that one down. What's looming large on the horizon after this is the War of 1812. Well, this is basically the first war for independence revisited. And I know there's a lot of folks that don't like me discussing the war in this tone, but it certainly has a lot of maritime issues associated with it. Whether you want to talk about the Chesapeake incident or the fact that the British Navy is taking, U.S. merchant ships and sailors and impressing them if they can't actually take the ship as a prize, they take the stuff off of it and burn the ship, etc., etc. Now, does it sound like the Brits are being pirates? Yeah, but we don't call them pirates because they're a civilized nation.

16:59So, we do in fact get together, declare war, and of course that's one of the issues that looms large over it. But once again, what does the British Navy do to U.S. ports? Blockades, and I've given you a clue here. The major source of federal government revenue is tariffs. The blockade means that your revenues are going down. You're fighting a war, so your expenses are going up. At the end of the War of 1812, we end up with a lot of debt. What a surprise. And just to keep it colorful, and for those of you who don't know, my hometown is Baltimore, Maryland.

17:45I'm very proud of this flag. This is in fact a Star Spangled Banner. What's interesting about it? 15 stars and 15 stripes. Back then, they cared enough about states that they actually added a star and a stripe at the time. The Battle of Fort McHenry really is one of the turning points of it. and Armistead, who's also a great southern name in the war between the states, basically turns the tide of the battle and we defeat the British in round two. Of course, we have all this debt to pay. Enter Professor Tolzak's work in the tariff history of the United States. The tariff of 1816 looms large over any discussion of the tariff history of the United States because he says that's where the 20% benchmark is set for the average dutiable rate for tariffs.

18:36What does he mean by that? As long as tariffs remained at or below 20%, basically you didn't have folks threatening to nullify, secede, bringing guns to the floors of Congress, caning each other, etc., etc. Basically, there's a threshold. And if you look at more modern history today, you'll find that no matter what tax rates have been in post-World War II America, All they collect out of the economy is 19.5% of GDP. So folks back then even understood if you start trying to steal more than a fifth, people start trying to stop you from stealing from them. What a surprise. Now, even John C. Calhoun signs on the dotted line of the Tariff of 1816. Why? He says we have to pay off this debt from the War of 1812, and we have to think about future possibilities of dealing with issues like this and the thing that he basically felt the most comfortable with is it was supposed to be limited to 1819, they were supposed to phase out.

19:36Well of course they didn't. Now it's important to understand in the international trade that's going on here and in Taussig's book he does a wonderful job showing the data. and Data. Whenever Europe goes to war, demand for U.S. exports explodes. During the Napoleonic Wars there's this little lull in the battle called the Peace of Amiens and it's like somebody turns off a switch and demand for U.S. exports go right back down again. They start the war, turn on the switch, demand for U.S. exports goes right back up again. It's a wonderful Now, instead of tariffs starting to go down in 1819 like they're supposed to, right, and here's where Congress did a rather wise thing, say, okay, guys, all these things that you've benefited from, wars, etc., etc., have come to a close, it's time to realize you're going to have to compete and tighten your belts.

20:34And what's nice about it, right, is you're giving them a time frame to peg and start to phase out. Well, not all is smooth sailing, as you'll see, the tariffs over the next several years change and by 1824, they're going up. 1828, they reach fever pitch with a tariff of abomination, the average dutyable rate goes from the benchmark of 1816 of 20% to 61%. When I go to this, I ask my students how do you think folks would feel if federal taxes tripled over the next dozen years or so? Well, they'd be pretty angry. And you really think folks were any different 100, 200 years ago than they are today. This is where things come to loggerheads, which triggers the nullification crisis.

21:22And this is where John C. Calhoun in South Carolina evoked the old nullification ideas from the Northeast, which stemmed from the Alien and Sedition Acts and say this doesn't follow the letter of the spirit of the U.S. Constitution. The Tariff of 1828 is going to be null and void in the confines of the state of South Carolina. This is where you have Andy Jackson who has no clue about what the Constitution says, much less care about adhering to it. He actually asserts state sovereignty where there is none with pushing out the Cherokees and letting the Georgians do a whole bunch of stuff they're not empowered to do under the Constitution. But then, of course, doesn't allow South Carolina to do something that you can make a very strong argument for out of the Constitution. Cooler heads prevail, tariffs are lowered in 32 and 33.

22:13Now, the whole stage for war between the states is set with a tariff of 1828, but it doesn't happen. And I'm convinced that the reason why it doesn't happen is there's not a whole bunch of rhetoric, right? The folks on the floor of Congress are actually being honest about what their jobs are. and they're not trying to trump up rhetoric about class warfare and fairness and all this other sort of stuff. Now it's interesting the courage that your Congress had back during the War of 1812. That's the first time the income tax is proposed, but it shut down. Of course the members of Congress realized that this would be an abomination to their oath of office if they were to go to direct taxation given what the document was set up to be and how it was supposed to finance itself.

22:59Now, the next diagram that I'd like to just briefly go through, and it's a very simple one, many of you will just associate it with being the Laffer curve, and of course it applies to the tariff history of the U.S. So on one axis, you've got tariff revenue. On the other axis, you've got the tariff rate. And of course, students always get angry when they end up scoring poorly on their quizzes because they swap up the axes. And once you see in a moment how foolish that is, the Laffer curve generally looks like this. And this stems straight from the demand curve, right? At a zero percent tariff rate, how much revenue are you going to get?

23:48Zero, right? Zero percent of a billion dollars is still a zero. Of course, as you raise the rate higher and higher and higher, the revenue you receive will go up and up and up forever, sooner or later the price of the import is going to get so high because of the tax, what's going to happen to purchases? It's going to go down and down and down until the rate is so high that how much is purchased? Zero at least legally. Now I'm going to borrow from Professor Rockwell's terminology. He says that the Constitution basically put the government at war with itself and I really like that nomenclature. Basically, if the government wanted to start playing a tax game of picking winners and losers, they did it at their own expense because it would cut revenue at the same time.

24:33If states get together and say they want protection, they're saying we're not interested in trade. Well, do you need a Navy and customs officials and forts and all this other stuff if you're not interested in trade? No, and it also cuts your revenue at the same time. time. This is pure genius. In my estimation, in my humble opinion, this is one of the most important parts of the U.S. Constitution and of course Article 1, Section 8 goes on further to describe those few things that the federal government is supposed to be involved in. All right, so all seems smooth sailing after the tariff of abominations. Instead of killing 600 plus thousand people, We just lower the taxes back off of it and we're done. Now, some students find it odd to watch the tariffs come down, especially the Walker Tariff of 46, which is a democratic measure.

25:25Most folks think of Democrats as the big government spend party and all that other sort of stuff. And of course, in modern days, they are, right? But back then, they actually were the party that tried to lower taxes, get government off the backs of people, et cetera, et cetera. And I guess one of my catchphrases when I try and get people to understand this, you know some folks think that Hoover was the small government low-tax guy we're going to blow up that myth here in a little bit right you need a strong right wing and you need a strong left wing to get the pig to fly well as long as you've got both of those wings flapping nice and strongly then the thing actually takes off and there's no amount of folly that ends up being the result now the tariff of 1857 is where the benchmark is returned you're back to for that 20% average-duteable rate.

26:15And as I throw out many things here today, here's one where the Austrians are uniquely placed. We do a terrible job as economists getting folks to understand the difference between panic and depression and contraction and recession. We throw all these words around and they tend to not mean anything. The panic of 1857 stems from the fact that folks have been investing in Wall Street under this distortion that the government's created. Well, once you get out of protecting the industrial sectors and all these folks that are getting preferential treatment, you want to remove monies from those sectors and put them into the competitive sectors that actually are going to generate profits instead of wealth transfers.

27:03Does that create some short-term heartache? You bet it does. But understand what generated the source of that heartache was a distortion that was started by a disuniform tax system to begin with. Now once we as economists can get people to start understanding the difference between this sort of creative destruction that's taking place and what's going to happen when you remove yourself from command and control economies, we're going to continue to fall into that same claptrap of see what happens when you lower taxes and get rid of regulation? and it's a disaster every time. No, you have to understand that those realignments are going to take place over time because of the distortion that started. All right, now we're to 1860.

27:50The moral tariff of 1861, and that is M-O-R-R-I-L-L, not to be confused with the word moral that some of you folks think of. It's named after a rather unscrupulous congressman And those of you who know the parallel, Auburn University is a moral land-grant university and here was a guy who basically tried to capture southern intelligentsia to get him to believe all this Republican protectionist nonsense was actually good for the economy. And I even like the nomenclature that this little article or this page out of the encyclopedia history uses, the Triumph of Protection. The moral tariff in one step more than doubles the average dutiable rate and note the date on it, 2nd March 1861.

28:38What happened shortly thereafter? South Carolina fires on Fort Sumter. I love the words that Taussig uses in his book. He says the ink isn't even dry on the moral tariff before South Carolina is firing on Fort Sumter. Now what's the interesting part of Fort Sumter? It's not the first fighting of the war. That takes place at Fort Brankus, January of 1861. It's not first blood of the war, which takes place days later in Baltimore, when the 6th Massachusetts commits treason and invades the sovereign state of Maryland. What's the importance of Sumter? It's where the customs officials are stationed. Customs officials collect tariffs.

29:24This was supposed to be a symbolic event, every bit as symbolic as Sam Adams charging the British customs house in the first war for independence. Well, you can see that those two ideas are alive and well in the students of modern America. Brewing beer and all sorts of other things will come up as answers for either of those events. Certainly, taxation is never the answer. All right, so let's take some time to march through some of the minutiae of the Moral Tariff of 1861. The Moral Tariff in 1860 passes the House with flying colors. It does not pass the Senate. Why? The House is determined by population, right? So, all those folks up in the northeast that want those wealth transfers, because the lion's share of the taxes are paid by the southern states, Article 1, Section 7 of the U.S. Constitution says that all bills for generating revenue have to originate in the House of Representatives and then it goes on to talk about overriding a veto.

30:27Well, 11 states officially break off to start this new confederation out of 30 states. talk about overriding a veto. Well, 11 states officially break off to start this new confederation out of 33 states total. How's that for high-powered econometrics? 11 over 33 is a third. Now, for some reason, folks are talking about, the South just hated the Constitution, was dying to get out. It's all Boulder Dash. There are a whole bunch of constitutional unionists that wanted to stay in the Union but follow the letter and the spirit of the Constitution.

31:13Now, many students who come to my class, especially from government schools, have suffered through, you know, bleeding Kansas and the Missouri Compromise and all that other sort of stuff. Of course, what's not being told is the reason for it. It matters, right? At the next state in the coalition, if it's a tax state that's going to advocate high taxes instead of trade, then no matter who your executive is, you can just do what? Override the veto. Now, who's your 15th president? James Buchanan, a Pennsylvanian. He actually got votes from North and South, maybe because he was Pennsylvanian, but he was a champion of Trade.

31:59So southern states were more than willing to vote for this guy and of course then when you start to see tariffs go down in 1857 in a panic, everybody starts backpedaling. Enter the newly formed Republican Party which is basically just a rehash of the old Whig Party. If you read Mr. Lincoln's platform, one of the planks in it is he wants to return the tariff back to 1828 levels. Everybody in the nation knew exactly what that meant. He's saying, I'm going to go bullhorn this, railroad it through, and try and play games with lowering like the last time. It's not going to happen. Now, why does the moral tariff pass the House and the Senate in 1861?

32:46Southern states are gone. South Carolina left a year prior in December, Florida's gone, Mississippi's gone, Alabama's gone. If you've ever read Jefferson Davis' farewell speech to Congress, it's certainly an eye-opener in that regard. Alright, cooler heads did not prevail here, obviously, and of course, 620,000 people die in this endeavor. Of course, I've missed out on one of my colors here. And once again, I apologize for how poor they are. These things actually used to fly. This flag is the stars and bars. This is the flag that flew over Fort Sumter after Anderson left.

33:31And for those of you actually know the story, it's probably interesting of note. What is it? 35, 33 hours of bombardment. Does anybody die at Sumter? No, Anderson knew exactly what he was up against. Beauregard knew exactly what he was firing upon. The only deaths in the incident are the next day when they allow the Union guys to bring down their flag. I guess some arrogant Yankees decided to overcharge a signal cannon. Don't ask me how you do that. And it exploded and one died and four were wounded. No one considers that first blood of the war any more than anybody considers Fort Brancas, first blood of the war. When the Confederates get the Union forces out of Brancas, they just cross the moat, for lack of better words, to Fort Pickens, which never falls.

34:18One Confederate dies there from a snake bite. Nobody considers that first blood of the war. What do folks consider first blood of the war is April 19th, ironically enough, right? Shot heard around the world, same date. When the Sixth Massachusetts assemble as an army through the streets of Baltimore, each issued 20 rounds of ammunition. And for those of you who don't know, Article 3, Section 3 of the US Constitution says that treason shall consist only in levying war against them or adhering to their enemies. Note the plurals. So of course, when South Carolina is firing on Fort Sumter, it's not one state committing an act of treason against another state. When the 6th Massachusetts marches through the sovereign state of Maryland, which is still in the Union at the time, Barely, there is your first implicit, well I guess that's explicit act of treason.

35:11Lincoln's call for the 75,000 man Federal Army is the first implicit act of treason. Now a little side note and things that I've corresponded with over the years with Professor Adams, Baltimore was the first town to suffer under Benjamin the Beast Butler, those of you who know who he is, real nice guy. He comes under the cover of a storm and takes the high ground at Federal Hill over Baltimore. And he aims a bunch of cannons at the city and says, you folks are going to adhere to federal law, we're going to open fire. Of course, what's the first thing that they do when Baltimore capitulates? Make sure that the United States military federal flag is flown over the customs house.

36:00One of my favorite international professors from over at Auburn University, who I'll allow to remain nameless since academic freedom is not particularly alive and well over there once said that the war between the states was simply a trade war that went hot. I think that's about the best I've ever heard it described that. So you had a group of people who did not want this tax system that didn't follow the letter of the spirit of the Constitution. and once again, when in the course of human events, decided to break those bonds. Now, I'm not gonna belabor all the stuff with the war between the states and I know I annoy a lot of people because I just don't take a lot of interest in the ground battles and all that other sort of stuff because it's all pretty moot to me.

36:48Once you understand what triggered this just catastrophic event, it's a monument to man's stupidity that so many people died. Now, it's important to understand that this is really when you start to see the class warfare game play, right? It's hard to go before Congress and say, we want to raise tariffs to 61% average doable rate because we want to steal from consumers, right? It's just like the American Dairymen's Association doesn't go before Congress when they want price supports on milk and say, I want to steal 75 cents from everybody who buys a gallon of milk in America, right? You get Willie Nelson to come out and, you know, to all the cows I've loved before and Sally Fields, right?

37:33I love cows, all that other sort of stuff. It doesn't mean anything, but it's great rhetoric to cloak the wealth transfer. The war between the states, I think, is really the first example of how catastrophic that can be when you decide to not pay attention to the letter in the spirit of the Constitution. All right, since I'm running out of time, let's start talking about the end of that century. And for those of you have the handout in front of you, it talks about the McKinley Tariff, which now is raising the average dutyable rate to 49.5%. This is even higher than the 47% of the moral tariff. An interesting thing starts to happen.

38:21The debate starts to rear its ugly head up again about the income tax. Well, what did I tell you? The war between the states is when we observe the first federal income tax, 3% on incomes over $800 for those of you who are nostalgic. Boy, those were the days, huh? Now, understand it's the same game at play. Once the southern states stop paying taxes, Lincoln finds himself in a tough position. His expenses are rising. His revenues are decreasing. So they're issuing a bunch of bonds and stuff to try and get themselves out of debt. And of course, that's what gives us the income tax.

39:06Now, the war between the state's income tax is abolished in 1872 when Southern states returned to Congress that realized it's an abomination and a direct taxation. It doesn't rear up its ugly head again until the Wilson-Gorman Tariff. So here's my second charge to you Austrians. Now realize, you know, when I was suffering through macroeconomics, right, and they're all marching their bordered Hessians around and nailing themselves to a Keynesian cross, nobody wants to talk about what's going on in fact. It's an interesting point in history. At this point in history, the Wilson-Gorman tariff reintroduces the income tax in return for lowering the average dutiable rate from about 49.5% to about 39%, pretty big reduction, now it's a Faustian bargain basically what's happening is all the big government advocates who need those southern states to get this thing to go through and say, gee, we'll give you some tariff relief so you guys can be made better off and we're going to tax all those big incomes in the Northeast.

40:19Now, of course, the morons that didn't think about it, oh yeah, you're going to tax all those people in the Northeast, where do I sign? Doesn't work. Thankfully, you actually had a Supreme Court back then that paid attention to the letter in the spirit of the Constitution and in 1895, the income tax actually makes it to the Supreme Pollock versus Farmer's Loan and Trust, which rules the income tax, unconstitutional, everybody knew it was unconstitutional. The congressmen that weren't willing to do it during the War of 1812 knew it was unconstitutional. I can't believe that someone of Lincoln's intellect didn't understand that it was unconstitutional, not that he had any reverence for the Constitution, of course, when they were doing it at the time, they knew it was unconstitutional.

41:07So this is where I affectionately tell my students that the Supreme Court came and peed in Congress's cornflakes, so all bets are off. What do they have to do? Go back and redo the tariff. The Dingley Tariff, which Professor Blackstock still chuckles whenever I mention the name of the Dingley Tariff, raises the average dutiable rate to a new high, 57%, we're almost back to the tariff of abominations level. All right, because I'm running out of time, let me skip to what they call the period of moderation here. Of course, what's going on is you're starting to see the 16th Amendment gets ratified, right? Once something's ruled unconstitutional, what's the way around the Constitution? You amend it.

41:53And what I want to finish out the last 10 minutes or so is to get you to understand how terrible it is now because you've got a double-barreled shotgun. Now, you can increase your tariffs and even though your tariffs are going up so high that your revenues are going down, you can now substitute your revenue with what? The income tax. Thank you, sir, may I have another. This is a pure disaster for the future of the nation. All right, as I said in the past, whenever Europe goes to war, demand for US exports explodes. Well, notice that the next tariff that's getting into the range of where I'm talking about is the emergency tariff of 21.

42:38Well, what's the emergency? The Treaty of Versailles in 1919, Europe is actually getting back on its feet and being able to grow and make its own stuff. Demand for US exports is going back down, what a surprise. Now for those of you who think that John Maynard Keynes was a complete dullard, believe it or not there was one time where he actually could bring together facts, logic and reason and he was one of the folks that warned against how terrible the Treaty of Versailles was going to be for the future of world economies and he was dead on in that respect. Now, all this, and of course, what's the emergency Europe is getting back on its feet, and U.S. producers are going to have to tighten their belts or compete, or they're going to have to go to Congress for wealth transfers.

43:23What do they pick? Surprise, surprise, go to Congress for wealth transfers. Now, the Fordney-McCumber tariff basically just formalizes what's going on with the emergency tariff, but notice what's happening. It's not only raising duties on manufactured goods, but this is where the Republicans start to come along and try and play the game on farm products and raw materials. Why is that a disaster? Comparative advantage. Why is it stupid to put high tariffs on your comparative advantage? When we raise our tariffs, other nations often do what in response? Raise theirs. So, when you raise tariffs on manufacturing goods and crap that nobody wants overseas, does it really hurt you that much?

44:13No. If you raise tariffs on what you're exporting, does it hurt you? Yes. You start closing markets that were available to you because people are responding with their higher taxes. Taxes. All right, interesting things are going on at this time. So as these tariffs start getting higher and higher and higher, the agricultural community starts to suffer. So basically, the Fordy-McCumber Tariff shoots the agricultural community in one foot. Boom. So what do they do? Enter Hoover and the Republicans and they go to them and say, where was all this relief you promised us? We're suffering out here. We're falling apart. What do they do? Shoot themselves in the other foot.

45:01I love this Hoover quote, basically saying, you know, you folks are still suffering. We must not have raised tariffs high enough. Enter Ben Stein, the Smoot-Hawley tariff, which raises tariffs to the most protectionist in U.S. history. That's cited by at least some economists because they're trying to look at the impact of tariffs overall. A 100% tariff on diamonds isn't going to be as damaging to an economy as a 100% tariff on corn and that's why they cite it as such. Alright, notice I'm getting back to this double-barreled shotgun stuff of now you don't have folks that care as much about tariff revenues because what do they have as a substitute?

45:49The income tax. Tax. Now, this is straight out of Professor Vedder's book, The Out of Work, which is a great read for those of you who have not done so, and I love to use this in class because it gets people to understand the facts. Heaven forbid we give these facts to folks who somehow want to believe that, you know, Hoover was this laissez-faire, low-tax guy and that, you know, FDR was this nasty big government, you know, regulator stuff. Well, you're only half right. They were both big government, tax and spend social engineers. And of course, back to getting that left wing and right wing together to get the pig to fly. Now, most students have it memorized. When does Wall Street crash?

46:37October 29. Now understand, when this is going on, you don't have Keynesian economists. You got economists that actually think about the world around them and understand some history. 1,000 professional economists send an open letter to Hoover and say, don't do this. He's out there jaw-boning about how great tariffs are going to be. The economists are telling him, this has been tried back to the days of Diocletian. It doesn't work. It causes wars. It causes crisis. Hoover's response, those pinheaded economists, they don't know what they're talking about. We realize consumers are going to pay higher prices, but they're going to be made better off. Now whenever a politician tells you you're going to be made better off by higher prices, and those higher prices aren't going to motivate more supply in, right?

47:28Those higher prices are a result of supply being restricted. Run, don't walk from them, hold on to your wallet the entire way. This is moronic. Now once that letter hits and everybody knows that Hoover's not going to listen to any sort of Reason, Wall Street crashes well before this, but notice that unemployment is still in single digits. When I try and get students to understand some of this business cycle thing, I ask them the question, when do you think Wall Street responds to legislation? When somebody sits their butt down in a chair and actually signs it into law, or when they think it's going to pass? and they think it's going to pass. To use Mr. Thornton's analogy, you want to be the first cat out the door, right?

48:18So the folks in Wall Street that know what's going on have already gotten out of the market. They realize that this huge endeavor in social engineering is going to fail. This is where you get famous quotes from Joe Kennedy when they realized that the power is no longer in Wall Street. It's going to be in D.C., picking winners and losers and market forces are going to take a back seat. Now, what's nice about this? Note, when the Smoot-Hawley tariffs enacted, what immediately happens to unemployment? It explodes, right? And of course, we've already told folks what our tariff schedules are going to be, so they went ahead and retaliated in that regard and of course, who you're disproportionately going to find in that pool of unemployed are folks that are discriminated against, agricultural workers, etc., etc. Well, when you start to It's good to see the U.S. bank failures, where are they disproportionately skewed towards?

49:15The Midwest, the South, the agricultural state. Why? They're the ones that are getting hammered. Understand that the Fordney-McCumber tariff is the first real exercise in trying to play this protectionist game in agriculture. And it's not working. Now, of course, that's when the whole house of cards starts to fall in, because no matter how many much folks think are insulated by this, once banks start failing, it has a domino effect. Of course, one of my favorite things is, oh, yeah, we're suffering. Let's raise the income tax. That'll help. Now, for folks who really believe that Roosevelt somehow saved the country, please take a look at the diagram. Now, and I should have looked at this before my note, so if I'm wrong, I apologize, it was either three or four ballots at the DNC before Roosevelt gets the nomination.

50:09Because there are some folks in the Democratic Party who really realize that FDR is just another fraud. Remember, this is still a time, and basically you have Cleveland as your last sort of true Democratic president. He's the first Democrat that's voted in after the war. He's trying to lower taxes and regulation, and here you've got FDR who's basically angry because he can't get elected as a Republican, all those sloths are kicked in, so he's going to go be even a bigger government command and control guy in the Democratic Party. Now, Roosevelt, anticipating him being elected for folks who don't know any better, they think he's going to come in and lower taxes. Traditional Democrats sort of stuff. Does he do it? No, in his first hundred days, that's all the stuff that my government school students love to tell me about.

50:59The NRA, the WPA, the CCC, I just call it alphabet soup. Of course, I ask my students that bring that up, were you ever taught whether any of that stuff worked? Of course, that's when you get the RCA Victor dog look. Well, of course they're not told, because none of it worked, right? In his first hundred days, he doesn't talk about lowering taxes, getting out of command and Control, boom, unemployment goes to even higher than before, anticipating him being elected. What a surprise. Now, the first time that you really start to see some tariff relief is right about in through here, where this thing called MFN comes about, and that acronym stands for Most Favored Nation Trading Status, which allows the executive to reduce specific tariffs with a nation up to 50% without congressional approval.

51:49and the unconstitutional, but at least you get some tariff relief in some situations. Now, any of you folks know why we get this spike back up here? I've never asked Mr. Vetter why he doesn't put this on the chart. The Fair Labor Standards Act gives us the first federal minimum wage, and of course when the federal minimum wage kicks in, unemployment goes right back up again. And, of course, what brings unemployment down and it stays down? September 39, World War II begins, demand for U.S. exports once again, what a surprise. Now, understand if we really want to advance this literature and get people to get some idea of how we got from this very rational system of taxation to the perverse taxation system Back to my colors, when was the income tax reintroduced after it was abolished in 1872?

52:591894, the Wilson-Gorman Tariff, that's the same time that a state adopted this flag. What's the state? Not Georgia, good guess though. Well, Mississippi, 1894, and of course you start to see this happen in many states to register their disdain for it. Y'all better get this one right, even though it's not a correct flag, it's supposed to be a square. Alabama officially adopts this in 1895. It took a little longer for some other states.

53:45Upside down, sorry, Bush will have a letter to me in the mail if I put it upside down, right? Prior to when they put the bars on this, it was all a white field, and I think it finally got passed in 1899 when the state of Florida changed their state symbol. Of course, one of my favorites, and I've already tipped my hand. I think this is a beautiful flag.

54:17Maryland, and before the war between the states, Maryland's flag was just the golden black, the Calvert seal. Sometimes it would actually have a seal in the center. The second CSA Maryland didn't like the fact that they were going into the battle with the same flag as the Yankees. So they cut it into fours. And for those of you who don't know, the botanical cross is a Catholic symbol. Maryland is a very Catholic state. Red and white are the colors of succession that go all the way back to the colonial merchant flag. Usually about this time when I really want to annoy people, I'll start singing all the verses of Marilyn My Marilyn, which we weren't allowed to sing after, I think it was the second or third grade, we were no longer allowed to sing it anymore because students might start asking questions about their history. If you don't know, the state song starts out, the despot's heel is on my shore, Marilyn, my Marilyn, his torch is at thy temple door,

55:06Marilyn, my Marilyn, avenge the patriotic gore that Flect the Streets of Baltimore, which is in reference to April 19th when treason is committed. Another one just for kicks. Arizona, very good. Anybody know what flag this is drawn off of? The Bonnie Blue and the Arizona Sunrise and all that sort of stuff put the flag in there. For those who like a little bit of trivia, What was the only territory to secede from the union? The Arizona territory. I'm convinced that's why they ended up being the last state allowed into the union of the 48 states.

55:52Now, when the income tax comes about, folks are certainly trying to fight it on one side, but then you've got the other folks on the other side and some of the testimony is really great. They were actually talking about putting a cap on the income tax at 7%. I think it was one of the guys from Tennessee who beat his breast and said, a 7% cap, what manner of men do you think we are? There'd be revolution in the streets if it ever went above 3% or 5%.

56:22Now to show how people can really fight what's going on and understand this, Charles Adamson tax got out of hand. In 1916, just three years after the income tax was ratified, The marginal rate, the top tax rate, for incomes over 300% was 7%. By 1921, it was 77%. I did not misspeak. An 11-fold increase. Now, all you Austrian folks that understand economics as a behavioral science, the number of files returned at 7% was 12,000, What do you think happened to the number of returns filed at 77%?

57:17Went from just under 1,300 to just under 250. You think that gave folks an incentive to shift, hide and underreport income? Now here's the kicker. What happened to the amount of revenue generated? When folks play the tax warfare card with you and sit there and say yeah we're going to raise taxes so we can soak those nasty rich people and we're going to get more revenue, it's nonsense, it's bolder dash, it doesn't happen and the more and more that folks end up selling out to that sort of nonsense the more and more you're going to see the sort of disasters that we've talked about take place. Incredibly high taxes cause crisis and war and And there's no substitute for somebody coming in with logic and reason and saying enough's enough.

58:09Back off of this stuff and go back to the letter in the spirit of the Constitution. Alright, thanks for your time.