We start today’s journey through tax history the year after the war of 1812 with Great Britain. Congress doubled the tariff schedule to fundraise the war. But it turns out, trading across oceans is very difficult when your navy is just 18-years-old. Comparatively, the British fleet had the power of being the world’s most powerful seafaring nation.
It was able to effectively strangle commerce on the eastern seaboard, which made up the entirety of young America’s trade paths with other parts of the world.
Due to the conflict and Congress’ need to raise revenue to continue to fund the war, it levied about $3 million in internal taxes on things like refined sugar, distilled spirits, and carriages. These were designed to be repealed after the war was over. To collect this tax, the federal government offered a 15% tax discount for those states that collected the taxes themselves, which caused many states to take advantage of the arrangement.
With the conflict with the British and French behind them, Congress passed the Tariff Act of 1816, which levied 25% duties on items to encourage local manufacturing.
This was the year of the Panic of 1819, which is the crisis sparked by a drop in world agriculture prices. This caused more protectionist policies to be pushed to keep cheap European agricultural interests from flooding the market.
The house pushed a bill that would enact a 5 percent tariff on cotton, wool, clothing, iron, and hemp. The law was never enacted, but it set the stage for similar laws to be passed. The North was split on its opinions of the tariff, but the South was firmly against it. It was losing its voting power in Congress regionally as the population dropped slightly there and rose slightly above the Mason-Dixon line.
Henry Clay served as speaker of the House this year and appointed John Tod, a die-hard protectionist, to head the Committee on Manufactures. He implemented a 35% tariff on imported iron, wool, cotton, and hemp. This caused American-produced goods to finally be cheaper than the British goods, which in turn stirred up support in states that had been against protectionist measures in the past.
This year, the tariff on imported goods expanded to cover hemp, wool, fur, flax, liquor, and imported textiles. It was also raised to 50% of the value of the goods. This was good for the north and Ohio valley, but bad for the South. They didn’t get the benefits of manufacturing these products in their region. The reduction of cheap British goods isn’t a positive either, as the South relied on the British to buy their cotton in exchange for those cheap goods. That cotton was often sold back to the states as finished goods, so the tariffs significantly disrupted this system.
In July, Congress reduced tariff rates slightly, but kept the high rates on products like iron and manufactured cloth. South Carolina passed a Nullification Convention, which declared the tariffs unconstitutional and ceased collecting them in the state.
In response, Jackson passed the Compromise Tariff, which reduced tariffs automatically between 1833 and 1842. Simultaneously, he levied the Force Bill, which said that the president could use force and arms to collect tariffs.
By 1837, an extended economic depression had settled in, driven by a financial panic from the reduction of British investment in the states. The depression lasted until 1843. This caused the Whig Party to gain national support for some of its economic development strategies (which included higher tariffs).
In 1840, the Whigs won the presidential seat and implemented revenue tariffs that were to be partially distributed to the states to build roads and canals.
The Compromise Tariff was abandoned due to the states’ need for revenue and many tariffs were returned to their prior rate or slightly lower than the prior rate.
The Walker Tariff was passed, which slashed all duties to the minimum necessary for revenue. In Britain, Parliament repealed the Corn Laws, which levied tariffs on imported bread. Both measures set the stage for freer world trade.
The custom and commerce programs were running so well that the American government was able to pay off the entirety of its debts in the Mexican War before the Civil War even started.
Slavery was becoming a highly political issue and the Northern and Southern states were growing increasingly polarized. The economy was booming but the interests of the Northern and Southern states grew increasingly misaligned.
Tariffs were lowered even further by the Democratic party, which plunged the nation into an economic panic. Government revenues plummeted 30%, which caused Republicans to demand tariffs be increased.