The Federalists Reloaded | No. 12
Taxed, Tariffed, and Totally Screwed
“The genius of liberty reprobates every thing arbitrary or extravagant in taxation.” - Alexander Hamilton, The Continentalist, No. VI
If Alexander Hamilton were around today, he wouldn’t be standing at a customs house collecting tariffs. He’d be sitting in front of Congress, shaking his head at how we’ve turned the simple idea of taxation into a bureaucratic obstacle course. In Federalist No. 12, Hamilton made a clear case: commerce should fuel the economy, and the revenue it generates should come in through a system that’s easy to manage and fair to the people. He wasn’t dreaming of an IRS manual the size of a refrigerator.
But somewhere along the way, we traded Hamilton’s clean logic for a mess of loopholes, exemptions, and rules that most Americans can’t navigate without software or professional help. We abandoned the customs house, sure, but we also abandoned simplicity. What we have now isn’t more efficient. It’s just harder to understand and easier to exploit.
Let’s go back and look at what Hamilton actually said, why it worked for a while, and how both tariffs and the income tax have drifted far from what he had in mind.
Hamilton’s Revenue Plan: Commerce, Simplicity, and Trust
In Federalist No. 12, Hamilton argued that the new federal government could fund itself through customs duties. It was a straightforward plan. Tax imported goods, monitor ports, and avoid the need for intrusive property or income taxes. The economy at the time was driven by trade, and the infrastructure for direct taxation simply didn’t exist.
Hamilton saw this as the best of both worlds. People chose to pay the tax when they bought imported goods, and the government could collect it without asking for personal financial records. No complex forms. No IRS audits. Just a system that worked, at least for a young nation with a small federal footprint.
This idea paired neatly with Federalist No. 11, where Hamilton emphasized the power of a unified commercial policy. If the states worked together, the U.S. could gain real leverage in global trade and prevent European powers from exploiting internal divisions.
“The rights of neutrality will only be respected when they are defended by an adequate power.” - Federalist No. 11
The pitch was simple: unify to trade stronger, tax smarter, and avoid the chaos that came from thirteen states competing with each other.
And for a while, it worked.
When Tariffs Went Sideways
What Hamilton didn’t fully account for was how easily tariffs could be hijacked by politics. Over time, customs duties stopped being about simple revenue and started becoming tools of protectionism. Instead of quietly collecting money at the ports, tariffs were used to shield favored industries from competition.
The most infamous example came in 1930, when Congress passed the Smoot-Hawley Tariff to protect U.S. industries during the Great Depression. Other countries retaliated. Global trade collapsed. The world economy spiraled, and American farmers and workers paid the price.
We’ve been dipping in and out of that playbook ever since. Steel tariffs. Solar panel tariffs. Cheese tariffs. Every few years, another round gets tossed into the political arena, often with more interest in signaling toughness than solving a problem.
The problem is, tariffs today are a hidden tax on consumers. They drive up prices on everyday goods, such as clothing, food, and electronics, and that burden hits working families hardest. Lower-income households spend a larger share of their income on imported goods, so they’re the ones who feel the squeeze.
And despite all this, tariffs barely move the needle on the federal budget. In 2024, they accounted for less than 2 percent of total revenue. Now with the new tariff regime in place, we don’t know the full impact on consumers and won’t for months to come. However, politicians are already lining up to redistribute any new tariff revenue rather than eliminate the $1.3 trillion annual deficits projected out for years to come.
The Anti-Federalists saw this coming. Brutus, one of their most prolific writers, warned that centralized control of commerce could easily turn into favoritism and manipulation.
He wasn’t anti-trade, he just didn’t trust Congress to play it straight. In hindsight, that cynicism looks more like realism.
From Tariffs to Taxes: The Next Revenue Model
When the tariff model wore out its usefulness, the country pivoted. The Sixteenth Amendment, ratified in 1913, gave Congress the power to levy a federal income tax. It started out simple, just a few brackets, low rates, and clear rules. It didn’t stay that way.
Over time, the tax code evolved into a sprawling network of deductions, credits, and exemptions that rewards those who can afford to game it and frustrates everyone else. Today, the U.S. tax code is so complex that more than 90 percent of Americans use software or professional help to file their taxes. Many can’t even explain how their taxes are calculated. They just hope the refund shows up.
If you earn wages, you pay straight in. There’s no escape hatch. But if your money comes from capital gains, carried interest, or real estate, the code gets friendlier. Add in a skilled accountant, and you’re not just lowering your tax bill, you’re reshaping your entire liability.
“Under the auspices of tyranny the life of the subject is often sported with, and the fruits of his daily toil are consumed in oppressive taxes, that serve to gratify the ambition, avarice, and lusts of his superiors. Every court minion riots in the spoils of the honest laborer, and despises the hand by which he is fed. The page of history is replete with instances that loudly warn us to beware of slavery.” - Hamilton, 1774
He didn’t live to see the income tax system, but it’s hard to read that and not think he saw it coming.
The Middle Class Is Holding the Bag
There’s a lot of noise in Washington about protecting the middle class. But when it comes to the tax code, the middle class isn’t protected. It’s targeted.
If you’re a wage earner, someone who clocks in, works a full week, and gets paid through a W-2, you're taxed from the start. Your income is reported in full. Your taxes are withheld before your paycheck even hits your account. And your ability to reduce what you owe is limited, if it exists at all.
Here’s the real kicker. Most middle-income households don’t benefit from the tax breaks that dominate the system.
Take a two-earner household making between $90,000 and $120,000 a year. That’s not rich in most parts of the country. Maybe you’re paying off student loans, trying to save for retirement, or juggling child care and a mortgage. But you earn just enough to get boxed out of:
The Earned Income Tax Credit, which phases out once you pass working-class income levels.
The full Child Tax Credit, which shrinks or disappears when your income rises, even if you’re still stretched thin.
The student loan interest deduction, which vanishes once you hit income limits that don’t reflect your actual expenses.
As for itemizing deductions? It probably doesn't help. Unless you're paying heavy mortgage interest or making significant charitable contributions, the standard deduction is your only option. So even while your costs rise, your tax relief doesn’t keep up.
Now compare that to someone whose income comes from investments or business ownership. Their capital gains are taxed at lower rates. They can defer income for years. They can deduct expenses you’ve probably never even heard of: carried interest, depreciation, and passive losses.
This isn’t gaming the system. It is the system. Built to favor capital over labor. Structured to reward ownership instead of work.
This is the truth about the tax code. It leans hard on the middle class. While politicians squabble over top marginal rates or talk about “making the rich pay their fair share,” it’s middle-income households quietly keeping the system running.
Then there are the tax expenditures, those deductions, credits, and loopholes that never show up in the federal budget but cost over $1.3 trillion a year. They aren’t voted on. They aren’t reviewed annually. But they shape policy outcomes just as much as any spending bill.
They tell a clear story about who benefits. And in that story, the middle class is holding the bag.
What Would Hamilton Say?
Let’s be clear, Hamilton wasn’t allergic to taxation. He believed the government needed revenue to survive and grow. But he was obsessed with efficiency. He wanted a system that was hard to cheat, easy to understand, and politically honest. What he would not recognize today is the bloated, legalistic monstrosity we’ve allowed to take over.
He imagined a public finance system that respected the taxpayer not just in theory, but in practice. That meant avoiding taxes that required armies of agents and accountants. It meant building a system that didn’t breed resentment by favoring wealth over work. And it definitely didn’t mean turning the IRS into an obstacle course for working families.
Hamilton believed in funding the government through commerce, not coercion. He assumed a natural link between the prosperity of the people and the prosperity of the government. When citizens thrive, so does the treasury. Today, that link is broken. The complexity of the tax code severs trust. People feel more like targets than participants.
He might’ve accepted that income taxes are necessary in a modern world. But he’d be appalled at how we’ve weaponized them, not just against the wealthy, but against ordinary people trying to stay afloat.
A fair tax code, in Hamilton’s eyes, wasn’t just about math. It was about legitimacy. You can’t have a government “of the people” when the people have no idea how they’re being taxed or why.
Ronald Reagan, two centuries later, echoed the same frustration:
“The taxpayer-that’s someone who works for the federal government but doesn’t have to take a civil service exam.”
That line came with a wink, but the frustration behind it was real. A tax system that requires a second language to navigate is a system that works for insiders, not citizens.
Where We Go From Here
Here’s the real frustration: we’re not even having the conversation anymore. Back in the late 1990s, Former House Majority Leader Dick Armey (Texas) and Congressman Billy Tauzin (Louisiana) traveled the country debating whether the U.S. should adopt a flat tax or a national sales tax. They didn’t agree on how to reform the tax system, but they agreed that it needed reform. People got to hear, consider, and challenge the ideas.
Today? Nothing. No real debate. Just more duct tape slapped on a broken system. Every time, Congress promises that it’s fixed the inequities and the complexity by creating other inequities and complexities.
We’ve forgotten that tax policy isn’t just accounting. It’s political philosophy. It’s about what kind of country we want to be, who we reward, and what we expect from one another. Right now, the system says, "If you work, we’ll tax you early and often. If you have capital, we’ll be in touch next quarter, maybe."
We can do better. And we don’t have to burn everything down to start fixing it.
Simplify the tax code. Expand the standard deduction. Eliminate most itemized deductions and credits. Let people file quickly and confidently.
Treat all income the same. A dollar earned is a dollar taxed, whether it comes from wages or Wall Street.
Audit and cap tax expenditures. If it’s worth keeping, it should be worth defending in daylight.
Reignite the debate. Flat tax, national sales tax, progressive consumption tax? Whatever the model, bring the ideas back to the table. Let the American people weigh them.
These aren’t radical ideas. They’re the foundation of trust between a government and its citizens. A tax system that people can understand, afford, and believe in is a step toward restoring that trust and toward building something a little closer to what Hamilton had in mind.
The Last Word
“It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess.” - Federalist No. 21
Hamilton understood that taxation was a necessary part of governance. But necessity didn’t mean carte blanche. For him, taxes needed to be structured in a way that respected individual liberty, preserved economic vitality, and protected citizens from arbitrary abuse. That meant taxes should be visible, proportionate, and carefully restrained.
We’ve moved in the opposite direction. Today’s system hides its excesses in complexity. It burdens those least equipped to navigate it. And it erodes public confidence in the very idea of self-government. But it doesn’t have to stay this way.
We don’t need to return to the 18th century to honor Hamilton’s principles. We just need to bring the same clarity, discipline, and respect for the public into our modern debates. A tax system that values simplicity over manipulation, that rewards work without favoring wealth, and that asks more from those who can afford it without punishing those who can’t, that’s a system that might not just raise revenue, but restore faith.
Because in the end, taxes aren’t just about funding government. They’re about trust. And trust, once broken, is hard to buy back.
Another valuable history lesson! I truly hope that all of this work is going into an eventual book that helps people understand the continuing relevance of the Federalist Papers.