Federalist 34
It is not my habit to go into contemporary politics, especially in these essays, but the power of taxation being — along with death — two of the certainties of life, and the twig having long been bent, it seems worth thinking about the relationship of Federalist 34 to the perennial problem of debt, one of the main themes of the essay.
At the end of 2024 the national debt was $35.46 trillion dollars, a number so staggering one can’t even imagine it. The federal government spends about $7 trillion a year and takes in about $5 trillion, meaning that it adds roughly $2 trillion to the debt every year. We pay slightly over a trillion a year in interest payments to service the debt — a non-negotiable that means the government can’t spend money on other things. We now pay more in interest than we pay for national defense. If every US household contributed $1000 a month to paying down the debt (assuming no new debt), it would take 23 years to pay it off.
Here’s a rough visual of debt over time:
Most economists are more interested in the relationship of debt to GDP (gross domestic product). GDP at the end of 2024 was $29 trillion. (There is debate among economists concerning GDP as a measure of economic activity since it doesn’t distinguish between good and bad economic activity.) This chart shows the historic relationship between GDP and national debt.
As you can see, war has been the main driver of debt, along with the pandemic and the 2008 financial collapse. The higher the number is, the more insolvent we are. I’m not adding into the mix our problem of unfunded liabilities: that is, payments the government is expected to make (social security, medicare) for which it has appropriated no funds. Economists refer to this as the “fiscal gap” – the gap that exists between liabilities and anticipated revenues — and estimate the US fiscal gap at roughly $230 trillion (taking us 30 years into the future). The increased tax burdens on American households will be devastating, and the longer we wait to solve the problem the more expensive it will be.
When faced with deficit spending you have two choices: reduce your expenses or increase your revenues. One way to cut spending is to cut services. I won’t comment on DOGE except to say this: our government is bloated and needs to be trimmed. Just as William Sutton robbed banks because that’s where the money was, so too you cut spending where the money is: social security, medicare/medicaid, defense, and interest payments.
The key number when it comes to government expenditures is, once again, its relationship to GDP. The invaluable data set at the St. Louis Federal Reserve Bank gives us this:
In general, when government expenditures are below 20% of GDP we remain in fairly responsible fiscal shape. Once above 20% we have trouble. Why? Because government can rarely raise more than 20% of GDP in revenues, as this chart shows:
So why doesn’t government just “tax the rich?” I’ll set aside the ethical question and state the obvious: It tries. Take a look at this historic chart on top marginal tax rates (the rate you pay on the last dollar you make):
Compare that with the revenue chart and you’ll notice that it doesn’t matter what the top marginal rate is (tax the rich!): the government struggles to get greater than 20% in revenues. The lesson should be obvious. Look at the 1950s: do you really think anyone is going to give up 91% of their income over a certain level? Not a chance. Government is charged with the unenviable task of finding the sweet spot where people will pay their taxes and where it makes more financial sense to hide their money. Check out this report to see how the super-rich pay a far smaller percentage of their wealth in taxes than does the average American household.
We have a problem. We may seem a far way from Federalist 34 but I think it’s worth asking this question: are catastrophic levels of debt baked into our constitutional system or are they an historical accident? Clearly part of the reason why some thinkers wanted to move away from the Articles of Confederation to the Constitution involved the serious debt crises that besieged the nation and the states in the period between the end of the war and the convention. A nation has to be able to discharge its debts, and not many Americans were willing to take the position that the revolution was either unjust or unwarranted (although I regard it as an interesting question) or could have been accomplished without borrowing money.
I have already discussed the idea of the problems associated with a cash economy and need not rehearse them here, but will note that war, being a constant accompaniment of human affairs, extracts many costs, wealth being one of them. For that reason the war-making power has to be exercised with great restraint and prudence, for it is a destroyer of economies, of families, of communities, of property, and of culture itself. The ancients got it right when they treated their gods of war as malevolent. The Greek name Ares, after all, has its etymology in bane and ruin.
I digress, but only to a point. When Hamilton raised the issue of revenue and debt in Federalist 34, he did so with an eye toward war. The federal government’s power of taxation, he claimed, would on the one hand be mostly limited to war-related costs (14/15ths being his oddly exact equation) while the state governments would have the rest of the revenue field open to pursue their domestic affairs. I’ll repeat that few of the Anti-federalists thought that the government should have no revenue authority, nor did they think that the federal government had no role to play in national defense, but they worried that defensive capacities might soon become offensive, bankrupting the nation both economically and morally in imperial schemes. For his part, Hamilton declared “novel and absurd” the very idea of “tying up the hands of government” for the purposes of preventing an offensive war.
According to reliable historical studies, the US has been engaged in nearly 400 military engagements since the Constitution was ratified — only a naïf would think they were all defensive. Even as I write, the US has 750 military bases in 80 countries and is directly involved in about military 15 conflicts. We have also divided the globe into a series of command structures. If this isn’t the definition of empire, I don’t know what is.
It’s also exactly what the Anti-federalists feared would happen, and the main mechanism that would make it possible would be the power of concurrent taxation, by which the federal government would be able to bankrupt the states and fund ambitious enterprises (keep in mind that ambition used to be a vice and not a virtue). Hamilton’s argument in Federalist 34 was both subtle and strange. On the one hand he wanted to suggest that the states had little to fear from the federal government’s taxation power, while on the other hand he suggested that federal power should admit of no limits. Given that the populace had at its disposal limited resources, and given that in a free society they weren’t giving up all those resources and, I might add, they just fought a war that involved anger at confiscatory taxation, people asked to ratify the Constitution were going to be skeptical about expansive claims.
The big issue Hamilton addressed in Federalist 34 involved the repeated bugaboo of divided sovereignty. The Anti-federalists had repeated their worry that there could be only one final authority, and feared the federal government would usurp state powers. Hamilton addressed this in two ways, one more compelling than the other. In the first place, he cautioned against settling political arguments on the basis of abstract principles. The idea of sovereignty, essential to modern notions of state-based politics, remained to him an abstract idea. In theory, he conceded, the idea of two ultimate authorities made no sense but it was clearly working in practice, rendering the theory moot. Maybe it was true to say a thing such as a unicorn ought not to exist, but riding one made the theory sound pretty stupid.
Hamilton tried to reassure the critics with a case study. Consider the chambers in ancient Rome, he said. They had rival power, but neither had the capacity to nullify the actions of the other. Whatever powers the federal government would have would not be able to nullify the ability of the state’s to raise revenue. But this argument seems strange when one remembers that the Constitution required the agreement of both chambers.
Hamilton conceded that the Constitution would reserve “to the States far the greatest part of the resources of the community” commensurate with their duties to provide detailed goods concerning the public weal. At the same time, however, he suggested limits to state spending while suggesting that the federal government should have unlimited revenue raising authority since it had to have the capacity to respond to every possible exigency. This idea of “no limits” ran contrary to the very idea of limited government American’s had fought for. His argument is worth quoting at length:
“To form a more precise judgment of the true merits of this question, it will be well to advert to the proportion between the objects that will require a federal provision in respect to revenue, and those which will require a State provision. We shall discover that the former are altogether unlimited, and that the latter are circumscribed within very moderate bounds. In pursuing this inquiry, we must bear in mind that we are not to confine our view to the present period, but to look forward to remote futurity. Constitutions of civil government are not to be framed upon a calculation of existing exigencies, but upon a combination of these with the probable exigencies of ages, according to the natural and tried course of human affairs. Nothing, therefore, can be more fallacious than to infer the extent of any power, proper to be lodged in the national government, from an estimate of its immediate necessities. There ought to be a CAPACITY to provide for future contingencies as they may happen; and as these are illimitable in their nature, it is impossible safely to limit that capacity.”
“Illimitable.” Our inability to imagine the full extent of future possibilities ought not limit the ability of the federal government to raise revenues to address that which cannot be imagined. One wonders how this claim was consonant in any way with the idea of limited government that was, after all, an animating principle behind American republicanism. Lest he be misunderstood, Hamilton doubled-down: “the exigencies of the Union could be susceptible of no limits, even in imagination.”
These debates between Federalists and Anti-federalists may have been resolved but they’ve never been settled. To this day debates about military preparedness and its use in offensive wars, the evisceration of the authority of the states once the federal government flexes its “concurrent” muscles, the levels of wealth confiscation government may engage in, how best to manage debt once you’ve conceded its inevitability — still animate our politics to this day. Indeed, some of our political arguments seem puerile in comparison, but also layered over these previous arguments. All too often, it seems, Americans don’t know exactly what it is they are arguing about. Whatever else the legacy of the Constitutional generation, they weren’t guilty of that.
Director of the Ford Leadership Forum, Gerald R. Ford Presidential Foundation
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