How did the Federal government originally fund itself?

By Douglas V. Gibbs
Author, Speaker, Instructor, Radio Host

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Question asked by reader:  How did the Federal government originally fund itself?

The original federal government coming out of the Constitutional Convention of 1787 used various mechanisms for funding.  Some of the revenue for the federal government was obtained through import and export taxes.  The primary funding came from the States.  The federal government would send its budget to the States, and they would determine whether or not to fund it, and if they did a State would pay their portion of it based on their percentage of population of the total population. The 16th Amendment in 1913 changed it so that taxation could be directly taken from the people, of which it began only as taxing the rich, but then advanced to the process of taxing all people in the country through W2 withholding which began in the 1930′s.  Prior to 1913, the States served as a middleman between the people and the federal government when it came to taxation, and as a control mechanism when it came to federal spending because the federal government could not get funded without approval by the States.  In other words, when it came to federal spending and taxation, the States were the check and balance against financial abuse by the federal government.  This is why the progressives, during the Progressive Era, pursued the 16th Amendment.  They were restrained because federal spending was limited because taxation was limited. Once the federal government was able to tax people directly there was no limit on the Taxation, and therefore no limit on the spending. During the 1890s federal spending was only between 3 and 4% of GDP.

That’s why when you read the constitution in a few spots where it mentions taxation it also mentions enumeration. You’ll notice in the sixteenth amendment they were careful to get rid of the enumeration requirement.

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