system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5: How did the United States function until 1861 (temporary) and then the 16th Amendment passage without an income tax on the people?

I know that we had tariffs for imported goods, but did this give the government enough money to operate? And if so, is it possible to create a system where our citizens aren't taxed?
gpt
Ok, let me chip in as an economist.... a very general explanation.

There are four ways a government can finance its operations:

*  **taxation** of income, wealth, trade

*  **borrowing** on the market or from the citizens

*  **state-owned enterprises** producing income such as monopolies or land sales.

*  **money creation**  which causes the so-called Cantillon effect (transfer of wealth through extraction of purchasing power from the existing money by increasing the amount of money in circulation)


The early US governments used all of those methods to finance the operations but the main one - since the rebellion was about taxation and not everyone was as rich as George Washington to just give their own money - was borrowing and money creation.

That was essentially the main reason behind the creation of the first Bank of the United States - to consolidate all the states' debt and state-issued money floating around and continue on the credit issued abroad. There was a very serious economic crisis resulting from the debt the US incurred fighting for independence.

In the subsequent years there was very little need for taxes because governments didn't need money for social services or the like. But in the 1820s and on there grew two movements - industrial protectionism and internal improvements - which required money. Some of that came through sale of land, some of that had to be collected through taxes.  The taxes at the time were mostly **tariffs**. Tariffs were import taxes - especially against foreign industrial production and it led to many conflicts along the North-South lines because North was undergoing intense industrialization and started to produce its own industrial goods while South was heavily agricultural but also export-oriented and it used its cotton production to buy everything it needed.  North wanted South to buy northern stuff and lobbied heavily for protectionist tariffs against British and other European products.

Over time - as North grew in population, wealth and influence they managed to pass more and more tariffs which the South really didn't like and it was one of the foundations of the upcoming war. By the time of the Civil War the overwhelming majority of the taxes in the federal budget would come from the tariffs (IIRC as much as 70%) the majority of which were paid by the then "richer" South so you can clearly see how the tariffs were going up and down depending on who currently held the advantage in the government. The taxes were actually quite severe - around 1830 the tariffs were close to 50% - although the US had a serious war debt to pay off (1812).

Still you have to remember that at the time the US government was practically nonexistent compared to the organization known today.  There was no large standing military and a fairly symbolic navy. There was no social security, no medicare, no agricultural subsidies, no apollo program etc.It was just a bunch of politicians, some bureucrats and some cronies. The idea that this was what government was supposed to look like was so strong that even after the Civil War (which cost a fortune and required both tarriffs, and income taxes, and debt and money printing, and confiscation) when the feds started the railroad subsidies they would subsidy it with land rather than direct financial investment and only create bonds and bond markets off of those land grants.

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As for the question whether it is possible to create a system where citizens aren't taxed. Yes it is - it is called **anarchic society** and depending whether you lean left or right it would be anarcho-collectivism or anarcho-capitalism.  You find people who think like you do and you work together to achieve the same goals the state is providing for you now.