Tax History: Tax Imperialism, American Style

The United States has a long history of tax imperialism, stretching back over a century and coincident with the nation’s geopolitical ascendancy.

Indeed, the two are intertwined; fiscal imperialism has bolstered America’s national might while also serving as an expression of that power.

Scholars in many disciplines have studied economic imperialism for decades, but as Diane Lourdes Dick noted in a 2015 essay for the American University Law Review, “there continues to be a relative dearth of scholarship identifying the precise legal mechanisms that create and regulate economic dependencies.” 

Dick’s article set out to fill that void, exploring the use of tax law to establish and maintain the power dynamic between the United States and Puerto Rico over the course of the 20th century.

Dick’s work is not the only contribution to this literature on U.S. tax imperialism. Just two years earlier, Michael Adamson published an article on the U.S. tax missions to Cuba in the 1930s.

While these missions were conducted on fundamentally different terms than U.S. tax policymaking in Puerto Rico (thanks to Cuba’s independence following the Spanish-American War), the relationship was nonetheless shaped by imperial power dynamics, at least as those dynamics have been traditionally understood by scholars.

But what do we mean by imperial power dynamics — and tax imperialism specifically? The meaning of the phrase is not self-evident — especially since, as Dick acknowledged in a footnote, the term has sometimes been used to describe a nation’s effort to tax citizens’ worldwide income.

What Dick means is something else: the “legal mechanisms” — and tax laws specifically — that one nation uses to “create and regulate economic dependencies.”

However, tax imperialism extends beyond legal mechanisms to include political, diplomatic, and financial mechanisms as well.

A phrase like “legal mechanisms” captures much of what developed between the United States and Puerto Rico, for instance, but it can’t fully describe the relationship between the United States and Cuba. Yet both relationships were clearly examples of tax imperialism, broadly conceived.

Puerto Rico

In 1898 the United States defeated Spain in a war ostensibly fought to guarantee Cuban independence. As part of the peace settlement, Spain ceded Puerto Rico and Guam to the United States and agreed to sell the Philippines for $20 million.

With that settlement, the United States began its long run as a colonial power. And in Puerto Rico, it began wielding its taxing power to assert economic power over the island.

In her article, Dick described a three-stage history of U.S. tax imperialism in Puerto Rico. During the first stage, stretching from 1898 to 1919, the United States dismantled Puerto Rico’s existing tax system inherited from the Spanish colonial era, replacing it with a new tax regime designed to benefit American businesses operating on the island.

In the second era, lasting from 1920 to 1974, the United States imposed and encouraged tax policies designed to make Puerto Rico a provider of low-cost manufacturing inputs for U.S. companies.

In the third stage, beginning in 1975 and continuing through the 2010s, U.S. policymakers, worried about capital flight, began to encourage capital to flow out of Puerto Rico and back to the mainland.

Dick’s three-part story challenged what she called the traditional (and dominant) narrative of U.S.-Puerto Rican relations — one that casts the United States in the role of benevolent patron.

Instead, Dick offered a much less flattering portrait of the United States as an exploitative, colonizing power. “In essence, the United States has, for more than one hundred years, practiced an understudied form of economic imperialism in Puerto Rico,” she wrote.

This American imperialism advanced the interests of U.S. corporations, denied Puerto Ricans their rights to economic and political self-determination, and ultimately “crippled” Puerto Rican enterprise.

In many respects, the first stage of Dick’s three-part story is the most interesting. While far removed chronologically, it remains highly relevant to Puerto Rico’s present-day fiscal struggles. Many of the dynamics and expectations established in those early years have defined the U.S.-Puerto Rican relationship ever since.

When American officials first assumed control of Puerto Rican governmental institutions, they immediately set about reforming the island’s revenue system, eager to align its tax laws with prevailing theories of sound taxation, Dick pointed out. These, after all, were the years of Progressive Era tax reform — the same years that produced sweeping reforms in the domestic U.S. tax system.

But while domestic U.S. tax reform was broadly democratic, Puerto Rican tax reform was paternalistic and even authoritarian. It was also couched in moralistic terms that obscured the self-interested nature of many reforms; even as American officials restructured Puerto Rico’s tax system to serve the interests of American corporations, they insisted that they were seeking only to help the Puerto Rican people.

In her essay, Dick explored the motives behind U.S. tax policy decisions regarding Puerto Rico. And to her great credit, she allowed for a wide variety of aims, assumptions, and prejudices; hers is not a simplistic or oversimplified analysis.

While she tends to see economic interests as dominant, she makes ample room for cultural and racial prejudice, too. “Not all harmful tax and economic policies imposed by the United States reflect deliberate attempts to promote mainland economic interests at the expense of Puerto Rican growth,” she writes. “The story of U.S. involvement in Puerto Rico is far more nuanced. Some laws and policies were motivated, in whole or in part, by white paternalism and other forms of racism.”

Making room for race seems crucial when trying to explain U.S. tax imperialism in the Caribbean basin. It might also help explain how and why U.S. policy might differ among various nations and colonial entities in the region, depending on their racial composition and colonial relationships.

My own brief exploration of U.S.-Bahamian tax relations during the 1930s suggested that race played a key role in mediating that relationship; Dick’s work clearly points in the same direction, but even more substantively.

Ultimately, however, motive is probably secondary to effect when trying to understand U.S. tax imperialism. As Dick observed, America’s tax dominion over Puerto Rico has served the island poorly.

“Regardless of the specific motivations, the primarily self-interested tax laws put into place by the United States with respect to the captive and disenfranchised island territory have had the cumulative effect of leaving Puerto Rico financially and economically crippled,” she wrote.

Cuba

Dick’s description of Puerto Rico as “captive” and “disenfranchised” is important regarding the essence of its colonial relationship with the United States. But America’s tax imperialism has also been evident in its historical relationship with nations outside its legal empire. 

Adamson’s study of U.S. tax missions to Cuba, published in 2013 as a chapter in The Political Economy of Transnational Tax Reform, describes some of the ways America extended its tax imperialism beyond its borders.

Twice during the 1930s American experts were dispatched to Cuba to help modernize, rationalize, and generally improve its tax system. Both times, these missions were headed by Carl Shoup, a relatively young economist affiliated with both the Treasury Department and Columbia University. 

Shoup was a protégé of both Robert Murray Haig and Edwin R.A. Seligman, both giants in the history of tax economics. In his own work, Shoup was an early expert on general sales taxation and later became a chief architect of the modern U.S. income tax, including the mass-based individual income tax adopted during World War II.

Shoup and his American colleagues were sent to Cuba with the more or less explicit goal of ensuring the security of American loans to the island nation. “Shoup’s missions to Cuba went forward in the interest of American capital and its official representatives,” Adamson wrote.

Wall Street had loaned the Cuban government of President Gerardo Machado rather large sums, confident that (1) the Cuban president would manage to repay the loans, and (2) the U.S. government would ensure he made good on his debts, if necessary at the point of a gun. More specifically, the so-called Platt Amendment of 1901 essentially guaranteed that the United States would intervene in Cuba militarily if necessary to ensure that U.S. debts were repaid.

Many U.S. loans to Cuba were also guaranteed by specific claims on tax revenue. Customs receipts, for instance, guaranteed a series of loans made by the firms of Speyer & Co. and J.P. Morgan between 1904 and 1923.

Eventually, however, even such guarantees proved insufficient to assuage the fears of U.S. bankers, who ultimately convinced American policymakers that Cuba needed help building a better tax system.

The resulting U.S. tax missions to Cuba were ambitious attempts to modernize that nation’s tax system. In some respects, the proffered programs of tax reform bore a family resemblance to the ideas advanced for Puerto Rico.

But in Cuba, the United States had no actual authority to make good on its plans for fiscal reform, and neither of the Shoup missions produced much in the way of substantive results.

Indeed, to the extent that U.S. tax imperialism has included an academic, intellectual component — as it did with the Shoup missions and similar tax reform evangelizing in other countries — it has often met with limited success. Just like any other projection of national power, tax imperialism can be frustrated by competing forces.

In Cuba, one key obstacle in the early 1930s proved to be the weakness of the existing political regime; Machado’s weakness made the recommendations of the first Shoup mission almost impossible to implement.

Popular resistance also complicated efforts to collect adequate taxes, at least to the extent that adequacy was defined as the ability to service foreign loans.

But the other element of U.S. tax imperialism on display in Cuba — the insistence on extracting tax guarantees in exchange for loans — was more successful.

American political and financial institutions clearly exercised enormous power over this sovereign nation, as they did with other countries in the American geopolitical sphere of influence.

This power over the tax policies of foreign countries was made possible by an implied military threat, but it was also crucially bolstered by America’s growing financial might. The resulting tax imperialism, in turn, further bolstered that financial strength.

A New Model

Taken together, the Dick and Adamson articles illuminate two important examples of American tax imperialism. Especially during the first half of the 20th century, the United States wielded enormous power in the Western Hemisphere generally and the Caribbean basin in particular. Military strength was the linchpin of that power, but economic dominance also shaped the dependent relationships developing across the region.

Dick offered her article on Puerto Rico as a contribution to the broader project of developing a model for understanding tax imperialism. It is certainly an important, extremely valuable contribution to that effort.

But as she acknowledges, a full understanding of tax imperialism must also account for the dependent relationships that develop outside explicit colonial relationships — like the relationship between the United States and Cuba. After all, these are the forms of tax imperialism that have proven most durable.

“Tax imperialism and other forms of economic subordination are by no means creatures of the past or limited to situations of quasi-colonial territorial control,” Dick pointed out. “They are features of North-South relations that remain ubiquitous.”