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Source link: http://archive.mises.org/6907/prohibition-and-the-income-tax/

Prohibition and the Income Tax

July 27, 2007 by

Don Boudreaux writes:

Prior to the creation in 1913 of the national income tax, about a third of Uncle Sam’s annual revenue came from liquor taxes. (The bulk of Uncle Sam’s revenues came from customs duties.) Not so after 1913. Especially after the income tax surprised politicians during World War I with its incredible ability to rake in tax revenue, the importance of liquor taxation fell precipitously.

By 1920, the income tax supplied two-thirds of Uncle Sam’s revenues and nine times more revenue than was then supplied by liquor taxes and customs duties combined. In research that I did with University of Michigan law professor Adam Pritchard, we found that bulging income-tax revenues made it possible for Congress finally to give in to the decades-old movement for alcohol prohibition.

Before the income tax, Congress effectively ignored such calls because to prohibit alcohol sales then would have hit Congress hard in the place it guards most zealously: its purse. But once a new and much more intoxicating source of revenue was discovered, the cost to politicians of pandering to the puritans and other anti-liquor lobbies dramatically fell.

Prohibition was launched.

Despite pleas throughout the 1920s by journalist H.L. Mencken and a tiny handful of other sensible people to end Prohibition, Congress gave no hint that it would repeal this folly. Prohibition appeared to be here to stay — until income-tax revenues nose-dived in the early 1930s.

From 1930 to 1931, income-tax revenues fell by 15 percent.

In 1932 they fell another 37 percent; 1932 income-tax revenues were 46 percent lower than just two years earlier. And by 1933 they were fully 60 percent lower than in 1930.

With no end of the Depression in sight, Washington got anxious for a substitute source of revenue.

That source was liquor sales.

{ 9 comments }

Yancey Ward July 28, 2007 at 12:08 am

A very nice hypothesis.

happylee July 28, 2007 at 12:35 am

Brilliant!

Big surprise July 28, 2007 at 10:40 am

Government interference always has something to do with revenue.

Ray G July 28, 2007 at 12:28 pm

Yeah, but it created a nice black market for my grandfather to make a couple of bucks.

Moonshine was more than a quirky thing found in the deepest “hollers” of Appalachia, it was a good way for a man to make a living with very little overhead. When I found out my grandfather had been a moonshiner, I dug into it a little, and discovered during the Prohibition era, the production of corn mash moonshine was very wide spread, well beyond the typical “Mayberry” types of places we might normally think of.

Bernd Haug July 28, 2007 at 1:22 pm

Nice observation!

Some searches I did that seem to confirm your conclusions:
http://www.ustreas.gov/education/fact-sheets/taxes/ustax.shtml – search “World War I and the 1920′s”
http://www.truthandpolitics.org/top-rates.php

But where did you get the inflation adjusted income tax revenue data? I looked for quite a while but didn’t find any!

Kevan Huston July 28, 2007 at 3:01 pm

Further evidence that the government bans that which it can’t tax or regulate. The list of human actions not prohibited or regulated consists of … ?

N. Joseph Potts July 28, 2007 at 9:17 pm

Wow . . .

There’s nothing new in the world but the history we don’t know. THIS is new, but really so, so familiar.

Brad July 30, 2007 at 10:49 am

I don’t what is more frightening, that the government does these things as part of a grand design, evil as it is, or it’s policies are merely the sum total of flippant imposition of force without any real design other than impounding revenue and the power that goes with it.

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