Thursday, October 6, 2011

Don't like income tax? Blame Prohibition

Let's revisit for a moment today's political sound bites.
We either should "tax the rich and pay our fair share." Or the income tax is "unconstitutional" and "puts an unfair burden on job creators."
Critics on both sides say this is great class warfare fodder. Maybe it is. Real class warfare will emerge when the unemployed continue to be without work in the longest job-related dry spell since the 1930s.
However, rather than feed the flames of emotion, I found it interesting when tracing back the history of the income tax, how it was philosophically devised given the backdrop of a country founded against unfair taxation.

IN THE tender years of America, the federal government was supported by internal taxes , not income taxes. Things like taxes on distilled spirits, carriages, sugar, tobacco, corporate bonds and even slaves. In fact, the only time we looked for alternatives was to help fund the high cost of wars.
The War of 1812 we saw the first sales tax on gold, silverware, jewelry and watches.
Five years later, Congress did away with all internal taxes relying on tariffs of imported goods.
Then the Civil War broke out and Congress enacted the nation's first income tax and by 1872 it eliminated it, focusing rather on taxing tobacco and distilled spirits.
And that proved to be most beneficial for revenue if not so much for the nation's health. Revenue from alcohol taxes accounted for 80 percent of the federal tax collections in 1907.
If you're getting that much revenue, it's because there was a lot of drinking going on and it was having a harmful effect not only on those who drank, but their families and their employers.
The admirable and entrancing Ken Burns PBS series "Prohibition" pointed out that "By 1830, the average American over 15 years old consumed nearly seven gallons of pure alcohol a year – three times as much as we drink today – and alcohol abuse (primarily by men) was wreaking havoc on the lives of many, particularly in an age when women had few legal rights and were utterly dependent on their husbands for sustenance and support."
The subsequent rise of temperance groups and prohibitionists started to have effects on government and by the turn of the century, the fervent "teatotalers" were a formidable force. Tactically, it knew it needed to replace America's reliance on alcohol for revenue, so it got behind the Sixteenth Amendment to the U.S. Constitution in 1913 imposing the national income tax. It soon became the chief source of revenue replacing alcohol and opening up the doors to accepting Prohibition and enacting the 18th Amendment, a prohibition on alcohol.
It should be noted that President Howard Taft, a Republican, pushed for the income tax.
Burns' series points out that "Prohibition cost the federal government a total of $11 billion in lost tax revenue, while costing over $300 million to enforce. The most lasting consequence was that many states and the federal government would come to rely on income tax revenue to fund their budgets going forward."
It was that reliance, that unintended consequence of ending a national vice that spawned the controversial and imperfect national income tax of today.


  1. wow this good but ,I like your post and good pics may be any peoples not like because defrent mind all poeple. small business taxes

  2. Very interesting take on tax history. And just as inebriating as the past sources of our national budget, is the actual process of dealing with our financial dues. And with the loopholes and lee ways in taxpaying, it's bound to take our mind into a spin. There are a lot of obligations we have to attend to, and sometimes, tax computation is simply one of them, yet no less important.. That is why we have to take it this a CPA at some point, with the storied ingenuity and skill to figure things out on behalf of us and always game this thing in our favor.

    Allison Gill