How Liquor Taxes Led to Big Government


There was a time when the United States government ran on hooch. Hard up for cash, taxes on whiskey and beer funded the Civil War. With 40 percent of government revenues coming from liquor taxes, alcohol made the dramatic post-war expansion of government possible so that by the 20th Century, the federal government would have been unrecognizable in scope and function to a man of the 1800s, but would have been all too familiar to us.

The Department of Education was created in 1867, the Department of Justice in 1870, the Department of Agriculture in 1862 and the Department of Commerce and Labor in 1903. Within that time the federal government had become concerned with every aspect of life in the country. After the Civil War, the same whiskey taxes that had paid for cannons, aerial balloons and widows’ pensions began paying for the transformation of the government into a booming engine of social change.

During the same period that the government was being reshaped, the major cities were being transformed by a tremendous immigration boom. Immigration had made it possible for the Union to win the war by providing a supply of fresh bodies to throw into the fight. German, Irish and Jewish immigrants came by the hundreds of thousands and made the Union victory possible.

Progressive reformers however cast an uneasy eye on the slums and pursued a grab bag of strategies for curing their ills, from birth control to temperance to socialism. The progressive vision of a New America was being funded by liquor taxes, but bigotry brought quite a few reformers around to temperance. Associating Catholics with liquor, they went after liquor itself. But liquor could not be outlawed, without also outlawing big government.

For the practical politician the link between liquor and big government was a web that should not be touched. The drinking American was making big government possible and should be left to drink in peace. But the reformers, faced with a liquor revenue problem, contrived a solution in the form of the personal income tax.

The Anti-Saloon League assembled a coalition encompassing Klansmen, Suffragists, Socialists and Preachers focused on a single-minded agenda, while passing whatever other laws it needed along the way to achieve its final goal.

Before the income tax, the progressive expansion of government had been built on a hypocrisy that reformers had denounced. A better world was being built with whiskey money, some of it, though far from all of it, coming out of the slums where the new immigrants worked and died. Afterward all that whiskey money went to a mob built out of the worst elements of the slums while the government fattened itself on a new source of tax revenue.

But the income tax was not nearly enough. The federal government had been running shocking deficits in the 1930s. The budget deficit hit $903,000,000 in 1931, and then more than doubled in 1932 to $2,472,000,000.

A 2.4 billion dollar budget deficit might not attract much attention today, but that same year government revenues stood at only 1.9 billion dollars so that the size of the deficit was actually larger than the revenues. A comparable budget deficit today would not be the usual trillion dollar booms in the age of Obama, but a figure more than three times that size.

With the Great Depression underway and the ultimate progressive Democrat with a big government agenda in the White House, the liquor taxes were sorely missed. Republicans lost 100 seats in the 1932 congressional election and with FDR in the White House, it was time to put an end to Prohibition and put all the lost revenue from liquor sales to work funding the New Deal.

By 1935, revenues had jumped to 3.6 billion dollars, nearly double what they had been only a few years earlier, but the budget deficit had gone up to 2.8 billion dollars because spending had surpassed 6 billion dollars reaching nearly 10 percent of the country’s Gross Domestic Product. It would eventually reach 24 percent of GDP, a figure only matched by another Democrat. Obama.

Roosevelt’s New Deal had drunk deeply of liquor taxes, but kept spending money like a drunken sailor, and even with the income tax and legal liquor sales, and a variety of other revenue raising gimmicks, the government had dug itself into a deeper fiscal hole than ever.

Social Security was born two years after the end of Prohibition. One of the creators of Social Security was Senator Pat Harrison of the Cullen-Harrison Act which legalized the sale of low alcoholic beer as a trial balloon for ending Prohibition. What had been thought a sin by progressive Unionists had become the salvation of progressive New Dealers who were less interested in moral reform and more interested in building the institutions that would give them permanent political power.

The expanding government had gotten a heady taste of how good steady revenues from sin taxes could taste, and from that day on it was hardly ever sober again, imbibing greater and greater quantities of the stuff. One tax led to another and then another. The more the tax revenues rolled in, the faster they were spent on creating and funding the bigger and bigger institutions of the perpetually expanding system of infinite progressive government.

Prohibition is long gone but the consequences of it, including the cat and mouse game between organized crime and national law enforcement, the personal income tax and the budget deficit, the pressure group that forces the will of the minority on the majority and the promise that the government can perfect the men it rules over and the national orgy of hypocrisy that follows are still with us today.

With the end of Prohibition, the State accepted the idea that it had to turn corrupt in the service of the greater good.

Freedom Center pamphlets now available on Kindle: Click here.

  • http://www.tundratabloid.blogspot.com KEGS59

    This is exactly right. The same kind of governmental policies on liquor exists here in Finland. ALKO, the state run monopoly (only the sale of beer exists outside its control) runs the gauntlet of selling liquor in quantities that bring in welfare state supporting revenue, with taxes levied to appeal to law makers and their supporters who want to ''clamp down on the excesses of drunkenness and the results from it''…without killing the golden goose.

    It's statism in the raw..and no amount of trying to appeal to reason or to common sense will change people's minds here. Paternalism and welfarism is ground too deep into their psyche.

  • Mary Sue

    Canada itself taxes the crap out of alcohol. Many provinces still have government run liquor stores as a monopoly (such as Ontario).

  • κατεργάζομαι

    How some of the TARP funds were spent in 2008:

    In June 2008, U.S. Virgin Islands Governor John deJongh Jr. agreed to give London-based Diageo Plc billions of dollars in tax incentives to move its production of Captain Morgan rum from one U.S. island — Puerto Rico — to another, namely St. Croix. DeJongh says he had no idea his deal would help make the world's largest liquor distiller the most unlikely beneficiary of the emergency Troubled Asset Relief Program approved by Congress just four months later.
    ~ Ryan Donmoyer of Bloomberg

  • Edward Cline

    Another fine article by Daniel Greenfield, one that demonstrates the principle that actions have consequences, consequences not immediately perceived. __The Lincoln administration can also be credited with introducing the income tax and the draft on a "temporary" basis to fund and staff the Civil War, and their imposition served as a precedent later. Some readers might object to criticizing the government for those sins of commission, saying, "But they were necessary to end slavery, a greater evil." Yes, slavery was the greater evil, but the income tax and the draft were also forms of slavery. That money wasn't yours (and it was real money)

  • Edward Cline

    Another fine article by Daniel Greenfield, one that demonstrates the principle that actions have consequences, consequences not immediately perceived. _The Lincoln administration can also be credited with introducing the income tax and the draft on a "temporary" basis to fund and staff the Civil War, and their imposition served as a precedent later. Some readers might object to criticizing the government for those sins of commission, saying, "But they were necessary to end slavery, a greater evil." Yes, slavery was the greater evil, but the income tax and the draft were also forms of slavery. That money wasn't yours (and it was real money)

  • Edward Cline

    Another fine article by Daniel Greenfield, one that demonstrates the principle that actions have consequences, consequences not immediately perceived.

    The Lincoln administration can also be credited with introducing the income tax and the draft on a "temporary" basis to fund and staff the Civil War, and their imposition served as a precedent later. Some readers might object to criticizing the government for those sins of commission, saying, "But they were necessary to end slavery, a greater evil." Yes, slavery was the greater evil, but the income tax and the draft were also forms of slavery. That money wasn't yours (and it was real money); well, maybe it was yours, but we're taking it anyway. And your life wasn't yours, because you must perform community service by taking part in the carnage of Civil War battles.

  • Edward Cline

    I've always suspected that the war waged against the Southern states was motivated more by a determination by the federal government to retain power over all the states, than by a desire to end slavery. If we view the war as an unjust one, the question arises: Would slavery have ended in the South over time? Britain and Europe benefited mightily from especially the cotton exported by the South. Indeed, the federal government came close to real blows with Britain over the blockades of Southern ports. Britain, for example, while it waged a war on the high seas against slavers, also had little problem with paying for the products of slave labor.

  • Edward Cline

    Slavery is an uneconomical institution, and it could very well have caused a major crisis in the Southern economy had the secessionists been left alone to continue the evil, and ultimately led to its necessary abolition. The Underground Railroad was siphoning growing numbers of former slaves northward, as well, causing a deficit in plantation manpower. A number of "alternative" history novels have been written that address the issue, some serious and some satirical. At the moment, however, it's fruitless to hypothesize about what might have happened had there been no Civil War, just as it's fruitless to wonder about the condition of the world had we let Nazi Germany and Soviet Russia destroy each other, or had the U.S. not entered WWI.

  • tagalog

    Part of the impetus for federal gun control came out of criminals dealing in prohibited alcohol using full-auto firearms to destroy the competition.

  • rightwingcanadian

    in my home province of Ontario only the government can sell alcohol at retail and there have been reports of LCBO (liquor control board of Ontario) gauging the prices, so in Ontario we pretty much a 100% liquor tax that the government can raise anytime they want.

    • Mary Sue

      yeah, you're being gouged pretty badly.

  • tanstaafl

    Next you're going to tell me a man can't make his own whiskey……

    • Michael

      You suspect right. As it so happens, here in the great white north, a man CAN'T make his own whiskey (legally of course).

  • DrBukk

    Slavery is uneconomical because the owner had to care for entire families while getting work out of about 1/5th of those living on the plantation. Those who worked had little incentive and constant supervision was necessary.

    Since slavery was voluntarily ended in Central & South America, as well as the Caribbean islands, it is preposterous to think the South would have kept slavery had she won independence.

    America's unique, highly charged racial tension can be traced to federal liquor control. At the same time newly freed negroes were seeking work, small farmers were dispossessed of their land because corn isn't nearly as valuable as corn squeeze. So they had to compete in desperate times and to this day you can't make a living off two acres. I say we legalize moonshine and weed and bring prosperity back to small landowners willing to work.

    • Ghostwriter

      DrBukk,I have a question for you. Do you want your kids smoking marijuana?

      • UCSPanther

        Or doing crystal meth?

        • DrBukk

          No on crystal meth. Did not mention that in my comment.

      • DrBukk

        That thought really doesn't frighten me if they are old enough to be self-sufficient.

      • FreedomIsEverything

        That argument doesn't work. I wouldn't want my kid drinking alcohol either, so do you propose we make it also illegal again? There is such a thing as personal responsibility, whether it's in the parent as gaurdian over their child, the children themselves to a point, or a legal adult on their own. We can't protect everyone from themselves and their own decisions regarding all things.

  • WilliamJamesWard

    Well well, you know the government has a nack of making people take to strong drink.
    William

  • cynthia curran

    Well, birth control was good. Whites that cut their birth rates switched from being Dems in the early 20th century to Republicans since they moved up out of poverty. I think that hispanics dropping their birth rate and out of wedlock births would changed them as well in the long run. Italians and Irish going from 6 kids to 1 to3 today made them less asking the government to help support them since they were less poor. HIspanics using birth control will helped whites since Hispanics having lots of kids helped Obama in this last election.

  • cynthia curran

    Cig taxes hurt the poor more and booze taxes hurt the rich more in regards to sales tax. Maybe some had said let's get rid of income taxes and moved to sales taxes. Big Govern grow the most with high income taxes not sales taxes.