Tuesday’s agreement to avert across-the-board tax hikes included a number of add-ons, including a provision extending a 1917 law that imposes a $13.50 tax on each gallon of rum produced in or imported into the United States. The revenue from the tax helps support the rum industries of Puerto Rico and the Virgin Islands. When did governments start imposing such steep taxes on alcohol?
Around 200 years ago. Minor taxes on alcohol are ancient: The Romans imposed duties on wine, and European hamlets taxed alcohol production throughout the Middle Ages. Truly heavy taxation began in the 19th century, when national authorities looked to finance their new roles as builders of infrastructure and guardians of the poor. There are a couple of reasons alcohol became a primary target. First, income taxes and other forms of direct taxation are difficult to levy. Collecting income tax requires enough state machinery to monitor every citizen’s finances, and intrusive government raises the risk of rebellion. Excise taxes—fees imposed on manufacturers, who pass the costs on to unwitting consumers—are easier to collect and less risky. Smallish 19th-century governments had to interact with only a few producers, and citizens didn’t notice they were paying tax. A British tax official told the Brewers’ Society in 1897: “Through your agency I am enabled to extract from the pockets of the people a sum of money … and to do this without their knowing anything about it at all.” In the late 19th century, excise taxes represented nearly one-half of government revenue in several European countries.
Alcohol taxation was particularly appealing because it was less regressive than excise taxes on grain or textiles. The poor needed food and clothing, but they didn’t really need ale. If they couldn’t afford the tax, the poor could abstain from drinking, or at least indulge in weaker libations. English political philosopher John Stuart Mill, who opposed regulation of alcohol on libertarian grounds, believed strongly in taxing it for this reason.
At the dawn of the 19th century, taxation of alcohol and its ingredients (such as malt and hops) accounted for 44 percent of British government revenue. That share fluctuated during the 1800s, but it didn’t drop below 30 percent until the 20th century. (The British also used heavy per-gallon tariffs as a weapon against French winemakers, shifting demand to the stronger drinks of Portugal and Spain.) The Netherlands relied heavily on alcohol taxes, which brought in one-quarter of the government’s money in the mid-19th century. The federal government in the United States was slower to tax alcohol, largely because of the Whiskey Rebellion that followed Alexander Hamilton’s 1791 excise tax scheme. During the Civil War, however, heavy excise taxes on many products came back, and taxes on alcohol and tobacco lasted well beyond Robert E. Lee’s surrender at Appomattox Courthouse. At the close of the 19th century, the tax on alcohol was many times higher than the cost of production. Between 1870 and 1917, alcohol taxes accounted for between 15 and 25 percent of federal revenue.
In the late 1800s, governments also used taxation to discourage alcoholism and public drunkenness—the primary justification for high alcohol taxes today. A 2006 report for the European Commission argued that using taxes to raise the price of alcohol 10 percent would save 9,000 lives per year.
Steep taxes have even offered benefits to alcohol manufacturers: Several technological innovations are the product of tax schemes. European governments that based the tax rate on the strength of drink developed sophisticated methods to determine the alcohol content of beverages. Belgian brewers, who were taxed based on the size of their equipment, developed a new style of production that enabled them to make more beer in a smaller vessel. Today, many beer-makers continue to use the practice, which is believed to enhance the flavors of sour beers such as lambics.
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