On July 14th, the IRS held a public hearing for the debt-equity rule (section 385 of the IRS code) that the Treasury Department proposed last April. The hearing, which had as many as 16 speakers from various industries,...
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- How Taxes Enabled Alcohol Prohibition and Also Led to Its...
How Taxes Enabled Alcohol Prohibition and Also Led to Its Repeal
Something like 4 million Americans watched documentarian Ken Burns's three-part series on Prohibition that aired this week on PBS. Full of historical details, one key point it raised that is generally not known widely is the impact of tax policy on alcohol prohibition.
Prohibition lasted from 1919 to 1933. One of the stumbling blocks advocates of Prohibition faced before 1913 was that the federal government was heavily dependent on taxes on alcohol. The passage of the income tax constitutional amendment that year allowed government the luxury of banning alcohol without reducing tax revenue.
From The Los Angeles Daily News interview with Lynn Novick, Burns's co-documentarian:
"I had no idea how important liquor was to the federal government," says Novick. "It started in the Civil War with the levy on beer and whiskey to help fund the war, and it never really went away. Some 30 percent to 40 percent of the government's income came from the tax on alcohol. So Prohibitionists realized that the only way they're going to have a ban was through income tax, which was a progressive cause and was really supposed to distribute wealth and to make things equitable during the robber baron era, where the wealth was being accumulated in a very small segment of the population."
The 16th Amendment of 1913, allowing Congress to levy a federal income tax, helped pave the way for Prohibition, but World War I helped stir up the pot. When the United States entered the war in 1917, anyone of German heritage was suspect. Since most brewers were of German decent, the Anti-Saloon League used this to equate migrants and drinking with being anti-American.
On the other side, as the Great Depression deepened in the 1930s, income tax revenues plummeted and there was a question about why we were foregoing all that tax revenue and jobs from alcohol sales and production. Burns himself talks about that around the 10 minute mark in this video put out by Reason TV:
More on Prohibition and tax policy can be found in reporter Daniel Okrent's book, Last Call: The Rise and Fall of Prohibition.
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