How the Income Tax led to Prohibition

Though long thought of as the quintessential example of “legislating morality,” the story of Prohibition in the United States may be better understood as a matter of political economy. At least that’s the interpretation offered by several scholars of the Public Choice persuasion. Here’s the argument:

Through much of the 19th and early 20th century a surprisingly large percentage of federal taxes came from the taxation of alcohol – as much as a third in some years! In fact, alcohol taxes the only truly reliable federal revenue sources on the table. Liquor taxes were the single largest category of the domestic excise system, and alcohol was one of the few items on the exceedingly complex and highly protectionist U.S. tariff schedule that could be adjusted without igniting a firestorm of interest group politics and rent seeking. Even more so, the federal government had surprisingly few other viable tax options due to the 1895 Supreme Court ruling of Pollock v. Farmer’s Loan and Trust Co., striking down the income tax as an unconstitutional and non-apportioned “direct tax.” As a result, Prohibition effectively meant cutting off the federal government from its single most lucrative and reliable source of revenue.

All of that changed in 1913 due to the federal Income Tax Amendment. Though initially intended as tiny tax of no more than 7% on only the highest wage earners, the income tax’s vast revenue potential became clear to Congress during the buildup to World War I. With liquor revenue no longer needed to keep the government running, Prohibition suddenly became a viable option.

This explanation of the Prohibition era, as Donald Boudreaux notes, is largely absent from most history books, which tend to focus on the temperance movement as a moral and religious crusade. It seems to be making inroads though. The main piece of literature about it is actually a 1994 article (funded in part by an IHS grant!) by Boudreaux and A.C. Pritchard, which recently found its way into Daniel Okrent’s book Last Call: the Rise and Fall of Prohibition. I am presently researching another angle of this theory as well from the constitutional side of things.

So I thought I’d throw it out there for discussion. What do you think of the income tax as an explanation for Prohibition? Do you see any parallels with the regulation of other social “vices” today, such as tobacco and drug policy? And why have historians generally missed this explanation of a topic so thoroughly researched as the Prohibition era?

By: Phil Magness

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