Introduction
In seeking possible causations of the Great Depression, is it possible one of them was the enactment of the 18th Amendment, i.e.., Prohibition? This law went into effect on January 17, 1920. Data in this study will demonstrate how fiscal changes, such as Prohibition, made negative monetary adjustments to the Federal Government Tax reserves.
Methodology
Christina D. Romer, in her 1992, article, What Ended the Great Depression?, argued, when government officials created and enacted economic changes to government taxation policies, they did not fully comprehend the long term effects of their new fiscal rules, thus, these new policies were partly responsible for an economic downturn after World War I, and a slide towards the Great Depression.
If this is the argument then a look at a specific single policy change, in this case, the 18th Amendment and the amount of liquor taxes collected. This data will look at taxes prior to the Great Depression, 1911, 1919, during – 1925, and then 1934, after the reversal of that law. The data gathered should yield results, like Romer suggested, thus, demonstrating the Federal Reserve, in creating the 18th Amendment, did not fully realize the monetary impact their decision would have on the government coffers, thus, the new void in liquor taxes would help to bring about the Great Depression.
Research Methodology / Economic Theory
All the data used in this argument was gathered from the year end fiscal report; Report Of the Commissioner Of Internal Revenue, which ends year on June 30th. Reports used for this survey, 1911, 1919, 1925, 1934. In order to assess the impact of Prohibition on the countries collected tax revenue a baseline must first be establish. This will be done by examining the total of all taxes collected and then a focused look at taxes collected on alcoholic related products. This first set of data will be collected from 1911, Report Of the Commissioner Of Internal Revenue. This will provide a snapshot of the countries tax revenue before special taxes, such as the War Tax, were generated to support the countries effort in World War I.
Tax year -1911
The 1911, report indicates, the total tax receipts collected, $322,526,299.73, which includes an increase of $32,559,079.57 over the year 1910. Additionally, in 1911, there was, 175,402,395.50 taxable gallons of spirits produced. The report also states this was the largest amount produced to date. The second biggest amount was in 1907, with 6,828,482.30 gallons produced. [1]
In 1911, Distilled Spirits tax generated, $155,279,858.25, whereas, in 1910, it generated $148,029,311.54. Thus, there was an increase of $7,250,546.71 over 1910. In 1911, Fermented Liquor tax generated, $64,367,777.65 and in 1910, $60,572,288. 54, with an increase of $3,795,489.11. The report also shows the total revenue generated on Tobacco, which in 1911, was, $67,005,950.56, and in 1910, $58,118,457.03, thus an increase of $8,887,493.53. See Table 1.
Table 1, Report Of the Commissioner Of Internal Revenue, 1911, p. 29
Table 2 demonstrates the changes in the number of taxable gallons produced between 1898 and 1911.
Table 2 Report Of the Commissioner Of Internal Revenue, 1911, p.8.
Chart 1 and 2, offer a basic cluster column and pie chart to demonstrate, in simplified terms, the taxation discussed in Table 1.
Note: The percentages shown on all charts are incorrect by +/- 2 percent. It is the auto percent generator feature in Word. They should have been manually produced the charts and percentages calculations in Excel then imported. (This was discovered just before publication, this too late to late to correct).
In 1911, alcohol tax revenue made up approximately two-thirds of the tax base. Add tobacco to the total tax equation then the revenue generated is almost one half of the tax base. Based on this data, it is not farfetched to conceive, if Prohibition would have been evoked in 1911, the government would have been hindered to some extent and would have needed to create some new type of tax policies to make up for the loss revenue.
1919 Tax Revenue
This years reporting was more complicated to dissect, as it now contained the War Tax and the October 3, 1917, Revenue Act. The report indicates between 1918 and 1919, it raised via taxation, nearly $8,000,000,000 with 8.5 billion being raised in the first 24 months under the new tax laws of 1917 and 1918.[2]
To simplify this blog, it will use data from page 9 of the report, (Table 5). This page is like the data presented above in Table 1. It looks at taxable; Distilled Spirits, Fermented Liquors, and Tobacco; except this table includes the years 1914, 1917, 1918.
The Internal Revenue Bureau Tax collections included a special war tax to support the countries involvement in World War I. In 1919, the report stated, it collected $3,850,150,078.56, and in 1918, collected, $3,698,955,820.93. This amount reflects an increase of more than two billion dollars, whereas, 1918, had a tax increase of $151,194,257.63, over 1917 tax total. [3]
Total Tax Revenue 1914-1919
1919: $3,850,150,078.56
1918: $3,698,955,820.93
1917: $0,809,393,640.44
1914: $0,308,008,893.96
War Tax
1919: $486,913,790.49
1918: $225,973,363.44
1917: $044,793,935.27
1914: $001,136,070.65
Revenue from Distilled Spirits:
1919: $365,211,252.26
1918: $317,553,687.33
1917: $192,111,318.81
1914: $159,098,177.31
Fermented Liquors
1919: $117,839,602.21
1918: $125,285,857.65
1917: $91,897,193.81
1914: $67,081,512.45
Tobacco
1919: $206,003,091.81
1918: $156,188,659.90
1917: $103,201,592.16
1914: $79,986,639.68
Table 3 Annual Report of the Commissioner of Internal Revenue for the Fiscal Year Ended June 30, 1919, (Washington: Government Printing Office,1919),9
Compare this to the Table 3, 1914 tax data,
In 1914, Distilled, Fermented, and Tobacco, tax comprised a total of 56 percent of the taxes generated. While in 1919, the combined entities accounted for a mere 23 percent of the tax generated. Based on this data, you can conclude the federal government, after evoking Prohibition, would survive without the taxes generated by distilled and fermented alcohol. Thus, you could make the case, they were banking on using the War and other Special Taxes to make up the difference. In chart 5, you can see tobacco is now generating more tax revenue that Fermented Liquors. This tax growth could also be a way the federal policy makers planned to offset the future losses from Prohibition.
Chart 6, looks at total tax generated for the years 1914-1919
1925 Tax Revenue
The Annual Report Of The Commissioner Of Internal Revenue Fiscal Year Ended June 30, 1925.
1925, saw a total collection of $2,584,140,268.24, compared with $2,796,179,257.06 during the fiscal year 1924, a decrease of $212,038,988.82, or a loss of 7.6 per cent.[4]
The 1925, report mentioned Income Tax, which the previous reports did not do. The income-tax collections for the fiscal year 1925, amounted to $1,761,659,049.51, compared with $1,841,759,316.80 tax collected from income for the fiscal year 1924, a decrease of $80,100,267.29, or a loss of 4.3 per cent.[5] As seen in Chart 8.
Table 4 gives tax data on the years 1918-1925, from Annual Report Of The Commissioner Of Internal Revenue Fiscal Year Ended June 30, 1925.
Table 4
In Chart 9, we see the data from the Table 4, Distilled, Fermented, Tobacco, and War, 1918-1925.
It is clear to see the taxes generated by distilled and fermented sharply decline and we can see a sharp increase in tobacco taxes. You can also see that the amount of war taxes was sharply decreasing. The question is, did the government spending decrease as the tax based decreased?
1935 Tax Revenue
The 1935, Annual Report Of The Commissioner Of Internal Revenue Fiscal Year Ended June 30,1935, which occurred after the Prohibition was appealed, and does not seem have a revenue for War Tax. Nor is there the same Distilled, Fermented Table, used throughout this blog. However, there is Income Taxes, Corporations, and Individual.
In 1935, total taxes received, $2,300,816,308.88, compared with $1,619,839,224.30 for the fiscal year 1933, an increase of $680,977,084.58, or 42 percent.[6]
The report also states there was a liquor tax collection of $215,000,000, because of repeal of Prohibition, the Liquor Taxing Act of 1934, and a full year of returns from beer taxes[7] Furthermore, according to, 1933, the collected alcoholic liquor taxes amounted to, $43,171,516.92 and in 1934, the collection was, $252,333,373.97. Thus, an increase of $209,159,057.05 was received in 1934.
Table 5
In chart 11 you can see how much the Corporate and Individual Income Tax, Liquor and Tobacco tax comprised the Total Tax of 1935.
Conclusion
The data demonstrates the Prohibition law clearly reduced the amount of tax generated by the sale of alcohol, but the new War Tax more than made up for any losses. If you look at the revenue generated by the tobacco tax you will find it quickly replaced any financial losses from the liquor sales. Additionally, the new income taxes made a significant contribution to the federal taxes.
The data suggest, Prohibition, though it effected many people, could not have been one of the causes of the Great Depression, nor could the 1935, alcohol tax generate enough income to end the Great Depression. To some analyst, World War Two and its income generated, via taxes, ended the Great Depression. That subject cannot be debated at this time.
Based on the evidence presented, it was the income generated by the War Tax which allowed the government to evoke Prohibition. If it had not been for the revenue generated by those taxes the government could not have started Prohibition. One could infer from the data; the Great Depression was caused by the government acting to slow to compensate for the reduction in the amount of war taxes lost. The use of the war taxes became what could be called Path Dependency. It could be argued that the government’s subsequent laws, such as Income Taxes, and the New Deal were coping tools against this war income dependency. The new laws helped the government wean itself off the revenue generated by the war taxes.
Based on this blogs findings, it could be said Christina D. Romer was correct in her assessment, that government officials who created and enacted monetary changes to administration taxation policies, did not fully comprehend the long term effects of the War Tax on the health of the nation.
Thanks for reading,
Works Cited
Department, Treasury. Annual Report of the Commissioner of Internal Revenue for the Fiscal Year Ended June 30, 1919. Washington: Government Printing Office, 1919.
—. Annual Report Of The Commissioner Of Internal Revenue Fiscal Year Ended June 30, 1911. Washington D.C.: Government Printing Office, 1911.
—. Annual Report Of The Commissioner Of Internal Revenue Fiscal Year Ended June 30, 1925. Washington: Government Printing Office, 1925.
Department, Treasury. Annual Report Of The Commissioner Of Internal Revenue Fiscal Year Ended June 30, 1934. . Washington: Government Printing Office, 1934.
Romer, Christina D. “What Ended the Great Depression?” The Journal of Economic History, Vol. 52, No. 4, 1992: 757-784.
- Treasury Department, Annual Report Of The Commissioner Of Internal Revenue Fiscal Year Ended June 30, 1911.(Washington D.C.: Government Printing Office, 1911),1. ↑
- Treasury Department, Annual Report of the Commissioner of Internal Revenue for the Fiscal Year Ended June 30, 1919, (Washington: Government Printing Office,1919),7. ↑
- Ibid. 9. ↑
- Annual Report of the Commissioner of Internal Revenue for the Fiscal Year Ended June 30, 1925, (Washington: Government Printing Office,1925),1 ↑
- Ibid. 1. ↑
- Treasury Department, Annual Report Of The Commissioner Of Internal Revenue Fiscal Year Ended June 30, 1935. (Washington: Government Printing Office,1935), 2 ↑
- Treasury Department, Annual Report Of The Commissioner Of Internal Revenue Fiscal Year Ended June 30, 1935. (Washington: Government Printing Office,1935), 2 ↑