How Liquor Taxes Led to Big Government

Posted By Daniel Greenfield

On January 4, 2013 @ 12:32 am

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.