Pubdate: Sun, 13 Jun 2010
Source: New York Times (NY)
Page: WK11
Copyright: 2010 The New York Times Company
Contact:  http://www.nytimes.com/
Details: http://www.mapinc.org/media/298
Author: Daniel Okrent
Note: Daniel Okrent, a former public editor of The Times, is the 
author of "Last Call: The Rise and Fall of Prohibition."
Bookmark: http://www.mapinc.org/opinion.htm (Opinion)
Bookmark: http://www.mapinc.org/topic/Prohibition

NO CLOSING TIME FOR INCOME TAXES

ON March 19, 1928, eight years into the reign of constitutional 
Prohibition, Pierre S. du Pont wrote a letter to William P. Smith, 
one of the very few people he ever addressed by first name. Du Pont 
was among the wealthiest men in the world, chairman of both his 
family's chemical colossus and the du Pont-controlled General Motors 
Corporation. Smith worked for a less well-known enterprise that 
Pierre du Pont also dominated: the Association Against the 
Prohibition Amendment.

"The object of the organization," du Pont told his friend Bill, "is 
not merely the return of the use of alcoholic beverages in the United 
States." He went on, "Another important factor is the tremendous loss 
of revenue to our government through the Prohibition laws" -- the 
revenue once collected through taxes on liquor and beer. With the end 
of Prohibition, he wrote, "the revenue of the government would be 
increased sufficiently to warrant the abolition of the income tax and 
corporation tax."

For today's advocates of legalized, taxable marijuana -- or new 
levies on, say, electricity use, baseball tickets or high-fructose 
corn syrup -- it's an appealing model. Some even believe that a tax 
on marijuana, which could be legalized by California voters this 
November, could lead to a reduction in the state's income taxes. But 
the history of the intimate relationship between drinking and taxing 
suggests otherwise.

The link between the two is as old as the Republic; Alexander 
Hamilton provoked the Whiskey Rebellion when he persuaded Congress in 
1791 to enact the first federal tax on liquor to help pay down the 
national debt. By 1910, as anti-alcohol forces were making a 
significant impact on American politics, the federal government was 
annually drawing more than 70 percent of its domestic revenue from 
the bottle and the keg. In those years before the advent of the 
income tax, only the tariff on foreign goods and materials provided a 
larger share.

The nation's dependence on the alcohol tax created a vexing problem 
for the leaders of the Prohibition movement. As early as 1883, the 
editors of the Woman's Christian Temperance Union's official 
newspaper coyly asked their readers, "How, then, will [we] support 
the government" if the sale of liquor is prohibited?

The editors had a ready answer: an income tax, they wrote, was "the 
most just and equable arrangement ever made for the equalization of 
governmental burdens." In 1895, the Prohibition Party recognized that 
an excise tax "is a pledge on the part of the state to defend and 
foster the thing taxed," and it soon nailed an income tax plank to 
its platform. And leaders of the most powerful Dry organization, the 
Anti-Saloon League, grumpily aware of what one called the "alleged 
'loss of revenue' argument," chose to focus most of its attention on 
state-by-state, rather than federal, prohibitory laws.

But the league also encouraged the populist campaign to authorize an 
income tax. When this support finally bore fruit in 1913, the 
organization announced that "the adoption of the Income Tax Amendment 
to the federal Constitution furnishes an answer to the revenue 
problem." As a result, it said, the time had come for all foes of 
alcohol to put aside the state-by-state strategy and focus on a new 
goal. "National prohibition," its executive committee declared, "can 
be secured through the adoption of a constitutional amendment." By 
1920, it was law.

Through the first nine years of Prohibition, income taxes went a long 
way toward covering the federal government's costs. But just as 
organized Drys had backed the income tax in 1913 in order to breathe 
life into Prohibition, a du Pont-led group of well-financed Wets 
would eventually seek to kill Prohibition so that the income tax 
might die with it.

The idea had first emerged in 1923, when the publisher of The Wall 
Street Journal, Clarence W. Barron, argued that ending Prohibition 
would enable the government to collect $2 billion a year and abolish 
the income tax. In 1926, Pierre du Pont's brother Irenee told an 
associate that General Motors would save $10 million in corporate 
taxes each year with the return of the alcohol levies. Irenee's 
specific solution -- imposition of a 3-cent tax on every glass of 
beer -- would, effectively, make the working poor and the unemployed 
finance tax relief for the rich.

These plutocratic longings began to take palpable form when 
prosperity was upended by the Crash of 1929. The Depression corroded 
tax collections: federal revenue based on 1930 incomes was down 15 
percent, the following year saw a 37 percent drop, and the year after 
that 26 percent -- a vertiginous 60 percent collapse in just three 
years. Capital gains taxes that had brought $1.5 billion into the 
Treasury from 1926 to 1929 dived into negative territory as the 
allowance for capital losses accrued. At the same time, the demand 
for government spending -- for relief, for reconstruction projects, 
for anything to restart the comatose economy -- soared.

By 1930, the chemical du Ponts had recruited a roster of other 
gilt-edged names to their anti-Prohibition cause: automotive Fishers, 
financial Harrimans, oil Harknesses, rubber Goodriches. Their 
publicity campaign featured pamphlets like "What Price Prohibition?" 
(Answer: with the return of legal alcohol, "the necessity of levying 
income taxes would be eliminated") and "The Cost of Prohibition and 
Your Income Tax."

By 1932, as the Depression plunged toward its devastating nadir, a 
new handout from the Association Against the Prohibition Amendment 
spoke more urgently to the historical moment: "The Need of a New 
Source of Government Revenue." The authors didn't have to look far to 
identify one, as Pierre du Pont made clear in a radio address that 
summer. "The income tax would not be necessary in the future," he 
said, "and half the revenue required for the budget ... would be 
furnished by the tax on liquor alone."

That message was for public consumption; privately, he was even more 
direct. "The Repeal of the XVIIIth Amendment would permit federal 
taxation in the amount of $2 billion," du Pont wrote to a relative in 
April 1932, by which time the congenitally Republican industrialist 
had become an ardent supporter of the pro-repeal Franklin Roosevelt. 
"Such taxation would almost eliminate the income taxes of 
corporations and individuals."

He didn't have to wait long to see if he was right. The repeal 
amendment was ratified on Dec. 5, 1933, just nine months after 
Roosevelt's inauguration, and new tax revenues began to flow. In the 
first post-repeal year, the government collected $259 million from 
the alcohol excise -- instantly, nearly 9 percent of total federal 
revenue -- even though many states either remained dry or severely 
limited the sale of alcohol.

Unfortunately for du Pont, the other half of his equation didn't work 
out. Roosevelt and Congress did respond to the repeal windfall by 
cutting income tax rates for workers earning less than $3,000 a year. 
But the New Deal had little sympathy for the wealthy, whose taxes 
actually increased over the next few years. Rather than the trade-off 
du Pont expected, the government used the excise income to expand.

"I acknowledge my mistake," du Pont wrote in 1936, after he and many 
of his colleagues had transferred their energies and financial 
support to the rabidly anti-Roosevelt American Liberty League. "The 
effort should have been directed against the XVIth Amendment" -- the 
income tax amendment -- "which I believe could have been repealed 
with the expenditure of less time and trouble than was required for 
the abolition of its little brother," the 18th.

Prohibition had been dead for three years, but the damnable taxes 
Pierre du Pont had expected to die with it lived on. Contemporary 
Californians indulging a fantasy of income tax relief emerging from a 
cloud of legalized marijuana smoke should realize that it is likely 
only a pipe dream.
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MAP posted-by: Richard Lake