Popular Science Monthly/Volume 48/January 1896/Principles of Taxation: US Government III
By DAVID A. WELLS, LL.D.. D. C. L.,
CORRESPONDANT DE L'INSTITUT DE FRANCE, ETC.
I.—THE COMPARATIVELY RECENT TAX EXPERIENCES OF THE FEDERAL GOVERNMENT OF THE UNITED STATES, PART II.
WITH the close of the war a marked change speedily occurred, in the nature of discontent, in the temper of the people in respect to taxation. But this discontent at the outset was restricted almost exclusively to the so-called "internal revenue taxes," and extended in little or no degree to the war taxes imposed on imports; which last, so long as the internal revenue taxes continued to be levied upon every manufactured product, and also upon the separate constituents of such product, were not only wholly justifiable, but absolutely necessary, if the fiscal burdens of the war between the domestic producers and their foreign competitors were to be equalized. In some instances, through oversight or neglect, the tariff taxation was made actually less upon the imported article than was the internal taxation on the domestic product manufactured from it; one illustration of which was, that the charges imposed on the import of Manilla rope were fifty-six dollars per ton, while the internal taxes on the rope manufactured in the United States from the Manilla fiber ranged from forty-eight to seventy-three dollars per ton.
It soon became evident that the country could not endure for any great length of time the war system of taxation, and, furthermore, would not, when a return of peace had made its ance unnecessary. And, pending its modification for the purpose of reduction, a desire to evade the payment of taxes everywhere manifested itself, until it seemed at one time as if the whole country and the Government itself were becoming corrupted and demoralized. For example, the revenue receipts from the income tax, without any change in the law, declined from $72,982,000 in 1860 to $66,014,000 in 1867; and those from a uniform tax on distilled spirits, from about $29,000,000 in 1867 to a little in excess of $14,000,000 in 1868.
It was under such circumstances that the Revenue Commission entered upon its prescribed duties. The work of investigation devolved mainly on its chairman, the second member being debarred by age and feeble health from any active exertion; while the third assumed from the outset that the best and most feasible way of meeting the financial difficulties of the situation was to abandon the " whole system" (of existing taxation) "in the shortest time consistent with the general interests of the country," and, by an amendment to the Federal Constitution, authorize and require the Federal Government to levy " a duty, payable in lawful money, of one per centum per annum " on the income of all interest -bearing indebtedness issued by the United States and payable in lawful money; and "a duty, payable in specie, of seven tenths of one per centum on the principal of all indebtedness of the United States, which shall belong to any person or corporation, and the interest on which may be payable in specie." He was also of the opinion that such taxes on the income or principal of the indebtedness of the United States, should be "in addition to any ordinary duty or tax equally imposed upon all incomes, or directly upon all personal and real property within the United States subject to taxation."
A subsequent report to this effect was not received with any marked disfavor by the general public, and had the indorsement of not a few leading American bankers and capitalists. As the average annual rate of interest accruing on the market price of the gold bonds issued by the United States from January, 1862, to January, 1866, was 8"82 per cent, and on investments in the debt of the United States payable in lawful money, from 1863 to 1866, was 10'68 per cent, the proposition to levy a tax of one per cent on the
the termination of the war finds striking illustration in the following examples of actual experience. Thus the tax of six pcsr cent, levied and collected during the fiscal year 1864- '65, on the value of the products of the woolen industry in Massachusetts alone ($48,430,- 6*71) was ecpiivalent to nearly twenty per cent on the whole capital ($14,735,671) invested in this business; while the tax on the value of boots and shoes manufactured in the same State during the same year ($52,915,243) was equal to thirty per cent on the whole capital employed ($10,067,474). income or principal of the same did not appear unreasonable, especially in the case where no exemption from taxation was stipulated in the contract for these issues. But neither the author of the report nor its indorsers could have anticipated that within little more than five years after it was submitted to Congress, the Federal Government could have borrowed $185,000,000 at four and a half per cent interest; and that twenty-five years afterward would be able to renew a debt of $25,364,500 at two per cent per annum, or at a rate fifty per cent less than loans on the best corporate or private securities would have at the same time commanded.
The method of prosecuting the work contemplated by Congress of the Commission was at the outset a matter of no little embarrassment. There was practically no material or basis to work on, except the bare statutes authorizing war taxes, and no official collection of these was published by the Government until two years after the commencement of the war. There was no bureau of statistics in the Treasury, and in this department of the Government the officials to whom was assigned the duty of collecting and publishing reliable data relative to the trade and commerce of the country were untrained. No full and reliable statistics concerning any branch of trade or industry in the United States, with possibly a very few exceptions, were then, or ever had been, available. The Treasury received returns of the aggregate of revenue collected and the sources whence it was derived; but these returns were rarely, if ever, accompanied by any suggestions, derived from administrative experience, of any value. The commercial returns from the customs were hardly worth the paper on which they were written. Thus, for example, when the duty on the importation of coffee came up for consideration as a source of revenue, the value of the coffee imported during the fiscal year 1864-'65 was officially returned at ten and a half cents per pound, while its average invoice price, according to the trade of New York for the same period, was not less than thirteen cents. Again, according to the Treasury statement, the aggregate imports of coffee for the same year, were 104,31 6,581 pounds. Of this amount 82,353,000 pounds, which were retained for domestic consumption, had a returned value of only six and four tenths cents per pound, while the value of 21,962,000 pounds of the same imports which were exported during the same year, had the extraordinary value of nearly twenty-five cents per pound. For the year 1863 the Treasury reported an aggregate import of spirits distilled from grain of 1,064,576 gallons, but of this quantity only 45,393 gallons were entered at the ports of Boston, New York, Philadelphia, Baltimore, and San Francisco, leaving an inferential import of 1,019,183 gallons at other ports of the loyal States that practically had no foreign commerce.
TOL. XLTIII. 22 In the Bureau of Internal Revenue a better system prevailed; but this department of the Treasury being always overburdened with work, and its service largely rendered by assessors and collectors who were destitute of business training, contributed but little in the way of deductions from experience. It had, moreover, at one time as its head an official who subsequently in a higher position refused to allow data to be collected in respect to certain taxes, on the ground that the less the people knew about such matters the better it was for the Treasury.
Another great source of difficulty experienced by the Commission in conducting investigations with a view of arriving at any correct estimates of the prospective revenue of the country was the abnormal condition of every branch of trade and industry after 1861, due primarily to the war disturbances, and next to the frequent alterations in the rates of taxation. Every advance made in tariff, or internal revenue taxes, was anticipated to such an extent by importers, manufacturers, dealers, and speculators that the Government could not fairly test the capacity of any one of its great and legitimate sources of revenue. Thus, for example, the almost incredible profits made by reason of anticipation of the large and repeated advances in the taxes on distilled spirits have already been pointed out. Of cigars, in like manner, it was estimated that above eighty millions had been made and stored at one time in the city of New York alone, in anticipation of a higher tax; and in the case of the comparatively insignificant article of matches, on which the tax was only one cent per bunch, the stock accumulated in anticipation of an advance of tax was so large that it was not entirely exhausted for a subsequent period of three years.
In the absence of any specific instructions, either from Congress or the Secretary of the Treasury, it was difficult for the commission to form an opinion as to the best method of entering upon the comprehension and reform of a scheme of taxation which embraced almost every form of tax that the ingenuity of man could devise, and with an incidence on almost every form of property, business, profession, or occupation that was capable of yielding to the state a revenue. The conclusion arrived at, after no little consideration, involved a complete abandonment of any idea of endeavoring to enter upon and comprehend the whole field of inquiry at the outset; and in its place, and in accordance with the maxim attributed to Emerson, that the eye sees only what it brings to itself to see, it was determined to take up and study specifically the sources of public revenue in the order of their importance; and give no attention to any other subject, or attempt to theorize, until everything that domestic experience or the experience of other countries could teach concerning them had been made familiar. In practically carrying out this idea, the chairman of the commission put himself in direct and frequent communication with revenue officials and representative business men from every section of the country; and availing himself of the power to take testimony, under oath, he often came into the possession of important facts which in daily life had been screened from the eye of the public. The result was that the commission presented to Congress, in January, 1866, a report which gave for the first time a full, clear, and exact statement of the curious and complex scheme of internal and customs revenue that had been evolved, as it were, out of the financial necessities contingent on the prosecution of a gigantic war: which involved the raising by taxation during the war period (and exclusive of loans) of an aggregate of over $2,000,000,000, and a not infrequent daily disbursement (expenditure) of over two millions of dollars; and in addition to this feature the report contained special and elaborate exhibits on distilled spirits, fermented liquors, petroleum, cotton, tea, coffee, sugar, spices, proprietary articles, and patent medicines as sources of Government income, with estimates of the amount of revenue which the Treasury might annually expect if taxation at various rates on the same was to be continued; the whole being really the first practical attempt in the United States to gather and use national statistics for great national purposes.
On the termination by statute of the Revenue Commission, in January, 1866, its chairman was appointed to an office specially created by Congress, for a period of four years, with the title of "Special Commissioner of the Revenue" of the United States; and the duties of which were thus defined by statute:
He shall from time to time report through the Secretary of the Treasury to Congress, either in the form of hill or otherwise, such modifications of the rates of taxation, .or of the methods of collecting the revenues, and such other facts pertaining to the trade, industry, commerce, or taxation of the country as he may find by actual observation of the law to he conducive to public interest."
In this office, and invested with large powers, its incumbent entered upon the work of co-operating with the appropriate committees of Congress " Ways and Means " of the House and " Finance " of the Senate in reconstructing the then existing and extraordinary system of the United States internal revenue; and under his initiation and supervision were originated almost all the reforms in this department of the Government that were considered or enacted by Congress between the close of the war and the year 1870; namely, the redrafting of nearly the whole body of complicated and often conflicting statutes; the reduction and final abolition of the taxes on crude products especially cotton, salt, lumber, petroleum, and the metals and most of the taxes on manufactures; the creation of supervisory districts and the appointment of supervisors; the origination of the use of stamps for the collection of taxes on distilled spirits, fermented liquors, tobacco, and the sales of stockbrokers (the last in place of a general tax of one twentieth of one per cent on sales); and the creation and organization of the Bureau of Statistics as a branch of the national Treasury. These modifications brought the internal revenue duties within a reasonable compass, introduced systems where the want of it was working mischief, and by their ready application in administration reconciled the people to a maintenance of important sources of revenue and a continuance of taxes, which have by their stability and steady increase enabled the Government to meet financial exigencies otherwise awkward and dangerous. The service thus rendered met with recognition at the time both in and out of Congress, and was strongly indorsed by those most interested the head of the Treasury and the industries taxed.
The work of taking down the vast and complicated structure of internal taxation, which had been built up during the war, having been once seriously entered upon by Congress (in 1866), it was prosecuted so vigorously that in the comparatively short space of three years the aggregate annual receipts from such taxes were reduced from $310,906,000 in 1866 to $160,039,000 in 1869 a reduction of $150,865,000 and to $102,644,000 in 1872, a further reduction of $57,395,000; while the sources of revenue, the annual receipts from each one of which were specifically reported, were reduced from about two hundred and seventyfive in 1866 to nominally sixty- six in 1872; but practically to three distilled spirits, fermented liquors, and tobacco the receipts from which alone in 1893 were $150,865,000 as compared with $91,464,000 in 1872. It should, however, be noted that this remarkable increase of revenue, coincident with a large reduction in the number of taxed articles, was due mainly to an increase of consumption consequent upon an increase of population during the period under consideration (26,230,000) rather than to any
done for his country more work, and more valuable work, than David A. Wells. Into the financial chaos resulting from the war he threw tho whole weight of a strong, clear mind, guided by an honest heart, and he has done more, in my judgment, to bring order out of chaos than any one man in the United States." (SpcecJi of General James A. Garfield, Member of Congress, United States House of Bepreseyitatives, July 13, 1868 )
"There are few of my oflScial acts that I look upon with more satisfaction than the appointment of David A. Wells to be Revenue Commissioner. All the reports that were made by him exhibited the most careful, painstaking, and intelligent investigation. In clearness and accuracy of statement, and in logical force, they have not been surpassed on either side of the Atlantic. Their ability was admitted, even by those who disagreed with the writer in his conclusions.' (Men and Measures of Half a Century, by Hugh McCulloch, Secretary of the Treasury during the Administrations of Fresidcrds Lincoln, Johnson, and Arthur.) increase in the rate of taxes imposed upon the remaining sources after 1872.
Of many other curious and instructive economic experiences, consequent upon the rapid and radical changes in the fiscal policy of the United States during the period under consideration, the following seem especially worthy of notice: The first abatement or repeal of internal taxation on various articles after the war to the extent of about fifty millions in 18G6 was not attended with any general and immediate reduction in the prices of the articles relieved, corresponding to the reduction of taxation, but with rather an increase of prices. The explanation of this circumstance was, that the continuance of the heavy war taxation, for a period after the extensive war demands of the Government for various commodities had ceased, had diminished their production to a point below what would have been the normal consumption of the country; and that, therefore, prices increased concurrently with the abatement of taxes and a renewal of demand. Such a result was, however, but temporary, and the condition of affairs was soon reversed. The supply of manufactured products quickly became equal to or exceeded demand. The price of products fell faster than the price of either labor or capital^ and taxation, which formerly had been paid wholly from profit, now fell mainly upon capital. The general result was a year (1867) of great industrial and commercial depression.
The enlarged use of stamps as machinery for the collection of taxes, and their novel application to fermented liquors and distilled spirits, were attended with very striking results. In the case of fermented liquors (beer), it was established almost beyond doubt by the Revenue Commission that previous to 1866 the Government was defrauded of its legitimate revenue to an extent of forty per cent, involving an absolute annual loss of about $6,400,000. The adoption, with no little hesitation by Congress in 1866, of the principle, that the payment of the tax on this commodity should be effected by the purchase and affixing a stamp to each barrel sold and removed from the place of manufacture, with the additional requirement that the stamp should be canceled by the retailer or consumer at once, increased the revenue from $3,657,000 in 1865 to $5,115,000 in 1866 the year of first application and to $5,819,000 in 1867; and ever since has proved most effective and satisfactory.
A recommendation to make use of stamps for the collection of taxes on tobacco was acceded to by Congress in respect to smoking tobacco and snuff, but was refused in respect to chewing tobacco, cigarettes, and cigars; in the latter case on the assumption that it was impracticable to affix an adhesive paper stamp on the body of a cigar, while the "trade," not long afterward, and at its own volition, demonstrated its entire feasibility. Had the recommendation in this particular found favor, it would have resulted in an accretion of many millions to the national Treasury, a relief from espionage and other frictions to the trade, and a larger diminution of administrative expenditures both to the trade and the Government.
The experience of the Federal Government in its taxation of distilled spirits is extraordinary, and so replete with instruction to economists, moralists, and social reformers as to merit a more extended notice.
The product of distilled spirits in the United States for the year 1860, as returned by the census, was about 90,000,000 gallons. It would be 'an error to assume that all of this immense production of spirits was used for intoxicating purposes, or in the way of stimulants, inasmuch as the extreme cheapness of spirits or alcohol in the United States during the period under consideration occasioned their employment in large quantities for various industrial purposes; which uses were subsequently in a great degree discontinued when the price of spirits was enhanced from one hundred to one thousand per cent and upward by Federal taxation. For 1860-'G1, the year preceding the war, the average price of proof spirits in Cincinnati was 14'40 cents per gallon.
From 1822 to 1862 distilled spirits, in common with all other domestic industrial products, were exempt from Federal taxation. In the latter year, under the necessity for revenue occasioned by the war. Congress imposed a tax of twenty cents per proof gallon on all distilled spirits of domestic production. This tax went into effect on the 1st of September, 1862, and continued in force until March, 1864. The total revenue derived from this source, including the receipts from licenses for rectifying, vending, and the like, for the fiscal year 1863, was $5,176,530. The receipts from the direct tax on the spirit itself was $3,229,990, indicating a domestic production of only 16,149,954 gallons as compared with a production of 90,000,000 gallons returned under the census of 1860, three years previous. The explanation of this result is to be found in the fact that a large amount of whisky was manufactured in anticipation of this low tax, and that there were doubtless some evasions of the tax after it was enacted conditions that were repeated, as will be presently shown, in a greater degree on every occasion when an advance in the tax was enacted.
The tax of twenty cents continued in force until March 7, 1864, when the rate was advanced to sixty cents per gallon. The revenue accruing under these two rates for the year ending June 30, 1864, was $28,431,797, and the number of gallons returned as having been assessed was 85,295,393. The striking discrepancy between the number of gallons taxed in 1864 at twenty and sixty cents and the number taxed the previous year (1863) at twenty cents again finds explanation in the fact that when it became evident to the distillers that the fiscal necessities of the Government would soon compel an advance in the tax upon their product, and that such increase would not be made applicable to stocks on hand on which the lower rates had been assessed and paid, they pushed their production to the uttermost in order that they might take advantage of the great increase in the market price of all spirits after the advanced rates had taken effect; all which anticipations were fully realized. Thus, of the 85,295,393 gallons on which the Internal Revenue Bureau assessed and collected the spirit tax for 1864 69,000,000 in excess of the product of the preceding year at least 70,000,000 gallons were manufactured prior to the 7th of March and were released from Government control by the payment of the twenty-cent tax only; and as after the 7th of March, 1864, the market price of the greater part of this increased product, which had not been allowed to pass into consumption, was advanced in accordance with the advance in the tax i. e., forty cents per gallon it is clear that $28,000,000 at least were thus at once legislated into the jjockets of the distillers and speculators concerned.
Again, immediately after the imposition of the sixty-cent rate in March, 1864, nearly all the distilleries once more suspended operation; the country was acknowledged to be overstocked with tax-paid whisky, and the Government almost ceased to collect taxes upon its manufacture. In May, however, the project for a further increase in the rates began to be again agitated in Congress, and as soon as its realization became probable, all the distilleries speedily resumed operations. How great at that time was the capacity of the loyal States for production may be inferred from the circumstance that the number of distilleries in the country, which according to the census of 1860 was 1,138, had increased in 1864 to 2,415.
On the 1st of July, 1864, the tax was again advanced from sixty cents to a dollar and a half per gallon; and during that month the entire product of the country of which the revenue officials could take cognizance was only 697,090 gallons. How great a "stock on hand," the result of manufacturing under the twenty and sixty cent rates of tax, was carried over the 1st of July and experienced the advance of ninety cents per gallon in market price in consequence of the advance in the tax from sixty cents to a dollar and a half, can not be accurately known; but 60,000,000 gallons would certainly be a low estimate; and on this amount the profit that accrued to private interests was at least $50,000,000.
On the 1st of January, 1865 (the succeeding year), the tax was further advanced to two dollars per proof gallon, when all the operations above described were repeated, with all the benefits to private or speculative interests derived from former experiences, and a consequent very large extension of the sphere of participants in the resulting profits.
In short, all the available evidence indicates that the profits realized by distillers, dealers, and speculators, through Congressional legislation having reference to the taxation of distilled spirits from July 1, 1862, to January 1, 1865 a period of two and a half years and exclusive of any gains accruing from evasions of taxes, and with every allowance for overestimates, must have approximated $100,000,000.
After the establishment of the two-dollar rate on the 1st of January, 1865, there was again a period of inactivity on the part of those interested in the manufacture of distilled spirits. The stocks on hand, manufactured in anticipation of the advances in rates, were very large, and, the markets being over-supplied, there was little legitimate inducement for activity on the part of distillers. The profits realized or made prospectively certain had been, moreover, enormous, and no further advance in the rate of tax could be anticipated. Under such circumstances there was an apparent disposition on the part of manufacturers and speculators to wait and see what developments in legislation and business would follow the termination of the war in favor of the Union, which was then everywhere recognized as approximately certain. These developments were not long in manifesting themselves.
The tax of two dollars per proof gallon (amounting to more than 1,500 per cent on the average cost of production) and the enormous profits contingent upon the evasion of the law, coupled with the abundant opportunity which the law through its imperfections, and the vast territorial area of the country, offered for evasion, created a temptation which it was impossible for human nature as ordinarily constituted to resist. This view was taken by the Revenue Commission in a report to Congress through the Secretary of the Treasury in February, 1866; and the chairman of the commission, after a thorough investigation of the subject and the collection and presentation of a large amount of evidence, expressed the opinion that the attempt to collect a two-dollar tax was utterly impracticable, and that the longer it was retained the less would be the revenue and the greater the corruption. He also coupled this opinion with a recommendation that a tax of fifty cents per proof gallon, with a judicious license system for rectifiers and dealers, be substituted as likely to be most productive of revenue and most efficient for the prevention of illicit distilling and other revenue evasions.
This report, although attracting much attention by reason of the singular revenue experiences of the preceding four years which it detailed (and which the public, with its thought concentrated on the results of the war, had in a great degree overlooked). found little favor in respect to its recommendation of tax abatement; and the general sentiment both in and out of Congress was expressed by a leading member of the House of Representatives, who publicly declared that "he was not ready to admit that the nation which had put down such a great rebellion at the cost of so much blood and treasure could not collect a tax of two dollars a gallon on whisky."  The two-dollar tax therefore was allowed to remain in force, and the tax experiences of the United States from 1865 to 1809 inclusive, in respect to spirits, viewed from the standpoint of finance, economics, and morals, constitute one of the most interesting, instructive, and disgraceful chapters in its history. Under the strong temptations of large and almost certain gains, men rushed into schemes for defrauding the revenue with the zeal of enthusiasts for new gold fields; and the ingenuity of the American people has never had more striking illustrations than was offered in their devices for evading the tax and providing for security against detection and punishment in so doing. The parties concerned in these transactions also showed throughout more ability than Congress and more shrewdness than the revenue department of the national Treasury; and at a later period a Secretary of the Treasury was obliged to resort to the use of a cipher for his telegraphic and written correspondence, in order to prevent the frustration of his plans for the enforcement of the laws by Treasury ofiicials who were specially charged with their administration. The evidence in part confirmatory of these statements is as follows:
The revenue directly collected during the fiscal year 1866 (the first full year under the two-dollar tax) from spirits distilled from other materials than fruits  was $29,198,000, and in 1867 $28,296,000, indicating an annual product respectively of 14,599,000 and 14,148,- 000 gallons. But during the succeeding year, 1868, with no apparent reason for any diminution in the national production and consumption of spirits, and with no increase, but rather a diminution, in the volume of imported spirits, the total direct revenue from the same source was but $13,419,092, indicating a production, of only 6,709,546 gallons.
As the consumption of distilled spirits in this latter year was probably not less than 50,000,000 gallons, and as out of this the Government collected a tax upon less than 7,000,000, the sale of the difference at the current market rates of the year, less the
Hon. W. B. Allison, both members of the House of Representatives indorsed the recommendation of the commissioner at the outset.
f The revenue derived from the taxation of spirits distilled from fruits has always been comparatively small: $283,499 in 1866; $868,145 in 1867. average cost of production (even if estimated as higli as thirty cents in currency), must have returned to the credit of corruption a sum approximating $80,000,000.
Another curious feature developed was, that the number of distilleries in the country increased just in proportion as the tax on spirits was augmented; the inducement of the great profit to be obtained from a high rate of tax the two-dollar rate especially undoubtedly tempting many to engage in illicit manufacturing who would be unwilling to do so with a certainty of realizing a much smaller rate of profit. Of many curious examples of evidence to this effect, the following reference is particularly interesting: In the eighth collection district of the State of New York there was, before the internal revenue law went into operation in 1862, but one distillery. When the first tax of twenty cents per gallon was imposed, six additional distilleries were started. Under the sixty-cent rate about one dozen were in operation. But this number, under the two-dollar tax, increased to about forty. Furthermore, the tax collected at one distillery in the same district in one month in 1864, under the sixty-cent tax, was one third more than was paid in the aggregate by thirty distilleries in the district in the eight months succeeding November, 1865, when the tax was two dollars; or, to state it differently, one distillery in one month, in 1864, paid $58,819, at sixty cents per gallon, while thirty distilleries in eight months in 1866 paid, at two dollars per gallon, only $33,664. For the entire country the number of licensed distilleries, which in 1864 was 2,415, was returned in 1868 at 4,721 an increase of double in the short space of four years.
Thus confronted with positive evidence of astounding frauds which the Government that put down a great rebellion virtually confessed that it could not prevent, and a steadily diminishing revenue from what ought to have been a steadily increasing source. Congress finally became thoroughly alarmed, and, acceding to the recommendation of the Special Commissioner of the Revenue, reduced (in July, 1868) the direct tax on distilled spirits from two dollars to fifty cents per proof gallon.
cents per gallon in 1868 has been criticised (see letter of United States Commissioner of Internal Revenue, embraced in report of the Secretary of the Treasury for 1893) as not in accordance with the statement that the tax imposed in the above-mentioned year was not fifty but seventy cents per gallon. The only warrant for such criticism to be found in the circumstance that the statute of 1868, which fixed the direct tax on spirits at fifty cents per gallon, and none other, also contained separate and independent provisions imposing licenses, taxes on capacity of stills, and on the sales of dealers, with some modification of the fees of gaugers and storekeepers; and that these additional assessments brought up the tax from fifty to seventy cents per gallon. But this reasoning overlooked two essential features of the act, namely, that the direct tax on every proof gallon must be paid by the distiller, owner, or other person having possession thereof, before removal from the distil- The results of sucli legislation were immediate and most remarkable. Illicit distillation practically ceased the very hour the new law came into operation. Industry and the arts experienced a large measure of benefit from the reduction in the cost of spirits; while the Government collected during the second year of the continuance of the new rate and system, with comparatively little friction, three dollars for every one that was obtained during the last year of the two-dollar tax. Assuming, as is warranted, that with a continuance of the two-dollar tax there would have been no increase in the revenue from distilled spirits beyond what accrued in 1868 the last year of its existence the gain in revenue to the Government in the succeeding two years from the adoption of the fifty-cent rate was at least sixty millions of dollars. Furthermore, but for the injudicious but popular speech (to which reference has been made) at an opportune moment in committee by a statesman who had bestowed but little attention to the subject, the reduction of the tax from two dollars to fifty cents per proof gallon would undoubtedly have been anticipated by a year, and attended with like gainful results. The cost of this speech, therefore, to the national Treasury may be rightfully estimated as at least ten millions of dollars. The record of this chapter of the tax experience of the United States also forcibly illustrates the impolicy and disaster of embodying any fiscal policy in statute enactments without a previous study and full comprehension of all the elements involved.
For the first but incomplete fiscal year (1869) under the fiftycent tax the revenue increased to the extent of nearly $20,000,000, or from $14,290,000 in 1868 to $33,735,000 in 1869; or, including all taxes on the manufacture and sale of distilled spirits, licenses, etc., from $18,655,000 in 1868 to $45,071,000 in 1869. During the next fiscal year (1870) there was a further increase in the total revenue of $10,534,864, or from $45,071,000 in 1869 to $55,606,094 in 1870.
lery or warehouse; and next, that none of the indirect and supplementary taxes could be assessed or collected until after the direct tax (of fifty cents) had been paid; the license taxes, for example, varying according to the product of the distillery, and payable in block, at different specified times. A great and novel object here sought for, namely, of diminishing the inducements to fraud, by directing the collection of the direct and supplementary taxes on spirits as respects persons, places, and times, was fully achieved; for, although the aggregate of the direct and indirect tax on spirits undoubtedly increased their cost to their final consumers, the largest possible gain to the distiller from the evasion of the separate and comparatively small indirect taxes which contributed to this increase, even apart from the risks of punishment involved, were too small to be worthy of his attention. The effort, therefore, to attempt to minimize by sophistical reasoning the remarkable effect of the reduction in 1868 of the tax on distilled spirits to fifty cents has no rightful claim for consideration, and unquestionably was prompted by a very general but unwise public sentiment, that it is desirable always to subject the manufacture and sale of spirituous and fermented liquors to exceptionally high rates of taxation. The specific tax on distilled spirits of fifty cents per proof gallon remained in force from July, 1868, to August, 1873, a period of a little more than four years. During this period the tax was assessed and collected on an average production of 67,175,822 proof gallons per annum, yielding an average annual revenue of about $34,000,000, and indicating an average annual consumption for all purposes of the country of about 1'65 proof gallons per capita. For the period of four years immediately preceding the fiscal year 1869, under a tax of two dollars per proof gallon for three years, and a dollar and a half and two dollars for one year (1865), the tax was assessed and collected on an average annual production of only about 13,300,000 proof gallons per annum, yielding an average annual revenue of about $21,727,000, and indicating an average annual consumption of only about 0'38 proof gallon per capita.
But, notwithstanding these satisfactory results, the law authorizing the reduction of the tax from two dollars to fifty cents per proof gallon had hardly become operative when agitation commenced for its repeal or modification. Speculators had the idea that the old scheme of increasing the tax after a little lapse of time, without making the increase applicable to stocks on hand, was, with its gainful prospects, again within the range of possibilities; while very many extreme advocates of temperance, untaught by and caring nothing for the record of recent experience, were inclined to regard the new and comparatively low tax as impolitic and in the light of the removal of a barrier against the spread of intemperance. These and other arguments proved sufficiently potent, and in June, 1872, Congress, by an act which took effect in the following August, increased the gallon tax to seventy cents, and subsequently, in March, 1875, raised the rate to ninety cents per gallon, and in August, 1894, further increased it to a dollar and ten cents, the present rate.
It is not necessary to recall that the experiences which were attendant upon every advance of the tax on spirits from its first imposition in 1862 to 1868 were repeated subsequently in 1872 and in 1875, when the increased rates of seventy and ninety cents were respectively enacted; those of the latter date being remarkable from the circumstance that the frauds upon the revenue, which were enormous, were more directly brought home to high officials of the Government than at any former period, and constitute a chapter in the history of government by the people which the people may well wish forgotten.
The above review of the experiences of the United States prior to 1869, in attempting to enforce the collection of an excessively high tax on the production and consumption of distilled spirits, is mainly valuable in this connection from the economic and moral lessons deducible from it, which may in brief be summarized as follows:
Whenever a government imposes a tax on any product of industry so high as to sufficiently indemnify and reward an illicit or illegal production of the same, then such product will be illicitly or illegally manufactured; and when that point is reached, the losses and penalties consequent upon detection and conviction no matter how great may be the one or how severe the other will be counted in by the offenders as a part of the necessary expenses of their business; and the business, if forcibly suppressed in one locality, will inevitably be renewed and continued in some other. It is therefore matter of the first importance for every government in framing laws for the assessment and collection of taxes to endeavor to determine, not only for fiscal but also for moral purposes, when the maximum revenue point in the case of each tax is reached, and to recognize that in going beyond that point the government "overreaches " or cheats itself.
Obviously those who in the past have shaped the policy of the United States in respect to the taxation of distilled spirits for the purpose of revenue have, for the most part, never studied this aspect of the case or cared to encourage any one to do so; but, on the contrary, as has been somewhat humorously expressed, " they have held out to the citizen, on the one hand, a temptation to violate the law too great for human nature as ordinarily constituted to resist, and in the other writs for personal arrest and seizure of property, and, thus equipped, have announced themselves ready for business."
The data ofiBcially collected and reported by the Internal Revenue Department of the United States Treasury furnish the only reliable basis for obtaining approximately correct answers to the following questions: 1. To what extent, through a well-considered system of taxation, can the manufacture and sale of distilled spirits be made available as sources of national revenue? 2. What has been and is the probable per capita and aggregate annual consumption of this class of spirituous liquors by the people of the United States? The first of these questions is eminently pertinent to the legislator; the second, to the student and advocate of social reform.
The experience derived from the taxation of distilled spirits previous to 1869 by the Federal authorities was so unnatural and, as it were, spasmodic as to debar its use for the determination of any general or average conclusions, and limits inquiry to the results which followed in subsequent years (1870-1894), under lower and more rational rates of taxation, and a more efficient and intelligent fiscal administration. And for the jJurpose of making a clear exhibit of these, attention is asked to the following table (prepared from official data), showing (1) the population of the country for each successive fiscal year from 1870 to 1894, inclusive; (2) the quantity of gallons of spirits annually taxed; (3) the average per capita consumption for each successive year; (4) the amount of revenue annually collected; (5) the average annual revenue, or tax per capita; (6) the annual tax per gallon; (7) the average tax per gallon.
The first point of interest which an examination of the above table reveals is, that the average per capita consumption of tax-paid distilled spirits by the people of the United States during the years 1870, 1871, 1872, and 1873, under the tax of fifty cents per gallon, was greater than it has been at any subsequent period under a seventy and ninety cent rate. Sucli a result is undoubtedly referable in the main to the economic law that a reduction in the price of a commodity encourages its consumption (in this instance for industrial as well as stimulant purposes), and in a degree to the fact that a fifty-cent tax, with its accompaniment of stringent penalties, greatly diminished the incentive for illicit production. A wonderfully striking illustration of the strength of temptation for the evasion of the revenue created by the previous high taxation, which had little other reason than mere sentiment for its imposition, is also afforded by the fact that while the Government in 1872, under a tax of fifty cents per proof gallon, took cognizance of an average annual tax-paid consumption on the part of the people of the United States of 1"63 gallons per capita, it was only able to recognize in 1868, under a two-dollar tax, a similar average annual consumption of about 0"38 proof gallon per capita.
The second point of interest in connection with the foregoing tabular exhibit is the demonstration it affords of the very curious variations which occurred in the successive years from 1870 to 1894, inclusive, in the quantity of spirits that annually paid taxes to the Government, and which may be regarded as constituting an approximately accurate measure of the average annual per capita consumption of this commodity by the entire population of the country. The explanation of such changes is not diflScult. They are in general unquestionably referable to immediately antecedent or contemporary changes in the business condition of the country, which in turn are determinative in a high degree of the popular ability to consume an article like distilled spirits of comparatively high cost and largely a luxury, popular tastes and habits and restrictive moral influences remaining constant. Thus, passing by the year 1870, in which there was a great increase (from altogether abnormal causes) in the number of gallons produced and made subject to taxation, the increase in the tax-paid product and in the average per capita consumption during the succeeding fiscal years 1872 and 1873, when the business of the country was fairly prosperous, was regular and not inconsiderable. The commencement of the next fiscal year (1874) was signalized by one of the most memorable financial panics in American history and a general prostration of business, from which last there was no decided recovery until 1879.
During all this period the domestic production of distilled spirits of which the Government took cognizance continued to decline, and the average per capita of consumption touched the exceedingly low proportions of 1*07 and 1*09 gallons in the fiscal years of 1878 and 1879 respectively. With a renewal of active and profitable business throughout the country in 1880, the annual taxed production of spirits went up from 50^704,189 gallons in 1878 to 79,616,901 gallons in 1884, and the per capita consumption from 1'07 gallons to 1*45 gallons in the corresponding years. During the period from 1871 to 1880 there was a decrease both in the quantity of spirits on which the Government was able to collect a tax and in the apparent per capita consumption of the people, and this, too, notwithstanding an increase during this same period of thirty per cent in the population of the country; 1871 showing a tax on sixty-two and one third millions (1"58 gallons per capita), while in 1879 the tax was collected on only fiftythree million gallons (1'09 gallons per capita).
The decade from 1870 to 1879 was further characterized by two periods of disturbance which ought to be instructive in view of future legislation occasioned by an advance in 1873 of the gallon tax from fifty to seventy cents, and again in 1875 from seventy to ninety cents. In both cases these advances in rates were followed by large annual reductions in the quantity of the spirits taxed and in an apparent per capita consumption, which in turn indicated extensive revivals of illicit practices which the reduction of the tax to fifty cents in 1868 had nearly extinguished, and which indications were also made certainties by abundant direct evidence.
During the fiscal years from 1888 to 1893, inclusive, under a uniform and prospectively stable rate of tax, an apparently good and efficient administration of the law, and a fairly prosperous condition of the country, the results in this department of our national revenues were very exceptional and interesting. The continuous increase in production, in per capita consumption, and in revenue was remarkable, the average increase in spirits paying taxes having been nearly 4,600,000 gallons per annum, or in a ratio greater than any concurrent increase in the population of the country; in average per capita consumption, nearly one third of a gallon; in average increase in revenue of nearly $5,000,000 ($4,910,000) per annum, the whole culminating for the fiscal year (1893) in a product of 99,000,000 gallons, an annual revenue of $89,000,000, and a per capita consumption of 1*48 gallons. During the same period the per capita consumption of all spirits, domestic and foreign, in Great Britain was about 1'063 gallons.
The financial troubles and business depressions in Europe and other countries during the years 1892 and 1893 do not appear to 321
have exerted the slightest influence on the production and consumption of distilled spirits in the United States. But the advent in 1894 of a similar state of affairs in the latter country speedily manifested itself, reducing the current per capita consumption from 1*48 gallons in 1893 to 1'33 gallons; the direct revenue from $89,231,000 in 1893 to $79,899,000; the current per capita consumption from 1'48 to 1"33 gallons, and the total annual revenue to the extent of $9,461,008.
The normal consumption of distilled spirits in the United States in 1894, as indicated by withdrawals from distilleries and warehouses, was about 8,000,000 gallons a month. The extent to which the increase in the direct tax on spirits by the act of August 28, 1894, from ninety cents to one dollar and ten cents per gallon, was anticipated by speculators is strikingly illustrated by the fact that an average monthly revenue from the lesser tax of about $8,000,000 per month during the first six months of 1894 increased during the month of July and the first twenty-seven days of August to $19,064,000 and $21,470,000 respectively, and declined in the succeeding month of September to $510,696.
Any review of the comparatively recent tax experiences of the United States would be incomplete that failed to notice its taxation (concurrent with that on distilled spirits) of domestic fermented liquors (beer, etc.). The internal revenue tax on this commodity has been practically uniform since its first authorization in 1863, namely, one dollar per barrel, holding theoretically thirty-one gallons. The tax was originally assessed and collected on the returns of the brewers, and was largely evaded. After July, 1866, it was successfully enforced through thfe employment of stamps, one of which, "denoting the amount of the tax," is required to be affixed upon the spigot hole or tap (of which there shall be but one) in such a way that the stamp shall be destroyed upon the withdrawal of the liquor from the barrel or other receptacle. The following table exhibits in detail the experience which has characterized each fiscal year since the inception of this source of revenue in 1863 down to and including 1894:
Revenue collected from barrel tax.
Tax per barrel of 31 gallons.
34,748,000 35,469,000 36,211,000 36,973,000
113,372,611 158,569,340 192,429,462 190,546,553
3-26 4-47 5-31 5-15
3,657,181 5,115,140 5,819,345 5,685,663
.11 .14 .16 .15
.60 ] .60
(1.00 1.00 1.00
VOL. XLVIII. 23
(1) The regular and great increase in the quantity of fermented liquors annually made subject to internal revenue taxation i. e., from 63,205,375 gallons in 1863 to 1,071,183,827 gallons in 1893, and an increase in per capita consumption very far in excess of the rate of increase in population i. e., from 1·86 gallons in 1863 to over sixteen gallons in 1893.
(2) The concurrent regular increase in revenue from this source i. e., from $1,558,000 in 1863 to nearly $32,000,000 in 1893.
(3) The variations in the product of fermented liquors which the Government has been able annually to subject to taxation since 1863 have been inconsiderable and in remarkable contrast to those occurring in the case of distilled spirits. Business depression from 1874 to 1879 and for the year 1884 appears to have been influential in checking per capita consumption, though in a small degree, and to have exerted little or no influence in the subsequent years, that are subject to analysis, down to 1894, when financial and industrial depression was again operative in the country, results indicating that similar larger and contemporaneous decrements in consumption and revenue in the case of distilled spirits were due to fraudulent practices, rather than to an impairment of ability to consume on the part of the masses.
(4) The average annual increase in the receipt of internal revenue from fermented liquors for the ten years from 1883 to 1892 was $1,306,057, and for the four years ending with the fiscal year 1893 about $1,617,000. That this latter ratio of annual increase under the present rate of tax is likely to indefinitely continue is almost demonstrated by the fact that the popularity of fermented or malt liquors as beverage among the American people is unquestionably increasing; and also that large, seemingly, as is their present average per capita consumption namely, sixteen gallons the present per capita consumption of the people of several other nationalities is much greater; that of the United Kingdom being estimated at thirty gallons; of England and Wales, thirty-six; of Belgium, forty; and of Germany, forty-five. An important fact pertinent to the prospective consumption of beer and its permanent value as a source of national revenue is, that the cost of the materials used in its manufacture has decreased in comparatively recent years, in the United States, Great Britain, and probably other countries characterized by its large consumption, to the extent of at least forty per cent; and the advantage from this change which has accrued to British brewer was stated by the British Chancellor of Exchequer, in May, 1895, to have been upward of 2,000,000 ($10,000,000) per annum. Another point of interest in this connection which is especially worthy of attention is, that if moral influences have ever materially affected the general consumption of distilled spirits or fermented liquors in the United States, the tabulated tax experiences of its Government, which constitute the only reliable basis for forming an opinion, do not afford any indication of it.
Having reformed and radically reduced the war taxes in the Department of Internal Revenue, it was next in order for Congress to consider the readjustment of the customs system of taxation, which had also been evolved, as it were, out of the war's fiscal exigencies; and it accordingly in 1867 instructed the Secretary of the Treasury to present at its next session the draft of a tariff embodying reductions of war rates. The responsibility of preparing such a draft having been next intrusted by the Secretary to the Special Commissioner of the Revenue, the latter, with a view of qualifying himself for the trust, visited Europe under a Government commission, and investigated under almost unprecedented advantages nearly every form of industry then competitive with the United States in Great Britain and on the Continent. The results of this visit and investigation effected an enlightenment on his part in respect to two salient and fundamental points: First, that no country, with the exception of the United States, which had adopted in a greater or less degree the policy of protection through duties or restrictions on imports, had ever regarded the taxation of the imports of "raw,"  or crude, or partly manufactured materials, to be subsequently used for larger manufacturing, as an element of protection in its largest sense to its domestic industry, but rather as antagonistic to, and destructive of, such industry; and that, while such taxation in the United States had undoubtedly built up some industries and enriched their owners, it had been a great restraint on the development of a much larger and higher class of industries, employing a greater number of workmen, and paying much higher average wages. Second, that the countries of Europe in which the average rates of wages were lowest were the most clamorous for protective duties on imports; and that high wages in any country, conjoined with the extensive and skillful use of machinery, instead of being evidence of industrial weakness, were evidence of great industrial strength; inasmuch as no employer can continuously pay high wages unless his product is large, his labor most effective, and his cost of product, measured on the terms of labor, comparatively low.
The announcement of these views, and especially their publication in a report in 1869, created much antagonism among the advocates of the policy of extreme protection in the country; and Horace Greeley and others publicly charged that the commissioner had been induced to change his views through the corrupting agency of British gold. Notwithstanding this, a draft for a complete revision of the tariff of the United States, prepared under his almost sole supervision, and accompanied with a report on the existing revenue resources and industrial and financial condition of the country, was submitted to the Forty-first Congress by Secretary McCulloch, with his indorsement, in December, 1887. This draft, subsequently embodied in the form of a bill, with slight modifications by the Finance Committee of the Senate, came very near enactment into law, the Senate passing it by a vote of twenty-seven to ten. In the House of Representatives it failed in the closing hours of the second session by a very few votes, and not by a direct vote, but on a motion to sus-
for manufacturing purposes has always been a matter of embarrassment to legislators and economic writers, inasmuch as a confessedly manufactured and often elaborate product may be relatively a raw or crude material for successively higher grades or processes of manufacture. A proposition recently proposed by Mr. Lindley Vinton, of New York, to restrict the application of the above terms in law, commerce, and economics, to the state or condition in which any product first enters into trade or commerce, would seem to be so free from any ambiguity of meaning as to be worthy of consideration. pend the rules, take the bill from the Committee of the Whole, and put it upon its passage. This motion, which required a twothirds vote, was defeated one hundred and six in the affirmative to sixty-four in the negative. It was thus made evident that, could the bill as it came from the Senate have been brought directly before the House, it would have passed by a large majority, and probably have quieted for years all difficult and disturbing legislation on this subject.
When the office of Special Commissioner expired by limitation in 1870, the appointment as chairman of a State commission, specially created for investigating the subject and laws relating to local taxation, was tendered to its late incumbent by the Governor (Hon. John T. Hoffman) of the State of New York, and accepted. This new position afforded an almost unprecedented opportunity and facilities for becoming acquainted with a practically new department of taxation; the taxes levied by the Federal Government being mainly of an indirect character, and subject to constitutional limitations; while those of the States are mainly direct, and practically subject to no limitations as to object, except as respects imports, exports, and the property and instrumentalities of the United States. The results of this new field of exploration were laid before the Legislature of the State of New York in the form of two reports (in 1871 and 1872), with an accompanying draft of a code of laws. The facts developed on this line of investigation, and which will be restated with much additional evidence in the following chapters, are generally regarded as antagonistic to the theory of taxation as accepted and taught by most economists, and incorporated into statutes by lawmakers. The Legislature to which these reports were submitted paid no further attention to them than to order their printing. They were, however, contrary to almost all precedent, reprinted in the United States and in Europe.
Note. The writer would take this occasion to acknowledge his great indebtedness to the late Isaac Sherman, of New York, whose innate modesty and desire to avoid publicity alone prevented a general recognition by his countrymen of his great intellectual ability; and that this characterization is not unwarranted is proved by the fact that it was fully admitted by such men of his time as Samuel J. Tilden, Charles O'Conor, and Rev. Dr. Bellows; and also by the circumstance that he was the one man of all others that President Lincoln selected as his adviser in the most critical periods of the war, and to whom he repeatedly tendered the highest civil offices in his gift. Mr. Sherman took a deep interest in the work of the New York State Tax Commission; participated in its investigations; con tributed to its councUs a very thorough knowledge of the views of English, French, and German writers on taxation, and of the cognate opinions and decisions of American and European courts and jurists; and is entitled to equal credit for whatever of merit may pertain to its conclu- conclusions. If these conclusions, arrived at and expressed in the following' chapters, do not meet the full concurrence of economists, the writer has the satisfaction of knowing that they received, in the main, the full indorsement of one so pre-eminently qualified to pass judgment upon them.