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One Good Outcome of the Great Depression

Here’s a letter to the Wall Street Journal:


Jason Taylor tells the interesting tale of the re-legalization of beer in the U.S. ninety years ago (“A New Deal on Beer,” April 7). But legalizing the sale of alcohol – first of beer and, soon afterward, also of stiffer beverages – wasn’t only about creating jobs and lifting Americans’ depressed spirits. Politicians’ focal motivation was financial.

In 1913, the year the national personal income tax was created, liquor taxes accounted for about one-third of federal revenues while customs duties accounted for nearly half. Together, these taxes brought in about two-thirds of U.S. government revenue. But the income tax soon proved to be prodigious at raking in revenue. By 1920 – the year prohibition began – income taxation alone brought in 70.3 percent of federal government revenue. The sharp decline in the importance of liquor-tax revenues made it fiscally feasible to prohibit alcohol sales.

But the Great Depression greatly depressed incomes and, hence, income-tax revenues. Between 1930 and 1933, these revenues fell by nearly 70 percent. Thirsty for revenue, Congress and FDR successfully pressed for prohibition’s repeal.*

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* See Donald J. Boudreaux and A.C. Pritchard, “The Price of Prohibition,” Arizona Law Review, Spring 1994; and Thomas L. Hungerford, “U.S. Federal Government Revenues: 1790 to the Present,” Congressional Research Service, September 2006.