Ken Burns is arguably the greatest film documentary producer in our history. Your perspective is always richer after viewing one of his films. After viewing Dust Bowl, I was fascinated by the failure of science in causing this disaster. Now, I just watched Prohibition and was fascinated by the failure of economics.
One of the tenets of classical economics, which was dominant at the time, was that, if you want more of something, you subsidize it and, if you want less of something, you tax it. Intuitively, that makes sense.
As the perceived dangers of alcohol increased, the government kept raising the tax on it. But, consumption kept increasing, along with government revenues. At one point, taxes on alcohol were 70% of Federal revenue. What a wonderful revenue source -- it was voluntary! People were not forced to buy alcohol. But, why were people drinking more, even with higher taxes?
What classical economists didn't know was called the "inelasticity of demand" or how will demand for a product increase or decrease in response to a change in price? Take the case of cigarettes: It is addictive, and addicts will pay almost any amount to have a cigarette . . . or alcohol . . . or "illegal" drugs. Increased taxes does not significantly reduce demand.
But, the government found itself in a paradox. Taxing alcohol did not reduce alcohol consumption, but the government itself became addicted to alcohol taxes. So, how to reduce alcohol consumption without bankrupting the government? Obviously -- create a substitute addiction for the government to replace its addiction to alcohol and instead become addicted to something else. The revenue had to be recovered!
And, the income tax was born.
One of the tenets of classical economics, which was dominant at the time, was that, if you want more of something, you subsidize it and, if you want less of something, you tax it. Intuitively, that makes sense.
As the perceived dangers of alcohol increased, the government kept raising the tax on it. But, consumption kept increasing, along with government revenues. At one point, taxes on alcohol were 70% of Federal revenue. What a wonderful revenue source -- it was voluntary! People were not forced to buy alcohol. But, why were people drinking more, even with higher taxes?
What classical economists didn't know was called the "inelasticity of demand" or how will demand for a product increase or decrease in response to a change in price? Take the case of cigarettes: It is addictive, and addicts will pay almost any amount to have a cigarette . . . or alcohol . . . or "illegal" drugs. Increased taxes does not significantly reduce demand.
But, the government found itself in a paradox. Taxing alcohol did not reduce alcohol consumption, but the government itself became addicted to alcohol taxes. So, how to reduce alcohol consumption without bankrupting the government? Obviously -- create a substitute addiction for the government to replace its addiction to alcohol and instead become addicted to something else. The revenue had to be recovered!
And, the income tax was born.
