INTERNAL-REVENUE TAX DISTILLED SPIRITS, MALT LIPORS, AND TOBACCO. TDA.^T'XID _ a __ wells . 4 The tax of 20 cents continued in force until March 7, 1864, when the rate was advanced to 60 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 20 and 60 cents and the number taxed the previous year (1863) at 20 cents again finds explanation in the fact, that when it be¬ came evident to the distillers that the fiscal necessities of the Govern¬ ment 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 pro¬ duction 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 of 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 of gallons were manufactured ' prior to the 7th of March and were released from Government control by the payment of the 20 .cent tax only; and as after the 7th 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., 40 cents per gallon—it is clear that $2S,000,000 at least were thus at once legislated into the pockets of the distillers and speculators. Again, immediately after the imposition of the 60 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 censusof 1860 was 1,138, had increased in 1864 to 2,415.' On the 1st ot July, 1864, the tax was again advanced from 60 cents to $1.50 per gallon ; and during that month the entire product of the country of which the revenue officials could take cognizance was only 697,099 gallons. Ho w great a * ‘stock on hand, ’ 7 the result of manufacturing under the 20 and 60cent ratesof tax, was carried over the 1st of July and experienced the ad¬ vance of 90 cents per gallon in market price in consequence of the advance in the tax from 60 cents to $1.50, can not be accurately known; but 60,000,- 000 of gallons would certainly be a low estimate ; aud 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 fur¬ ther advanced to $2 per proof gallon, when all the operations above f) 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. $2 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, w*ere very large, and, the mar¬ kets being oversupplied, there was little legitimate inducement for activity on the part of distillers. The profits realized or made pro¬ spectively certain had been, moreover, enormous, and no further ad¬ vance 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 busi¬ ness 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 $2 per proof gallon (amounting to more than 1,000 per cent o.i 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 im¬ possible 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, 1S66 ; and the chairman jof 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 $2 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 recom¬ mendation that a tax of 50 cents per proof gallon, with a judicious license system for rectifiers and dealers, be substituted as likely to be most pro¬ ductive of revenue and most efficient for the prevention of illicit distil¬ lation and other revenue evasions. This report, although attracting much attention by reason of thfe sin¬ gular 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 sentihient both in and out of Congress was expressed by a leading member of the House of Representatives, who publicly declared *‘tliat he was not ready to ad- 6 mit 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 $2 a gallon on whisky.” The $2 tax therefore was allowed to remain in force, and the tax experiences of the United States from 1865 to 1869 inclusive, in respect to spirits, viewed from the standpoint of finance, economics, and morals, constitute one of the most interesting, instructive, and disgrace¬ ful chapters in its history. Under the strong temptations of large and almost certain gains, men rushed into schemes for defrauding the revenue with thezeal of enthusiasts for new goldfields; and theingenuity of the American people has nev&r 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 aud 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 corre¬ spondence, in order to prevent the frustration of his plans for the en¬ forcement of the laws by Treasury officials 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 $2 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, 1S6S, 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, indicat¬ ing a production of only 6, 709,546 gallons. As the consumption of distilled spirits in this latter year tvas proba¬ bly 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 average cost of production (even if estimated as high as 30 cents) must have returned to the credit of corruption a sum approximating $80,000,000. The number of licensed distillers, which in 1864 was 2,415, had increased, moreover, in 1868 to 4.721, or to nearly double the number in the short space of four years. In view of such experiences Congress finally adopted the recommenda¬ tions of the Special Commissioner of the Revenue, and in July, 186S, re¬ duced the tax from $2 to 50 cents per proof gallon. The results of such legislation were most remarkable. Illicit distillation practically ceased the very hour the new law came into operation. Industry and the arts experienced a large measure of be nefit from the reduction in th e cost of spirits ; while the Government ^Ihe revenue derived from the taxation of spirits distilled from fruits has always been comparatively small : $283,499 in 1866 ; $868,145 in 1867. 7 collected during tlie 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 $2 tax. For the first but incomplete fiscal year (1869) under the 50 cent 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 iu 1868 to $45,071,000 in 1869. During the next fiscal year (1870) there was a further increase in total revenue of $10,534,864, or from $45,- 071,000 in 1869 to $55,606,094 in 1870. The specific tax on distilled spirits of 50 cents per proof gallon re¬ mained in force from July, 1868, to August, 1872, 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 au 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 $2 per proof gallon for three years, and $1.50 and $2 for one year (1865), the tax was as¬ sessed 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 au 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 $2 to 50 cents per proof gallon had hardly become operative when agitation commenced for its repeal or modifica¬ tion. 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 temper¬ ance, untaught by and caring nothing for the record of recent experi¬ ence, 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 follow¬ ing August, increased the gallon tax to 70 cents, and subsequently, in March, 1875, further raised the rate to 90 cents per gallon, which tax since this last date has remained unaltered. 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 in¬ creased rates of 70 and 90 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, andconsti- 8 tute a chapter in the history of government by the people which the people may well wish to have 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 valua¬ ble in this connection from the economic and moral lessons deducible from it, which may in brief be summarized as follows: Whenever a government imposes as a tax on any product of indus¬ try so high 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 con¬ tinued in some other. It is therefore matter of the first importance for every government in framing laws for the assessment and collection or taxes to endeavor to determine, not only for fiscal but also for moral pur¬ poses, 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 exj)ressed, “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. 7 7 TAX EXPERIENCES 1870-1893. With such an unnatural experience in respect to the taxation of dis¬ tilled spirits prior to 1S69, the data for determining the incidence of the present tax (90 cents) are obviously limited to the results which have followed in subsequent years the imposition of lower rates; and for the purpose of making a clear exhibit of these, attention is asked to the following table (prepared from official data), showing— 1st. The Population of the Country for each Successive Fiscal Year from 1870 to 1893, inclusive. 2d. The Quantity of Gallons of Spirits Annually Taxed. 3d. The Average Per Capita Consumption for each Successive Year. 4th. The Ajviount of Revenue Annually Collected. 5th. The Aver¬ age Annual Revenue, or Tax Per Capita. 6th. The Annual Tax Per Gal¬ lon. 7th. The Average Tax Per Gallon. Year ending June 30. ^ion ^ Quantity taxed. Quantity per capita. Revenue. Revenue per capita. Tax Average per tax per gallon, gallon. Gallons. Gallons. Dollars. Dollars Cents. Cats 1870 . . 38,558,371 78, 490,198 2.03 39,245,099 1.02 50 6 50 1871. . 39,555,000 62,314,628 1.58 31,157,314 .79 50 50 1872. . 40,596,000 66,235,578 1.63 33,117,788 .82 50 50 1873 . . 41,677,000 65,911,141 1.58 43,131,064 1.03 { '0J }- 65. 44 1874. . 42,796,000 62,581,562 1.46 43,807,093 1.02 | 70 J 70 1875. . 43,951,000 64,'425,911 1.47 46,877,938 1.07 f 701 I 90 J r "■ 76 1876. . 45,137,000 58,512,693 1.30 51,390,490 1.14 Sj j- 88. 58 1877. . 46,353,000 58,043,389 1.25 52,671,291 1.14 | Sj 89. 97* 1878. . 47,598,000 50,704,189 1.07 45,626,533 .96 1 70 1 t 90 J ► 89. 99 1879 . 53,025,175 1.09 47,709,464 .98 j S] 89. 98- l 90 1 1880. . 50,155,783 62,132,415 1.23 55,919,119 1.11 J 701 1 90 J 90 1881. . 51,316,000 69,127,206 1.34 62,214,127 1.24 J 70 j 1 90 j 90 1882. . 52,495,000 71,976,398 1.37 64,778,756 1.23 J 70| 1 90 j 90 1883. . 53,693,000 76,762,063 1.43 69,085,856 1.22 90 90- 1884. . 54,911,000 79,616,901 1.45 71,655,211 1.30 90 90- 1885. . 56,148,000 69,158,025 1.23 62,242,221 1.23 { 90 1886. 70, .851,355 1.23 63,766,219 1.11 90 90' 1887 . 67,380, 391 1.15 60,642,351 1.03 90 90 1888. . 59,974,000 71,565, 486 1.19 64, 408,937 1.07 90 90 1889. . 61,2.89,000 77,163,529 1.25 69, 447,175 1.13 90 90 1890 . . 62,622,250 85, 043, 336 1.35 76,539,002 1.22 90 90 1891. 88, 473, 437 1.38 79,626,093 1.24 IK) 90 1892. . 65,520,000 95,045,787 1.45 85, 511,209 1.31 90 90 1893 . . 66,826,000 99,145,889 1.48 89, 231, 300 1.34 90 90 * Population for 1870, 1880, and 1890 from census; others years calculated by the actuary of the Treasury Department. Distilled Spirits Exported from the United States and Returned, on which a Duty Equal to the Internal Tax was Collected when Im¬ ported.* Year ending June 30—f Gallons. Duty collected. Dollars. 1885. 816,617 736,995 1886. 967,500 876.779 1887. 2, 224, 706 1,995,558 1888. 2, 636, 756 2,377,823 1889.'.. 1,933,812 1,755,014 1890. 1,225,095 1,110,325. 1891. 1,081,482 980,695 1892 . 1,076,382 971,219 *This curious movement of spirits of domestic origin finds explanation in the circumstance that the period for which they can remain in bond without payment of tax is limited to three years, and owners who desire to extend this limit.and avoid confiscation of their property,effect it by exportation of it, or, what is the same thing, bonding it abroad. On a return of such spirits to the United Slates they pay to the customs department of the Treasury a duty equal to the internal-revenue tax to which they would have been subjected had they not been exported. tThe quantity and value of domestic spirits exported and brought back was not separately shown in collectors’ returns prior to 1885. The duty collected is accounted for as customs revenue. The first point of iiiterest 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, 18<2. and 1S73, under the tax of 50 cents per gallon, was greater than it has been at any subsequent period under a 70 and 90 cent rate. Such a result is undoubtedly referable in the main to the economic law, that a reduction in the price of a commodity encourages its consumption, and in a degree to the fact that a 50-cent tax, with its accompaniment of stringent j>enalties, greatly diminished the incentive for illicit produc¬ tion. 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 50 cents per proof gallon, took cognizance of an average annual tax-paid consumption on the part of the people of the United States of 1.6b gallons per capita, it was only able to recognize in 1868, under a $2 tax, a similar average annual consumption of about 0.38 per proof gallon. Tlie second point of interest in connection with the foregoing tabular ex¬ hibit is, the demonstration it affords of the very curious variations which occurredin thesuccessive years from 1870 to 1S93, inclusive, in the quan¬ tity of spirits that annually paid taxes to the Government, and which thus made free for use, may be regarded as constituting an approxi¬ mately accurate measure of the average annual per capita consumption of this commodity by the entire population of the country. The explana¬ tion of such changes is not difficult. 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 ot the popular ability to consume an article—like distilled spiiits 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 al¬ together abnormal causes) in the number of gallons produced aud made subject to taxation, the increase in the tax-paid product and in the average per capita consumption during the succeeding fiscal years IS,2 and 1873, when the business of the country was fairly prosper¬ ous, was regular aud not inconsiderable. The commencement of the mxf fiscal year, 1S74, was signalized by one of the most memorable financial panics in American history and a general prostration of busi¬ ness, born 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 propor- ionsof 1.07 and 1.09 gallons in the fiscal years 1878 and 1879, respect¬ ively It ith a renewal of active and profitable business throughout the iT’ thG aimUal taXed Induction of spirits went up from o0, <04,189 gallons in 187S. to 79.616,901 gallons in 1884; and the per capita consumption from 1.07 gallons to 1.45 gallons in the correspond- 11 ing 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 col¬ lect a tax and in the apparent per capita consumption of the people, and this, too. notwithstanding an increase during this same period of 30 per cent in the population of the country ; 1871 showing a tax on 621 millions (1.58 gallons per capita), while in 1879 the tax was collected on only 53 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 fu¬ ture legislation—occasioned by an advance in 1873 of the gallon tax from 50 to 70 cents, and again in 1875 from 70 to 90 cents. In both cases these advances iu rates were followed by large annual reductions in the quantity of spirits taxed and in an apparent per capita consump¬ tion; which in turn indicated extensive revivals of illicit practices which the reduction of the tax to 50 cents in 1868 had nearly extin¬ guished, and which indications were also made certainties by abundant direct evidence. The decade of 1880 to 1*8S9 shows, on the other hand, an increase in the aggregate amount paying taxes from 621 million gallons iu 1880 (1.23 gallons per capita) to 77 1 million gallons in 1889 (1.25 gallons per capita) an aggregate increase approximating a concurrent increase of 22 per cent in the population of the country. During the fiscal years from 1888 to 1893, inclusive, under a uniform and prospectively stable rate of tax, an apparently good and efficient ad¬ ministration of the law, and a fairly prosperous condition of the coun¬ try. the results in this department of our national revenues have also been very exceptional and interesting. The continuous increase in pro¬ duction, in per capita consumption, and in revenue, has been remarkable; the ayerage increase of the product 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; the average per capita con¬ sumption nearly one-third of a gallon: the average increase in revenue nearly $5,000,000 ($4,910,000) per annum ; the whole culminating forthe last fiscal year (1893) in a product of 99,000,000 gallons; an annual revenue of $S9,000,000, and a per capita consumption of 1.48 gallons of domestic spirits as compared with a per capita consumption in Great Britain in 1S90 of all spirits, domestic and foreign, of 1.003 gallons. During these latter years, moreover, the financial troubles and business depressions in Europe and other countries do not appear to have exerted any influence in this particular in the United States. An influence which has undoubtedly been potent to some extent in recent years in increasing the quantity of spirits which the Government is able to subject to taxation, has been due to the concentration, through the so-called “whisky trust, ” of the business of distilling in the hands of a comparatively small number of persons operating under conditions most favorable for economic production, and whose interest it is to co- 12 operate with the internal revenue (in preventing illicit distillation) rather than to antagonize it. Such parties also would naturally favor an increase in the existing tax, for the reason that it would advance the market price of the spirits they have in bond. Concerning the quantity of domestic spirits paying taxes which are used for industrial purposes in the United States, nothiug definite can be stated. An investigation made by the Internal Revenue Department in 1882, in accordance with a resolution of the Senate, indicated an actual consumption for that year for such purposes of 4,209,978 gallons of alcohol, equal to 7,604,000 gallons proof spirits. If these conclusions were approximately correct, a present industrial consumption of the country of 10,000,000 gallons would probably be an over rather than an under estimate. WHAT SHALL BE THE TAX ON DISTILLED SPIRITS? The question of next importance is, what, in view of past experiences and present revenue necessities, shall be the policy of the Government in respect to the taxation of distilled spirits? , Shall the present rate of 90 cents per proof gallon be retained ? Is any immediate change in rate,, in the way either of reduction or advance, expedient ? The first or prime cost of spirits depends on the price of grain, espe¬ cially corn, and is subject to extreme variations. On the average price of the proof gallon in Cincinnati for the year 18S9-’90, a tax of 90 cents was at the rate of over 660 per cent. On the average cost in the same market for the year 1891-92, the same tax was at the rate of over 340 per cent.* Illicit distillation, therefore, as might naturally be expected under the temptations offered by such a rate of taxation, constantly goes on and appears to be on the increase. Thus for the year ending June 30, 1892, the Internal Revenue Department reported a seizure of S52 illicit stills, a number 60 per cent greater than the annual average,of the preceding eleven years, or since 1880. Of the 852 st ills seized, ten were in the two northern States of New York and Pennsylvania ; one in Michigan, and none reported in Pacific States or any of the Territories; while the remainder, 538 in number, were mainly in the thinly settled and mountainous districts of the States of Kentucky, North Carolina, Alabama, Tennessee, and Virginia. The number of illicit stills that existed during the same year and were successfully operated, doubtless exceeded the number of which the Federal officials were able to take cognizance. The following statistics in connection with this subject are also sug¬ gestive. In 1S60, when there was no Federal taxation of distilled spirits, the whole number of distilleries in the country reported. by the census was 1,138. In 1892, with a tax ranging from 340 to 660 per cent on product, the number of distilleries reported as operated was 5,925. For this same year, the Internal Revenue Bureau reports an increase of * These average annual prices represent tire extreme. 'cmvaIwa va tW -c-m -oS wjmVi* m the Cincinnati market from 1880-’81, to 1890-'91 . 13 2,105 in the number of distilleries operated, as compared with the num¬ ber operated in 1891. A large majority of this increase was, however, . represented by small distilleries producing spirits from fruits. The number of distilleries operated in 1892 in the single State of North Carolina was largely in excess of the number operated during the same time in the whole of Great Britain. The number of distilleries and dis¬ tillery warehouses under the supervision of the Federal Government in 1892 in the five States of Kentucky, Tennessee, North Carolina, Vir¬ ginia, and Ohio was also probably greater than are controlled by the Government of Great Britain and by all the leading States of continental Europe. The conditions under which illicit distillation at the present time is mainly prosecuted in the United States is as follows: In extensive regions of the States above specified, the small farmers, who constitute the bulk of their population, grow little beside corn, and in the absence of railways, and also to a great extent of roads, there is no way for them to bring their surplus grain to any market except in the form of whisky, and, ex¬ cept what maybe paid them in cash for the same, handle but very little ready money at any time. The result is that the inhabitants of these sections of the country feel that they have the right (enjoyed by their fathers) to transform their corn into whisky, and that Government acts in a most unjust and tyrannical manner in seeking to prevent it. Hence the multiplicity of “moonshiners,” as illicit distillers are termed, the little rude stills among the mountains, and the murderous assaults on revenue officials who attempt to make arrests and break up the forbid¬ den business. Happily all the evidence is to the effect, thatthe territorial area of the United States in which natural conditions may be almost said to render illicit distillation expedient, is comparatively limited; while the regular increase in recent years of the tax-paying product of distilled spirits in a ratio equal to or in excess of the increase of population, is conclusive proof that whatever may be the quantity of illicit product in the en¬ tire country it does not materially affect the general aggregate of con¬ sumption productive of revenue. It ought not, however, to require any argument to convince, that a minimum tax of 830 per cent on spirits is dangerously near or in excess of the maximum revefftie point, and that any increase m the existing rate will favor a recurrence of the disastrous and disgraceful results that characterized the period of experimental taxation in the years immedi¬ ately succeeding the termination of the war. Certain it is, also, that an anticipation of participation in an increase of the tax would lead to such a production of spirits as to postpone for one or two years any increase of revenue to the Government. * The present stability of conditions is, *Itis admitted that the cause of recent financial embarrassments of tluT^Vdiisky trust ” was overproduction, and that this overproduction in turn was due to an expecta¬ tion that Congress would increase the tax on spirits. 14 moreover, a strong argument against any change in the existing tax. For not only is it possible to now tell with approximate accuracy what the revenue from distilled spirits will be in the future, but we may feel sure that it will be more each year than it was the year previous, and this certainty in respect to the productiveness of the one most impor¬ tant source of the national revenue constitutes a great factor of safety in determining what shall be the national expenditure. Thus, taking the per capita consumption of 1S92 as the basis for estimate, the reve¬ nue that may be anticipated from this source for 1899 with the existingtax will be $102,000,000, or more than one-half of the present ordinary ex¬ penses of the Government. The following table shows the comparative results of the taxation of the domestic product of distilled spirits in the United States and United Kingdom: 1 Population. Quantity taxed. Tax per gallon. Revenue. Consump¬ tion per capita. United States, 1892. United Kingdom, 1892. 38 109 3°9 95,045,787 31,469,392 80.90 2.43 $85,541,209 76, 373,055 1.450 0.825 CONCLUSION. In view of above exhibit of past experiences and the existing situation, can there be a better answer to the question, “Is any change in the pres ent rate of tax on distilled spirits desirable ,’ J than that expressed by the old proverb, “Let well enough alone?” / FERMENTED LIQUORS AND TOBACCO. The following table exhibits in detail the results of the taxation of fermented liquors and tobacco, under the internal-revenue system of the United States, for each fiscal year since the inception of taxes on the same in 1863 down to and including the year ending June 30,1893 : 15 Table showing the Internal Revenue collected from Fermented Liquors and Tobacco. [From official sources.] Years. Popula¬ tion. Beer. Tobacco. ' Quantity taxed. Quantity per capita. Revenue collected from barrel tax. Revenue per capita. Tax per barrel of 31 galls. Reven ue collected from all sources. Revenue per capita. Gallons. Gallons. Dollars. Dollars. Dollars. Dollars. Dollars. 1863. 33,365,000 62,205,375 1.86 1,558,083 .05 f 1.00 | ) .60/ 3,097,620 .09 1864. 34,046,000 1 97,382,811 2.86 2,223,719 .07 ( .60 1 (. 1.00 / 8,592,099 . 25 1865. 34,748,000 1 113,372,611 3.26 3,657,181 . 11 1.00 11,401,373 .33 1866. 35, 469,000 ! 158,569,340 4.47 5,115,140 .14 1.00 16,531,008 .41 1867. 36,211,000 192, 429, 462 5.31 5,819,345 .16 1.00 19,765,14s . 55 1868. 36,973,000 190,546,553 5.15 5,685,663 .15 1.0(1 18, 730, 095 .51 1869.,. 37, 756,000 196,603,705 5.21 5, 866, 400 .16 1.00 23, 430, 708 .62 1870. 38,558,371 203,813,127 5.29 6,081, 520 .16 1.00 31,350,708 .81 1871. 39,555,000 239, 948,060 ’ 6.06 , 7,159, 740 .18 1.00 33,578, 907 .85 1872. 40,596,000 268. 442, 237 6.61 8, 009,969 , .20 1.00 33. 736,171 .83 1873. 41,677, CM »0 1 | 298,633,013 7.16 8, 910, 823 .21 1.00 34,386, 303 .83 1874. | 42,796,000 297, 627, 807 6.95 . 8,880,829 1.00 33,242, 876 .78 1875. 43,951,000 1 293.033,607 6.66 i 8, 743, 744 .20 1.00 37, 303, 462 .85 1876. 45, 137,000 306,972,912 6.80 9,159,675 .23 1.00 39,795, 340 .88 1877. 46, 353,000 304,111,860 6.56 9,074,305 .20 1.00 41,106,547 .89 1878. 47,598, 000 317, 485,601 6.67 9, 473, 360 .20 1.00 40,091,755 .85 1879. 48,866,1X10 344,195,604 7.04 i 10,270,352 .21 1.00 40,135,003 1880. 50,155,783 , 413,760,441 8.25 12,346, 077 .25 1.00 38,870,140 1881. 51,316,000 i 1 443,641,868 8.65 13. 237,700 / 26 1.00 42, 854,992 !s4 1882. 52,495,000 525,514,635 i 10.01 15, 680,678 ' .30 1.00 47, 391,989 .90 1883. 53,693,000 550,494, 652 ! 10.25 16,426,050 .31 1.00 42,104,250 .78 1884. I 54,911,000 j 588, 957,1S9 10.73 17,573,722 .32 1.00 26,062, 400 , .48 1885. 56,148,000 | 594, 764,543 1 10.59 17,747,006 .32 1.00 26, 407,088 .47 1886. 57 404 000 642, 038,923 11.18 19,157,612 1.00 27,907, 363 .49 1887. 58,6.80,000 716, 767, 306 12.21 21,387,411 !:i6 1.00 30,108, 067 .51 1888. 59,974,000 r 765,086,789 12.77 22,829,202 .38 1.00 30, 662,432 .53 1889. 61, 289,000 j 778,715, 443 12.71 1 23,235,863 .38 l.oo 31,866,861 .52 1890. 62,622,250 854, 420, 264 1 13.64 25,494,798 .41 l.oo 33,958,991 .54 1891. 63,975,00O 944,823,952 i 14.77 - 28,192,327 .44 1.00 32,796,271 .51 1892. 65,520,000 ! 986, 352, 916 i 15.05 29,431,498 .45 1.00 31,000, 493 .47 1893. 66,826,000 ! 1,071,183,827 16.03 , 31,962,743 .48 l.oo 31,889,712 .48 FERMENTED LIQUORS. The internal-revenue tax on fermented liquors (beer) has been practi¬ cally uniform since its first authorization in 1863, namely, one dollar per barrel, holding theoretically 31 gallons. This tax is made payable in stamps, one of which, kt denoting the amount of the tax,” shall 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.* A deduction of 7^ per cent is allowed to brewers on the purchase of stamps, which is as¬ sumed to represent the difference between the theoretical barrel unit of 31 gallons, and the quantity contained in the commercial or trade supply barrel, which, owing to redriving of hoops and repitching, averages from 28 to 281 gallons. It is obvious, if this deductiou is not excessive, that the rate of tax, namely, $1 for 31 gallons, remains unchanged, and on this basis attention is asked to the following deductions : A tax of $1 per 31 gallons is equivalent to 3.225 cents per gallon. * Revised Statutes, section 3342, p. 655. 16 On a basis of $5.25 per barrel, the price at which beer of good quality <;ould be bought iu quantity or at wholesale during the past year in the city of New York or vicinity, the present tax is about 20 per cent ad valorem. One barrel of 31 gallons equals 248 pints or 496 half-pints, the present tax is, therefore, one-fifth of a cent per half-pint, or per glass as usually sold in saloons for 5 cents ; or two-fifths of a cent per pint. In recent years some of the large industrial establishments of the country have made a practice of furnishing their employes with beer of a good quality at a price but little in excess of the cost of production and distribution. In such cases the beer is sold by weight, a pint being regarded as equal to a pound, and a pound as equal to two glasses such as are usually sold in the saloons. From 26 to 30 tickets, each representing 1 pound of beer, are usually sold for $1, which makes the average cost to the local consumers of from It to If cents for a full glass or half pound of beer, and which charge is represented by those competent to express an opinion, as sufficient to cover the wholesale price and entire cost of distribution, labor, ice, rent, and light, and leave a fair profit. The points of interest made apparent in the foregoing tabular exhibit, and to which attention is especially asked, are as follows : (1) The regular and great increase in the quantity of fermented liquors 'annually made subject to internal revenue taxation, i. e ., from 62,205,375 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 popula¬ tion, i. e., from 1.86 gallons in 1863 to over 16 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) As large and costly plants are essential for the manufacture of fer¬ mented liquors on a large scale and at the lowest cost, illicit produc¬ tion is thereby rendered difficult, if not impossible, and whatever of fraud upon the revenue exists in this business is undoubtedly refera¬ ble to the non-use or noncancellation and re-use of the stamps which rep¬ resent the prepayment of the tax as a condition of sale and consumption. (4) The variations iu the product of fermented liquors which the Gov¬ ernment has been able to annually subject to taxation since 1863 has 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 other years of the three decades that are subject to an¬ alysis ; results indicating that similar larger and contemporaneous decre¬ ments 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. (5) The average annual increase in the receipt of internal revenue from fermented liquors for the ten years from 1883 to 1892 wa s $1,306,057, IT 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, 16 gallons—the present per capita consumption of the people of several other nationalities is much greater: that of the United Kingdom being estimated at 30 gallons ; of England and Wales, 36 ; of Belgium, 40; and of Germany, 45. Attention here is also asked to another point of fiscal importance. If it becomes desirable at this or any other time for the United States to materially increase its annual revenue by additional taxation, such a re¬ sult can not be attained more certainly and with so little of expense, effort, or industrial friction, as by a moderate increase of the tax on fermented liquors. The existing tax (20 per cent ad valorem) is lower than upon almost any other industrial product entering largely into domestic con¬ sumption. Spirits, paying, for example, from 340 to 660 per cent internal tax; manufactured tobacco, 129 per cent, customs duty ; pig iron, 30 per cent; steel, 25 to 50 per cent; wool, 24 to 100 per cent, and the like. The business of brewing malt liquors is acknowledged to be one of the most successful of domestic industries, and financial participation in it has in recent years been regarded by foreign capitalists as one of the most attractive of American investments. It is also reasonably certain that in the distribution of industrial products for consumption, there is no branch of business that returns a larger profit on the labor and capi¬ tal employed than the retailing of malt liquors ; a small retail store often supporting a large family, besides paying high Federal and State licences. The data already submitted, and which are believed to be re¬ liable, show that beer can be retailed at a profit for It cents per glass of a half pint, on which the present tax is one-fifth of a cent, yielding a present revenue of about $32,000,000 per annum. An increase on present rate of tax, i. e , from $1 to $2 per barrel of 31 gallons, or from one-fifth to two fifths of a cent per half pint glass, might be reasonably expected to at once yield $32,000,000 additional per annum, bringing up the pres¬ ent annual revenue from this source to $64,000,000, with a prospec¬ tive annual increase of $3,000,000; and this without increasing the cost of his beer to the individual consumer or materially diminishing the profits of the brewer or the wholesale or retail dealer. TOBACCO. The tabular exhibit of the tax experiences of the internal reveuue in respect to tobacco, shows the annual receipts and their per capita ap¬ portionment on the population of the country from the inception of the 2 w 18 taxation on this commodity in 1863, down to and including the fiscal year 1893. The consumption of tobacco in all its forms by the people of the United States, taking the data collected by the Internal Revenue Department as the basis of estimate, was for the year 1892 about 4 pounds per capita. The number of cigars and cheroots taxed for this same year was returned at 4,54S,799,417. As a basis for the obtaining of revenue, the comparative per capita consumption of tobacco in other countries is especially worthy of at¬ tention in this connection. For the United Kingdom, the amount for 1891, officially reported, was 1.61 pounds; France (estimated) If pounds; for the population of the city of Paris, 3k pounds; Germany, 41 pounds; Belgium and Holland, 31 pounds. The annual consumption of tobacco in the United States is therefore certainly much greater than in most other countries, and is equaled in not more than one or two. This result may be referred to several agencies; to the greater cheapness of the taxed commodity; to greater ability on the part of the masses to consume it, and to a larger use of tobacco for chewing,* the quantity manufactured for this purpose in 1891 being returned at 183,147,000 pounds as compared with 76,708,000 manufactured for smoking. From 1863 to 1869 the variations in the annual internal-revenue re¬ ceipts from tobacco (always in the way of increase) were very great, and, as it were, spasmodic, and were due mainly to frequent changes in the rate of tax on the different forms of tobacco. During this same period occurred one of the most remarkable illustrations to be found in fiscal history of the influence of a tax reduction in increasing the taxed consumption of a comparatively cheap commodity in general use. Thus, in 1866, with a uniform tax of $10 per thousand on cigars, only 347,- 443,894 were returned by manufacturers for taxation, while in 1869, under a uniform tax of $5 per thousand, 991,335,934 were returned, or nearly three times the quantity. The business depression from 1S74 to 1879 appears to have had an in¬ fluence in checking the popular consumption of tobacco, though iu a leaser degree than in the case of distilled spirits or fermented liquors. From 1870 to 1882 the ratio of annual increase iu the taxed product of domestic tobacco was greater on the average than the corresponding ratio of increase in the population of the country (which was not the case with distilled spirits), and the total internal revenue collected from this source attained the large aggregate in 1882 of $47,391,989. In 1883 the rates of tax on all forms of domestic tobacco and the special taxes on dealers and manufacturers of the same were reduced fully 50 per cent. This reduction of tax caused an immediate reduction of revenue, comparing the receipts of 1882 with those of 1SS4 the first full year of reduced rates, to the extent of $21,329,589. This reduction * France tlie sales of tobacco in 1885 were returned at 700,000 kilograms for “chewing.'” and at 15,400,000 for smoking. 19 of over 50 per cent in rate of tax, resulted in a smaller proportional reduction of revenue— i. c. of about 45 per cent. In 1S86 the tax on cigars was reduced 50 per cent, and in 1890 the taxes on snuff, chewing and smoking tobacco 25 per cent. At this latter date all special taxes relating to tobacco—i e., licenses to manufacturers, dealers, etc., were also entirely repealed. The annual reduction in revenue in consequence of these last abatements, comparing the receipts for 1890 with those for 1892, was near $3,000,000, notwithstanding an increase in population during the same period of 2,897,750. The internal revenue from tobacco for the fiscal year 1893 was about $31,800,000. Had the taxes on tobacco existing in 1882 been allowed to remain unchanged, the annual revenue from this source (the increase of population being taken into account) for the fiscal year 1894 would not be less than 860,000,000. The United States internal revenue taxes on tobacco are smaller than those imposed by any other country that seeks to make this commodity aleadi ng source of revenue. In the year 1892 they amounted to 49 cents per capita as compared with 90 cents in 1882. The duties collected on im¬ ports of tobacco for 1892 were $10,265,067 (as compared with $16,172,277 for 1891), and the total customs and internal revenue yielded by tobacco during the fiscal year 1892 was about $42,000,000. or 63 cents per capita. In 1891 the taxes on tobacco in the United Kingdom, excise and cus¬ toms, were $1.30 per capita on a population of 37,795.283, and yielded a revenue of $49,015,000. In France the taxes on tobacco are reported at $1.71 per capita on a population of 38,283,000, yielding an annual revenue about $65,000,000. In other European countries the per capita taxes on tobacco are reported as follows: Austria, $1.31; Germany, $1.30; Italy, 94 cents; Hungary, 79 cents! Were the same ratio of taxation on tobacco as exists to-day in the United Kingdom established in the United States, the annual revenue accruing to the Federal Treasury at the present time would be $85,000,- 000. If the rates existing in France were adopted, the annual revenue from this source would be $112,000,000. Whatever may have been the considerations that, prompted in recent years the abatement of this important source of national revenue in the United States, it is certain that they were uot based on any sound finan¬ cial policy or on any lesson of past experience in respect to the best methods of raising revenue. Taxes ou tobacco are taxes on a typical luxury. Their payment is not obligatory, as are the taxes ou the essen¬ tials of living, on any citizen, but are in the nature of a voluntary assess¬ ment ou the part of the consumer, on whom the entire burden of the tax ultimately rests, and which payments may be properl) regaidu as representing his surplus income. They are not obstructive to the de¬ velopment of any other industrial produce, and there is no evidence that the highest rate ever assessed under the,internal revenue lias ever been productive of general discontent on the part of the masses of the Ameri¬ can people. 20 CONCLUSION. A consideration of the tax experiences and conditions as above pre¬ sented ought to be in the highest degree instructive as to the elements of financial strength that at present characterize the Government of the United States. In all civilized nations at the present time the produc¬ tion and consumption of spirits, fermented liquors, and tobacco are recognized as the most legitimate and productive sources from which revenue can be obtained with the minimum of expense and industrial disturbance. The factors determinative of the productiveness and con¬ tinued increase of revenue from these sources are mainly two ; namely, continued increase of population and continued or increasing ability on the part of the masses to consume. These factors are more influential at the present time in the United States than in any other nation. We are increasing in population in a greater annual ratio than any other country of which we have any definite information. Our ability to consume, owing to the rapid accumulation and distribution of wealth among the masses, is far greater than that in any other nation. Com¬ mercial disturbances and business depressions, which are potent in all other countries in reducing the consumption of luxuries, appear to have comparatively little effect in the United States, and are not of long con¬ tinuance. The wisest fiscal policy for the Federal Government, certainly for the immediate future, would therefore seem to be to impose the maximum rates of taxation on distilled spirits, fermented liquors, and tobacco, that will not create, in face of efficient administration aud severe penalties, undue temptations for revenue evasions. A government that disregards this line of wise expediency to a greater or less degree invariably cheats itself. In the case of distilled spirits, on which the existing rate under the most favorable conditions of production is always in excess of 300 per cent on their first cost, or taxable unit, this line seems to have been absolutely ignored; but as the experience of recent years shows that the revenue from this source is increasing in a ratio equal to or in excess of the increase of population, aud the amount of illicit product compara¬ tively small, any change in the present tax would seem clearly inexpe¬ dient. On the other hand, in the case of fermented liquors and tobacco the existing taxes are far below the safe line of expediency, and might be advanced— i. e., to the extent of $1 per 31 gallons, or one-fifth of a cent on the half pint—in respect to the former, and in the latter at least to the rates imposed in 1S82, with great advantage to our national revenue and to a greater simplification of our whole fiscal system. Certainly if ad¬ ditional revenues to meet present existing and extraordinary require¬ ments for expenditures are needed, it would be difficult to show where an immediate annual increment—with a certain large annual increase of the same in the future—could be obtained with less of expense and pop¬ ular friction than by the tax modifications suggested. The existing customs duties on the imports of spirits, fermented 2t 1 liquors, and tobacco, are exceedingly high and absurdly disproportionate f: to the corresponding internal-revenue taxes on the same, and can un- r doubtedly be modified to some extent to the advantage of the revenue Thus, on imported spirits, the duties are $2 per proof gallon and the in- ternal-revenue tax 90 cents; on fermented liquors the relative rates are 20 cents and 3£ cents per gallon; and on snuff, chewing and smoking ■» tobacco, 50 and 40 cents and G cents respectively. In the United King¬ dom, where the productivity of taxes has been carefully studied, the customs duties exceed the excise (internal revenue) taxes upon beer by 6d. (12 cents) on 36 gallons, and upon spirits by 4 d. (8 cents) per proof gallon. One effect of the maintenance of our excessively high duties on imported spirits is, that a greater opportunity is offered to combinations (trusts) of domestic producers to advance the price to domestic con¬ sumers; and another is, that they encourage the domestic manufacture from cheaper materials of imitations of foreign spirits, whereby the American consumer is induced to use a spurious in place of the genuine article, and the Government is defrauded of the difference in relative taxation, and this amount is believed to be very considerable. WHAT THE NATIONAL REVENUE FROM SPIRITS, FERMENTED LIQUORS, AND TOBACCO ANNUALLY IS AND WHAT IT MIGHT BE WITH CERTAIN MODIFICATIONS OF EXISTING TAXES. The following is an exhibit of the receipts of revenue from spirits, fer¬ mented liquors, and tobacco for the year ending June 30,1893, and what might be anticipated from the same sources with the modifications of taxation thereon, as suggested: Existing taxes. Proposed taxes. INTERNAL REVENUE.* Distilled spirits. Fermented liquors.. Tobacco.. Total.-. . . CUSTOMS. Spirits, wines, and beer.1 Tobacco.:... Total. Aggregate, three commodities. Dollars. 95,000,000 32, t'OO, 000 32,000,000 Dollars. 95,000,000 64, IKK), 000 60,000,000 159,000,000 219,000,000 t9,000,000 t!3,000,000 10,000,000 {16,000,000 22,000,000 181,000,000 26,000.000 245.000,000 *Owing to existing industrial and financial conditions, no material increase in the revenues from spirits, fermented liquors, and tobacco for the current fiscal year is anticipated. t Partly estimated. I The customs revenue from tobacco in 1891 was 516,172,277. The normal expenditures of the Federal Government fbr the fiscal year ending June 30, 1894, were estimated by Secretary Foster at $169, 049, 571.* Including an estimate for interest on the public debt of $26, 771, 293, the total aggregate expenditure for the year, exclusive of pensions, will approximate $195,810,754. * Civil service (less bounty on sugar). Army.. Navy. Indians. $90, 483, 670 43, 394,192 25, 083, 498 10, 083, 211 Total 169,049, 571 22 It is therefore obvious that from taxes judiciously imposed on only three commodities or branches of industry, the Federal Government can at the present time certainly, economically, and with less burden and disturbance to its people than by any other form of levy, collect an annual revenue sufficient to defray all of its ordinary expenditures, including interest on all its debts, and have in addition an annual surplus of near $50,000,000, leaving its total revenue from other sources— i. e., import duties, less those collected from spirits, beer, and tobacco, and receipts from permanent miscellaneous sources aggregating about $9,000,000,. available for the payment of pensions and for other purposes. It is safe to assert that in all financial history no parallel can be found for such an exhibit of the finances of a great nation. The assertion is also warranted, that no greater degree of intelligence and honesty on the part of legislators and administrators is needed to free the financial policy of the United States from all possibilities of popular distrust or disturb¬ ance, than would be requisite for the successful management of the most ordinary manufacturing, banking, or commercial enterprises. I am yours, most respectfully, David A. Wells. O