CHAPTER XIX THE INTERNAL REVENUE SYSTEM OF THE UNITED STATES 67. The Taxation of Spirits (1862-1870). - The Civil War compelled our national government to create a most extensive and complicated system of internal taxes, - upon incomes, upon commodities, upon transactions. Of the war taxes upon commodities none had a more interesting or instructive history than that upon distilled spirits, the history of which was thus narrated by Mr. David A. Wells:1 Previous to the war the manufacture of spirits was free from all specific taxation or supervision by either the national or state governments; and being produced mainly from Indian corn, at places adjacent to the localities where this cereal was cultivated, was afforded at a very low price - the average market price in New York for the five years preceding the year 1862 having been 24 cents per proof gallon; with a minimum price during the same time of 14 cents per gallon. The price of alcohol during the same period ranged from 45 to 65 cents per gallon. Under such circumstances the consumption of spirits, for a great variety of purposes, in the United States previous to the war had become enormous; the estimated product for the year 1860 having been in excess of 90,000,000 of gallons; while the maximum quantity exported in any one year was not in excess of 3,000,000 of gallons. One of the purposes for which this product of spirits was extensively used at this time, which was previous to the discovery and use of petroleum, was the manufacture of "burning fluid" - an illuminating agent composed 1 David A. Wells, The Recent Financial, Industrial, and Commercial Experiences of the United States. Cobden Club Essays, second series. Reprinted, New York, 1872. of one part of rectified spirits of turpentine, mixed with from four to five parts of alcohol; and so extensive was the manufacture and consumption of this article, that it was stated on the floor of Congress in 1864 that in the city of Cincinnati alone the amount of alcohol required every twenty-four hours for this industry was equivalent to the distillate of 12,000 bushels of corn. The excessive cheapness of alcohol also led to most extensive use of it for fuel in domestic culinary operations, for bathing and cleaning, for the manufacture of varnishes and patent medicines, and for a great variety of other purposes. It is also to be noted that nearly all preparations and washes for the hair, which at that time in other countries as now universally were prepared almost exclusively on a basis of fats and oils, were in the United States then composed almost wholly on a basis of alcohol; the comparative difference in the price of this article in the United States and Europe giving an entirely different composition to products of large consumption intended to effect a common object. The immediate effect of the imposition and continued increase of internal taxes upon distilled spirits was to revolutionize all these branches of industry, and in some instances to utterly destroy them. The manufacture of burning fluid as an illuminating agent entirely ceased; the necessity of its employment being at the same time most fortunately supplanted by the discovery of vast natural supplies of petroleum, and by the use of its derivatives. And as illustrative of the compensations which invariably attend the losses immediately contingent upon industrial progress, through disuse of old methods and machinery, it may be stated that although the business of the manufacture of burning fluid ceased, the business of collecting, preparing, and exporting petroleum rapidly became one of the most important in the country; while the demand at home and abroad for glass lamps and their appurtenances, adapted to the use of the distillates of petroleum, was alone sufficient to employ the entire manufacturing capacity of the glassworks of the United States for a period of two years. Druggists and pharmaceutists in the United States estimated the reduction in the use of alcohol in their general business, consequent upon its increased cost from taxation, at from one third to one half. Manufacturers of patent medicines and cosmetics abandoned their old styles of preparation and adopted new. Varnish makers reported to the revenue commission a reduction in the use of spirits in their business to the extent of 80 per cent; while a manufacturer of horse medicines, using formerly 50,000 proof gallons per annum, testified that his business was in the main destroyed. The same result also happened to a firm engaged in the manufacture of a substitute for whalebone, which previous to the tax on spirits was coming into extensive use; and as further showing how curiously other and apparently remote industries were affected by this tax, a large business of exporting cider to the Pacific, which for transportation through the tropics required to be fortified with alcohol, was seriously curtailed; while the increased price of vinegar, before manufactured largely from whisky, so far affected the cost of the manufacture of pickles and white lead as greatly to diminish domestic consumption and almost entirely prevent exports. The first tax imposed on distilled spirits, of domestic production, was, as already stated, 20 cents per proof gallon. This tax yielded for the year ending June 30, 1863, a revenue of $3,229,911, indicating a production of 16,149,955 proof gallons. The tax of 20 cents continued in force until March, 1864, when the rate was advanced to 60 cents per gallon. The revenue derived from distilled spirits for the fiscal year ending June 30, 1864, under the two rates as above indicated, was $28,431,000. On the 10th of July, 1864, the tax was further advanced to $1.50 per proof gallon, and on the 1st of January succeeding to $2. The revenue derived from this source, for the fiscal year ending June 30, 1865, from the two rates, was $15,007,000; and for the succeeding fiscal years 1866 and 1867, under the uniform tax of $2, was respectively $29,481,000 and $29,164,000. With the advent of high taxes upon this article, however, the initiation and practice of frauds upon the revenue commenced upon a most gigantic scale, and soon became so successful and so reduced to a system that in 1868 it seemed as if the whole country and the government itself were becoming corrupted and demoralized. In the outset, while the war and its varying fortunes were engrossing the attention of the government and the people, the efforts made to repress and punish frauds in this particular were absolutely of no account whatever; and, indeed, it may be alleged with truth that the whole spirit and working of the statute was in the direction of the encouragement and promotion of fraudCongress in the first instance, under the influence of speculators, having advanced the rate of taxation on two occasions, with ample premonition, and without making the advance applicable to stocks on hand manufactured in anticipation of the legislation in question; and secondly, by so devising the law and providing for its execution as to make the detection and proof of fraud virtually impossible. Under this state of things there were repeated instances where distillers manufactured, conveyed to market, and fraudulently sold spirits in quantities varying from 20,000 to 80,000 gallons and upward, without a suspicion on the part of the local officers that the business was not in all respects conducted legally and honestly. It was also sworn to before the revenue commission in 1865-66 that the determination of the strength of the distilled spirits preparatory to assessment was often made by mere physical inspection or taste, and that the use of instruments (for which no uniform standard was provided) was discarded as something entirely unnecessary. It was also not infrequently the case that the barrels were inspected and branded some days in advance of their being filled, and the future regulation, the filling and removal, left entirely with the manufacturer. Distillers and their workmen were sometimes constituted inspectors of their own products, and in one instance an assessor was known to have been appointed who did not possess sufficient intelligence to understand or correctly use either a gauging rod or a hydrometer. Thus it was at the commencement; but subsequently, and after the close of the war, when the administration of the laws became more intelligent and vigorous, and some degree of concealment to the projectors of fraud became necessary, the expedients successfully adopted for the evasion of the tax were in the highest degree characteristic of the ingenuity of the people. One of the most fertile of these expedients was made available through a provision of law which allowed spirits to be made and stored in bond, or exported in bond without prepayment of the taxes. Thus, for example, spirits deposited in bond were, through the connivance and corruption of poorly paid officials, secretly withdrawn from bond, the barrels filled with water, or some cheap compound, and subsequently exported. On receipt of the landing certificate, obtained through a consul of an inferior grade in some remote country, the bonds given by the manufacturer for the payment of the taxes were canceled, and the profits divided among all concerned; while the barrels and contents, being once placed beyond the jurisdiction of the United States, were left either in a foreign bonded warehouse, or on foreign wharves, to take care of themselves. And thus it was that from Turkish ports in the Levant, and from places in Southern Asia, Africa, and Central America there came, in due time and in succession, not a few official inquiries in respect to the disposition of American property for which there was no recognized owner. In one instance a considerable quantity of what purported to be spirits left a bonded warehouse for transportation in bond by a long, slow voyage down the Mississippi to New Orleans. On arrival at the port of destination the entire contents of the barrels was found to have escaped, through shrinkage and imperfect construction of the packages; and proof being submitted of the loss, the bonds given for delivery were canceled. It is needless to say, that what left the warehouse was not the spirits for which the bonds were originally given, but a substitute of water flavored with spirit, and that the imperfect material and construction of the barrels was designed to effect the very object which was accomplished, namely, the accounting for the destruction of what was known to have been the product of the distillery. In short, such a tax, of about 800 per cent on the manufacturing cost of the article in question, the enormous profits consequent upon the evasion of the law, and the abundant opportunity which the law itself, and the vast territorial area of the country offered for evasion, constituted a temptation which it seemed impossible for either manufacturers, dealers, or officials to resist; and the longer the tax remained at a high figure, the less became the revenue, and the greater the corruption. During the year 1867 the revenue directly collected from dis |