War, Wine, and Taxes: The Political Economy of Anglo-French Trade, 1689-1900, by John V.C. Nye. Published by Princeton University Press: Princeton, N.J. (2007). 192 pages. Price: $29.95.
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Whatever happened to tariffs? For more than a century, they provided the bulk of federal revenue in the United States. They fueled the sectional tension that dominated politics before and after the Civil War. And ultimately, they -- and their regressive incidence -- helped drive the movement for a permanent federal income tax. For much of the nation's history, taxes and tariffs were inseparable -- two elements in the same political dynamic.
But since the early 20th century, tariffs and taxes have gone their separate ways. During World War I, internal levies supplanted the tariff as the mainstay of federal finance, attenuating the link between the two. And in the decades that followed, each field went on to develop its own set of institutions, experts, and ideas. Today, trade and tax both enjoy a prominent spot on the political agenda, but they're treated -- quite reasonably, for the most part -- as wholly distinct topics.
Still, it's worth recalling the ties that once bound these issues. And now we have a fine book by economic historian John V.C. Nye to do just that. Nye's story is about Britain, not the United States. But it demonstrates the vital linkages that often bind seemingly disparate economic policies.
From Trade to Tax
Nye's book War, Wine, and Taxes: The Political Economy of Anglo-French Trade, 1689-1900 challenges Britain's reputation as an island of free trade amid a sea of protectionism. "The idea that Britain was the leading free trader of the nineteenth century is one of those rare stylized facts in economic history that resonates with the public as much as it commands the attention of historians and other scholars," Nye declares in his introduction. In fact, British politicians made plenty of room for protectionism, even while British intellectuals were developing a powerful case for free trade. The resulting tariff regime, moreover, helped facilitate creation of a particularly robust array of internal taxes.
By the end of the 17th century, England was running a large trade deficit with France. But from 1689 to 1713, the two nations fought a more or less continuous war, and the deficit disappeared along with almost all trade between the combatants. When peace returned, protectionists in London engineered the imposition of high tariffs on a range of French imports. They imposed especially high rates on wine and spirits -- key imports responsible for a large share of the prewar trade deficit. The new tariffs successfully checked the growth of a new trade imbalance. And not incidentally, they also brought a windfall to domestic suppliers of substitute goods -- especially brewers.
Such solicitude for the brewers, however, came at a price. Political leaders imposed heavy excise taxes on beer, using the implicit threat of lower tariffs to keep the brewers in line. At the same time, they paired this stick with yet another tempting carrot (in addition to the wine tariff), encouraging consolidation among beer producers. The result was predictable. An increasingly oligarchic industry, protected from foreign competition and blessed with quasi-monopoly profits, proved more than willing to shoulder new taxes -- or, as it turned out, to pass them onto consumers.
Postwar success in raising the beer tax stands in notable contrast to earlier efforts. In 1689 and 1690, officials had increased beer taxes, only to see revenue stagnate and eventually decline. If beer taxes were to become a major source of revenue, brewers had to be granted some sort of protection from foreign competition. The postwar tariffs against wine did just that.
This is a compelling story, underscoring the give and take of politics in general and revenue politics in particular. Nye's analysis is richer still for its integration of other factors in the policy dynamic, including technological changes in the brewing industry that made consolidation both practical and attractive. Fewer firms meant bigger profits for the brewers. And not incidentally, it also meant easier tax collection. "From the government's perspective the change in the industrial organization of the brewing industry, especially the trend toward increased concentration in production begun around 1700 and the rise in the scale of production, made it substantially easier to monitor and implement the tax," Nye explains.
Although Nye does not stress the bureaucratic element of his story, he gives due weight to the growth of a robust British revenue agency in the late 17th and early 18th century. The story of this bureaucratic transformation -- best recounted by John Brewer in The Sinews of Power: War, Money and the English State, 1688-1783 -- must figure prominently in any account of British fiscal history.
Nye's book adds to a growing literature on the fiscal transformation of 18th-century Britain. Revenue increased steadily and dramatically throughout the 1700s, rising even faster than GDP. The per capita tax level soared from 16 percent in 1700 to 24 percent in 1800 to 36 percent between 1803 and 1812 (during yet another war with France).
This dramatic growth in revenue and tax burdens reflected a shift in the nation's tax base. During the 18th century, Britain moved from a revenue system based on direct taxes (like those on land) to one based on indirect taxes (like those on beer and other alcoholic beverages). Land taxes remained the largest single revenue source well into the 18th century, but their share of total revenue declined steadily. Alcohol taxes, meanwhile, provided a large and growing share of revenue, making up half of all excise receipts in the late 18th century, according to Nye's calculation.
Conceivably, consumers might have objected to this shift from direct to indirect taxes since it was broadly regressive. But in fact, Nye suggests, that possibility was remote. "At this time English consumers were not in any position to successfully protest the taxes imposed on them," he writes. Producers were the only realistic source of opposition, and they had been co-opted by favorable tariff policies and a generous approach to business consolidation. "The net result," Nye concludes, "was an expansive British state with revenues collected by central tax authorities and backed by a cooperative domestic industry shielded from foreign competition that found it easy to shift much of the burden of taxation onto the consumers."
Nye's most important contribution -- at least for tax specialists -- is his compelling integration of tax and tariff policy. Back in the day, tariffs used to raise some serious cash. But their importance as a revenue source -- already declining in 18th-century Britain and eventually to decline across the Atlantic as well -- should not be allowed to obscure their importance in the political transition to other forms of taxation.
Modern revenue systems in developed countries rarely depend on tariff duties to raise much money. But those revenue systems might look much different if tariff duties hadn't been a crucial part of the policy dynamic.
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Joseph J. Thorndike is a contributing editor with Tax Analysts. E-mail: firstname.lastname@example.org.