Question

What items does Hamilton propose raising or enacting new duties or taxes on? How does this anticipate the current-day use of "sin taxes" or federal taxes on items such as tobacco? Why did he choose to single out these items?

Answer 1

A)The federal government lacked the funds needed to meet its operating and debt-repayment expenses. The 1789 tariff act, putting duties on certain imports, had not raised enough money to meet the government's expenses. Hamilton recommended that a tariff be levied on foreign imports to protect domestic industries and discourage imports, as well as raise government revenue. This was the only major Hamilton proposal to be rejected by Congress. In 1791, however, Hamilton was able to convince Congress to pass an excise tax on whiskey. (An excise tax is one placed on goods produced or services performed within the country.). After significant debate, Washington signed the National Bank Bill into law.

B)Governments thus rely on indirect taxes on consumer goods as a source of revenue. “Sinful” items such as alcohol and tobacco have traditionally been taxed punitively and some have called for new taxes on fatty foods and sugary drinks, as well as a minimum price on a unit of alcohol.

It is frequently claimed that consumers of “unhealthy” products place an excessive burden on public services—health care, in particular—and that this justifies additional taxation in order to (a) reduce consumption of the sinful product, and (b) reimburse the state for the extra money it is forced to spend.

Taxing goods that are price inelastic, especially addictive ones, are far more likely to impoverish consumers than it is to turn them into abstainers. Alcoholics are rarely deterred from drinking by higher prices.

These taxes are also a means of attempting behavioral change. In the case of alcohol, there are additional externalities relating to violence, drunk driving, and property damage. It is likely that drinking and drunkenness result in additional costs to state budgets that are not offset by savings and benefits.

C)As part of his economic policies designed to address the national debt, Hamilton urged Congress to impose a tax on domestically distilled liquors. He believed this “luxury tax” would not cause much consternation in the American public. However, farmers on the western frontier operated private distilleries to generate extra income, and for many poor farmers, whiskey was a medium of exchange, rather than a source of cash. For these farmers, the whiskey tax constituted an unfair income tax that favored wealthy farmers and eastern distilleries who could afford to pay a flat tax per barrel. This led to Whiskey Rebellion.