Monday, October 27, 2008

Funding necessary government programs

Here's an excellent account of how Britain taxed gin in the 18th century (replacing an experiment in prohibition) to fund the central government.

The 2008 recession is driving down government revenues in the U.S. Can we afford not to tax marijuana?

Gin, drugs and the bank crisis

Gordon Brown could look back to the 18th century for a way to pay for the banks' rescue and eradicate a modern plague

I have a cure for the financial hangover we're about to suffer. My cure will make us better, it will cost us nothing and it is based on solid, historical precedent.

In 1742, Britain was involved in the Austrian war of succession, our principle enemy being France. Our navy was very powerful but if we failed to participate in the land war on the continent, our allies threatened to make peace without us. We urgently needed money to finance a force of Hanoverian troops, to be based in Flanders. Lord Carteret, secretary of state under George II, proposed a "sinking" fund of £1.8m to pay for the troops and for various other expenses, to be borrowed at 3% per year – and he also had a suggestion as to how to pay for it.

In the 1740s, gin consumption in Britain had reached the proportions of a plague. Originally encouraged as a replacement for French brandy, it resulted in large sections of the poorest in the land becoming addicted. There were an estimated 10,000 gin sellers in London alone. Destitution, crime and premature death walked in that addiction's wake. Various attempts had been made to crack down. In 1736, exorbitant licensing charges had amounted to prohibition. The result was riots, and an increase in consumption to an estimated 8m gallons a year by 1743. Too many people had become dependent, either as drinkers or sellers, or both. Gin went underground.

Now Carteret proposed a revolutionary reform. He suggested a cut in retail licensing charges from £50 a year to £1, a level affordable for small-time dealers. This, together with moderate duties from distillers and allowing for costs and for a small measure of supervision, would result in sufficient revenue to pay for the Hanoverian troops, and it might also bring about a reduction in the evils associated with the gin trade. The naysayers were horrified. In the parliamentary debate that followed, they insisted that gin was evil and must be outlawed permanently. It was abhorrent to make money from it. The debate was long and heated.

Carteret won the day, and the naysayers were comprehensively proved wrong. His 1743 Gin Act was a triumphant success. It raised £90,000 within a year – more than enough to pay the interest on his "sinking" fund. Indeed, gin substantially financed British efforts in the Austrian war of succession. But equally important, gin consumption was brought within the control of the law and mortality rates began to fall, as did alcoholism and crime. Further licensing during the following years tightened the screw (but not too much), and gin gradually ceased to be a matter of public concern.

Today, as we are learning to our cost, the government is once more obliged to raise vast sums of money, this time to counter weaknesses in the banking system. And the sums are much more vast than they were in 1743. Gordon Brown's "sinking" fund to part-nationalise the banks amounts to many billions of pounds.

It is perhaps tasteless to say so, but we are fortunate that we face a social plague very similar to that of gin – the illegal drug trade. And as in the mid-18th century, we see the failure of abolitionist policies to control the menace. The total value of this trade amounts to between £2bn and £6.5bn a year – all untaxed.

Our financial hangover will be caused by the payment of interest on Brown's bank rescue package. He should take a leaf from Lord Carteret's book. He should license and tax the sale of all currently illegal recreational drugs at a level that would allow a substantial number of those involved in the trade to come in from the cold, thus incidentally reducing crime – combining this, of course, with oversight and control.

He should ignore the naysayers, just as Lord Carteret did, and for the many medical and social arguments in favour of abolition he might care to look at the website of the Independent Drug Monitoring Unit. The total benefit of such legalisation to the Exchequer is likely to be between £3.5bn and £6.3bn a year, including excise duty, VAT and income tax from the dealers and allowing for additional costs. This is more than enough to pay the interest on the bank rescue package at the sort of rates a government can command. You're a world leader, Gordon, and it's a world problem. With luck, others will follow you – again.

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Wednesday, October 22, 2008

Take the Handcuffs Off the Economic Recovery

See my post on the economic consequences of our criminal justice policies on the Huffington Post.

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