The Whiskey Rebellion: All They Wanted was a Value Added Tax

The historical lesson drawn from the Whiskey Rebellion is usually that Americans are inherently anti-tax. Actually, that’s not quite true. The problem with taxing whiskey wasn’t so much that Americans weren’t willing to be taxed as that whiskey was the principal medium of exchange — it was what people used for money.

In response to Sean Linnane's post recalling the anniversary of the Whiskey Rebellion, the historical lesson drawn from this event is usually that Americans are inherently anti-tax.  Actually, that’s not quite true. The problem with taxing whiskey wasn’t so much that Americans weren’t willing to be taxed as that whiskey was the principal medium of exchange — it was what people used for money.  Consequently, the same jug of whiskey might be sold and resold many times before someone drank it. Since federal sales taxes applied on each transaction, the actual tax borne by a given jug of whiskey might in principle be very high — far higher than the tax.  So by taxing whiskey the way it did, the government made it difficult to do any economic transaction other than barter (specie was scarce).

This tells us two things relevant to current economic discussions. First it shows why a VAT is superior to a sales tax because previous taxes paid are credited to final sales, thus avoiding the cascading problem that was at the root of the whiskey rebellion.  Second, it shows why things like the Tobin tax are a bad idea. Because the tax is on transactions rather than final sales one doesn’t know who actually bears the burden of the tax or how much the burden is because of cascading.