Thomas Tooke

Archive for the ‘Tobacco’ Category

Measuring the wages in cigarettes, the low government taxes of 1905 and need of inflation for large governments.

In Tobacco on June 16, 2012 at 6:59 pm

In 1905, a pack of 15 cigarettes had a price of 7.5 cents, you can infer that as the mid price between the sweet Caporal for 10 cigarettes produced by the Tobacco Trust and the competing admiral brand which temporarily sold its 20 cigarettes pack for 5 cents in a failed attempt to undercut the Tobacco Trust.

In 1900, the median household income was in nominal terms 438 USD according to this source, so if you measure that in ounces of Gold which were trading at 18.96 USD in 1900, we have the median income equivalent to  23.10 ounces of Gold. The Median household income today is close to $50,050. One can decide if the households are richer now since they make 31 ounces of Gold instead of 23.1 or if the Gold has to be priced at 2,166 dollars in order to be fairly valued.

If one measures the household income in packs of cigarettes, the median household income works at around 438/ 0.075 = 5,840 packs of cigarettes. How about today? The median price of a pack of cigarettes is probably around 7.5 USD, the median income can be measured as 6,673 packs of cigarettes. Not much change in income if you measure median income either in Gold or in packs of cigarettes.

In 1907, Jacobstein wrote:

“Of the total tobacco revenue collected from 1902 to 1906, fifty per cent was derived from manufactured tobacco (plug, chewing and smoking tobacco and snuff), forty-five per cent from cigars and five per cent from cigarettes. If to these internal revenue receipts we add the custom duties on tobacco ($21,500,000), the total income to the government, from 1902 to 1906, from its taxation of tobacco was $66,000,000 annually, which is about thirteen per cent of the national public revenues from all sources.”

So if we work in reverse the numbers, what do we obtain? 66,000,000 / 0.13 = 507,700,000 USD as the total national government revenues. So how many median household incomes would that be? 507,700,000/438 = 1,159,114 median household incomes. How can we compare that to today´s context?

Since, the population of the United States is around 313,000,000 while it was around 76,000,000 at the time, we could say that in today´s context with 4.11 more people, maybe a rough estimate would be around 1,159,114 * 4.11 household incomes.
With today´s US household income at 50,050 USD, we get 1,159,114*4.11*50,050 = 238.5 billion USD.

So a rough estimate in today´s money of the total national public revenues of 1900 from all sources is 238.5 billion USD. Since the GDP is around 15.094 billions today, this works at around 1.58% of total GDP. The other way to look at that is the following: today the USD budget deficit per month is around 100 billion USD while at time the annual national public revenues from all sources would be around 2.8 months of today´s budget deficit. Interestingly according to this link, our approximation is not far of the mark from theirs at 2.7% of GDP as the total government revenues as a % of GDP in 1900.

Evidently the inflation has nothing to do as “with a small inflation being positive for business environment etc…etc…”. Without inflation the government obligations can´t just be repaid and that has been the situation since the huge accumulation of debt starting post World War I with some abatement post world war II and accelerating in the recent decades.

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War Financing with Tobacco Napoleonic Wars, Civil war and Spanish American war. Impact on consumption.

In Tobacco on June 16, 2012 at 2:46 am

It is a recurring fact in history that governments heavily use Tobacco as a tax collection mechanism, here we discuss the instances during which it was used to finance wars along with salient data about taxation and consumption and the higest taxation rates in 1905.

As Jacobstein wrote in 1907.

“The Napoleonic wars for a long time closed European markets to our products. The damage to our trade and commerce resulting from the Berlin and Milan Decrees, the Orders in Council and our own embargo, is a matter of history. Our tobacco trade suffered along with the others. In 1808 our exports fell from 62,000,000 hogsheads to 9,567 hogsheads of lead. Manufactured tobacco exports were similarly affected.

Moreover, these Napoleonic wars burdened European governments, especially England and France, with heavy public debts. To wipe off these debts, import duties were greatly increased on all products partaking of the character of luxuries, including tobacco. The tobacco tax had always been considered a lucrative as well as a justifiable one. These increased duties raised the prices of tobacco to the consumer proportionately, thereby cutting down consumption, or at least checking its rate of increase.  The falling of our exports was no doubt partly due to this factor. In England, for instance, the tax was raised in 185 on imported tobacco, from twenty-eight cents per pound to seventy-five cents per pound. This brought the duty up to nine hundred per cent ad valorem. England´s consumption consequently fell from twenty-two million to fifteen million pounds.”

” The English duties were so high that a special committee was appointed by Parliament to investigate the disturbed conditions of trade resulting from the increased tax. This committee reported that the prices of tobacco were so high that smuggling and adulteration of tobacco were made very profitable. The American Chamber of Commerce of Liverpool presented a petition to the committee requesting a reduction of duties on tobacco, on the ground that consumption, and hence trade, would increase for England and the United States. This Parliamentary investigation committee declared its belief that ” the annals of taxation do not exhibit an instance of such a heavy impost in any country as the present duty on tobacco.” (Nine hundred per cent ad valorem.) The like was true, though not to the same extent, in France, Austria, Spain and Italy, where the “Regie” was in vogue, and the government fixed prices arbitrarily. In our country the best snuff or manufactured tobacco could be bought at retail in 1840, for twenty-five cents per pound; whereas, the price in England was seventy-five cents per pounds for snuff and forty-five for manufactured tobacco; and in France the retail price was thirty-five cents per pound for the ordinary tobacco of both kinds used.”

From Jacobstein again:

“When, however, the influence affecting price is more permanent one, as a high tariff or internal revenue tax, then the reaction upon consumption is more noticeable. For instance, in the period from 1865 and 1868 when our internal revenue tax was increased from eleven cents to thirty cents per pound, consumption fell from one and three-tenths pounds to one pound per capita. The increase in the tax, during the Spanish-American War, on “manufactured tobacco” from six to twelve cents per pound, was accompanied by a decrease in consumption from three and nine-tenths to three and three-tenths per capita. ”

From Herbert Myrick and J.B. Killeberry.

” The United States internal revenues tax for the two years ended June 30th, 1864 was $1.50 per thousand on cigars valued at not over $5 per M, increasing to $3.5 on cigars valued at $20, an average of $2.37 per M on cigars of all descriptions. After June 30th, 1864, the tax was increased, for war purposes, to $3 per M, on cheroots and cigars valued at not over $5 per M; valued at over $5 and not over $15 per M, 8$  valued at $15 to $30; $15 per M; valued at $30 to $45, $25 per M. Cigarettes valued at not over $5 per 100 packages of 25 each, $1 per 100 packages; valued above that sum, $3; cigarettes made wholly of tobacco, $3 per M. By the act of March 3rd, 1865, cigars, cheroots and cigarettes made wholly of tobacco, or any substitute therefor, were taxed $10 per M, and cigarettes, valued at not over $5 per 100 packages of 25 cent. These war taxes were reduced by the act of July 13th, 1865, and March 2nd, 1867, and again July 20th, 1868. Under the later act, cigars and cheroots of all descriptions were taxed $5 per M; cigarettes weighing not over 3 pounds per M, were taxed $1.5, and heavier than that, $5. These rates prevailed until March 3rd, 1875, hwen cigars and cheroots were taxed $6 per M and cigarettes $1.75. These rates were again reduced March 3rd, 1883, to $3 per M for cigars  and cheroots of all descriptions and 50 cents for cigarettes weighing not over 3 pounds per M. These latter rates are still in effect. ”

The tariff on tobacco imported into the United States on leaf, or manufactured, was 6 cents per pound and snuff 10 cents per pound from 1789 to 1794, when it was advanced to 10 and 12 cents respectively, and remained there until 1846, except it was 20 and 24 cents from 1812 to 1816. In 1846, a tariff of 30 per cent ad valorem was imposed on leaf tobacco, which was made 24 per cent in 1857 and and 25 per cent in 1861 but in 1862 was raised to 25 cents per pound, and in 1866 to 35 cents per pound, continuing at that rate until 1874, when it was made 30 per cent ad valorem. From 1866 to 1883, the duty on snuff and manufactured tobacco was 50 cents per pound.

“The import duty on cigars and cheroots was $2.5 per thousand until 1842, when the rate was fixed at 40 cents per pound, which was changed to 40 per cent ad valorem in 1846 and 30 per cent in 1857 but in 1866-1867 was $3 per pound and 50 per cent ad valorem. This was changed to $2.5 per pound, and 25 per cent ad valorem, in 1868, and continued at that figure until 1883. ”

A quick comment: the Napoleonic wars were also a steep trade war between nations when trade collapsed. Tobacco consumption and imports were a key source of revenues during civil war. In  several instances those increases in taxes had the effect of reducing consumption.

To summarize from Jacobstein:

Here are few interesting set of figures dating from 1905 with the rate of taxation apparently impacting consumption.

Jacobstein writes in 1907:

“In France and Italy the rate of profits, or the tax, represents about eighty per cent of the gross selling price of the finished product, as compared with a fifteen to twenty per cent tax in our own country. Where the rate of profits is so high, the consumers are compelled to pay unreasonably high prices for their tobacco. For there is no good reason why this particular industry should be thus singled out and exploited by for government revenues.”

Tobacco: Importance of Tobacco taxes for the colonies around the American revolution period.

In Tobacco on June 16, 2012 at 2:35 am

The Tobacco was not only important for England in the early days of the American colonies, but also for the colonies taxes as well.

As Jacobstein wrote in 1907.

“The direct and indirect effect of the tobacco industry upon other social institutions must be passed by with a brief notice. Politically, the large plantation is responsible for a representative rather than a democratic government in the southern colonies; for it was inconvenient for settlers widely scattered, as a result of the large plantation system, to come together as was the case in the town meeting of the New England colonies. On the fiscal side, it might be shown how the particular methods of raising revenues were resorted to because of the existence and importance of the tobacco industry. The chief revenues came from an export duty and a poll tax; the export tax, besides being easily collected, was lucrative because so large a part of the chief crop of tobacco was exported. The ease with which it could be collected, and the difficulty of concealing the commodity in attempting to escape taxation, partly explains also the wide use of taxes on tobacco by the European government. ”

“At the outbreak of the American Revolution, tobacco was second on our list of exports in value, reaching in 1775 over one hundred million pounds, or about four million dollars. This product alone represented over 75% of the total value of goods exported from Virginia and Maryland. As a result of our independence, over 75% of this tobacco was carried directly to the continent, no longer exclusively in English vessels or by English merchants, but by Dutch and French ships as well. England´s revenues from her impost on tobacco was a handsome one. The tariff rates were very high, averaging from two hundred per cent to four hundred per cent ad valorem duty.  As early as 1686 with a duty of four and three quarter pence per pound, (the price of tobacco being about two pence) she received from this source exclusively about two million dollars. In 1764 the Crown of England thought it worth while to pay three hundred and fifty thousand dollars for the seigniorial right over the Isle of Man to prevent smuggling into England via that place. In 1700 it reached three millions five hundred thousand dollars. So far as the revenue on tobacco consumed in England is concerned, England lost nothing by our independence. Social wealth, however, she did lose by the shifting of trade profits from the pockets of English Merchants to Continental Merchants. The Tobacco trade of Glasgow, which had been the leading tobacco center of the world, was ruined.

Tobacco: government taxes and monopoly in the early days.

In Tobacco on June 16, 2012 at 1:47 am

It is often assumed that the heavy taxing of Tobacco is a recent phenomenon. The study of History brings counter intuitive results.

It is to be noted that the Government have always being meddling with Tobacco.

As Jacobstein wrote in 1907.

” A European Market for tobacco had existed for about fifty years before permanent English settlements were made in America. At the opening of the seventeenth century its sale in England was large enough to arouse anxiety among the Bullionists, who hated to see the precious metals leaving the country in exchange for “worthless weed”. In order to check its consumption, Parliament increased the import tax on tobacco from two pence to six shillings ten pence per pound. That tobacco trade had gained some importance at this early date may be inferred from the fact that by 1601 some individuals thought it worth while to buy a monopoly on the manufacture and sale of tobacco pipes.

Fortunately for the colonists, there were economic and political forces at work abroad cooperating with their own efforts to capture and develop the market. England´s practical commercial policy laid emphasis on the necessity of having a favorable balance of trade, in order to prevent too much bullion from flowing out of the country. The House of Commons voted unanimously (1620) ” that importation of Spanish tobacco is one of the causes of want of money within the kingdom.” There,  when it was learned that tobacco could be grown in the Anglo-American colonies, Parliament decided to cut off importation of Spanish tobacco, which in 1621, amount to 60,000 pounds. In 1621 Parliament enacted a law practically prohibiting the importation of foreign tobacco by levying discriminating duties in favor of colonial tobacco and against all foreign tobacco. This preferential tariff remained in vogue during the entire colonial period, and was of the important factor in building up the tobacco industry on this continent. ”

“Later developments of the tobacco trade fully justified England´s policy, for she not only was able to import from her American colonies sufficient tobacco for home consumption, but profited greatly by supplying Europe with her surplus. ”

“Nor was the King himself disinterested in the expansion of tobacco trade. For in spite of his “Counterblaste” against the use of tobacco, King James I was not opposed to increasing his income by the sale of a monopoly in the trading of tobacco. Under the pretense that a monopoly enjoyed by a few individuals would check the consumption of tobacco, the King was able to harmonize his moral repulsion to tobacco with personal financial gain. In 1621 the patent yielded James I annually as much as 16,000 pounds. Out of deference to a protest from Virginia planters against the abuse of the Tobacco Monopoly, the patent was withdrawn in 1621, but again farmed out in 1625. The farmers of the customs demanded a tax of one shilling on each pound of tobacco imported into England. The colonists, which provided for a tax of only five per cent on all imported goods and maintained that the monopoly granted to the “Farmers of Revenue” was equivalent to an additional and illegal tax. The Virginia Company fought so stubbornly against the monopoly that the King yielded and finally withdrew all monopoly rights form the “Farmers of Revenue.”

If it was to the King´s interest to have the tobacco trade grow, since the value of the monopoly privilege varied directly with the extent of the business done, all the more so was it to the interest of the Virginia Company to encourage it.

In the first charter of Virginia (1606) the London Company was allowed to impose a tax of two and one-half per cent. and five per cent on all goods “trafficked bought or sold” by English citizens or foreigners respectively. It was by no mere coincidence that the Virginia company was always back of legislation that shut out foreign goods from England´s market whenever Virginia´s products could be substituted. Mr. Sandys, who was instrumental in pushing through this legislation, especially the prohibitory act of 1624, was the first treasurer of the Virginia Company. ”

Here a personal comment: It is clear that the Tobacco trade was never a trade which escaped the government regulation or taxes. It was from the beginning a powerful source of taxes and far from being a freely trade-able commodity, it was always traded under the watch of the different forms of government during the last couple of centuries.