How the federal income tax affected Prohibition

How tax laws helped the federal government catch mob bosses during Prohibition

The IRS arrested top mob bosses during Prohibition after the Supreme Court ruled illegally-made income could be taxed. The IRS's biggest catch was Al Capone, who was charged with tax evasion and sentenced to 11 years in prison. But Capone wasn't the only bootlegger the IRS nabbed for tax evasion during this era.

In the 1920s, Prohibition helped cement tipping norms in the US

During Prohibition, restaurants lost significant revenue, given that they could no longer legally serve customers high-margin alcohol. As a result, many of these restaurants leaned more heavily on tips to ease the financial pressure of paying employees.

The federal government allowed toxic chemicals into alcohol during Prohibition

Industrial alcohol was still legal during Prohibition, and was often used by bootleggers. In an attempt to disrupt the black market, the government required toxic additives to be included in industrial alcohol, leading to more than one death.

The US officially adopted an income tax in 1913

The US first levied income taxes during the Civil War, but modern income taxes became an American fixture in 1913. Two years earlier, Congress passed the 16th Amendment to give the government the right to tax individuals' and businesses' income. The US still technically levies the same federal income tax now as it did then—though it's evolved.

The 21st Amendment was the only amendment to repeal another

The 1933 constitutional amendment rolled back 1920's 18th Amendment, better known as Prohibition, which outlawed "the manufacture, sale or transportation of intoxicating liquors."

Over a century ago, fewer than 1% of Americans paid income taxes—but the cost of World War II prompted the federal government to greatly expand the number of people required to pay income taxes.

The 16th Amendment paved the way for capital gains taxes

Ratified in 1913, the 16th Amendment paved the way for a far-reaching federal income tax and supercharged the country’s coffers. Before then, the US depended on import tariffs and so-called consumption taxes to raise revenue.

Before the 16th Amendment, US tax law required direct taxes to be directly apportioned to a state's population

Due to these requirements, the federal government could not impose many direct taxes. Direct taxes include property and income taxes, whereas indirect taxes include duties and excises.

How Prohibition changed beer

This historical survey from The Beer Connoisseur explores the breweries that survived the government's ban on alcohol production. The common denominator? They all pivoted their business models.

On July 1, 1862, the agency now known as the Internal Revenue Service was established and named the Bureau of Internal Revenue

It was created to collect the first-ever US income tax, which was created to help pay for the Civil War. After gaining their independence from Britain, Americans were skeptical about giving the federal government absolute power to collect federal income taxes. As a result, early US tax laws dictated that direct taxes, like income taxes, had to be directly apportioned to a state's population. The nation went back and forth on its federal tax laws multiple times. For instance, in 1872, the income tax from the Civil War was repealed. But it was revived in 1894, and then repealed again in 1895. In 1913, Congress passed the 16th Amendment, giving Congress the power to levy income taxes on individuals and corporations without apportioning the burden among the states in line with population, once and for all.

Tariffs once fueled the US economy, historically serving as a primary source of revenue and a means to protect domestic industries.

Jimmy Carter signed a 1978 bill that legalized home brewing, a move credited with kick-starting the craft beer industry.

Individual income taxes are the federal government's primary revenue source, see a tracker that breaks down where the rest of the budget comes from

The US government historically makes nearly half of its total revenue last year from individual income taxes. But the US makes also makes money from a variety of other sources, including Medicare taxes and corporate income taxes. However, the federal government has run a deficit since 2001—reaching a peak of $3.13T in 2020.

The IRS—a division of the US Treasury Department that enforces the Internal Revenue Code, collects taxes, and enforces tax laws—has been a frequent victim of arson over the years.

Hamilton's tax on whiskey sparked the first armed rebellion against US federal authority

As Treasury secretary, Alexander Hamilton designed an excise tax on whiskey that provoked violent resistance in western Pennsylvania. The Whiskey Rebellion ended when George Washington mobilized state militias under federal authority to enforce the law.

Since 1913, Americans have paid income taxes at varying rates

In the 2020s, the top marginal tax rate has floated around 37%, relatively lower than previous eras. Some have called for boosting the rate significantly to tax the highest earners.

During Prohibition, 'happy hour' became the go-to term for illegally having a drink after work before heading to dinner

This article provides a timeline of happy hour’s shifting shape in US culture, from the first recorded happy hour on a US Naval ship to today’s happy hours that sometimes include non-alcoholic beverages. It also details how prohibition actually helped establish the tie between alcoholic beverages and happy hour.

See how the federal estate tax has changed in the 21st century

In 2001, the government passed an act to completely repeal the tax. It was overturned in 2010. In 2017, the government increased the exemption threshold so fewer people would have to pay into the tax. In 2025, the exemption threshold was permanently set to $15M.

The federal government's decision to pay off the states' Revolutionary War debts required a new tax, which sparked an armed rebellion. 

Revenue from tariffs goes to the US Treasury's general fund.

Capital gains taxes were first levied in the US in 1913

However, up until 1921, they were treated the same as ordinary income. Ever since then, rates have swung up and down.

Anheuser-Busch sold half of its real estate holdings to survive Prohibition

The Budweiser parent company also created and sold out more than 25 different nonalcoholic products during this time, including but not limited to infant formula, frozen eggs, and specialized coffees and teas.

Al Capone's business structure kept him from ever getting charged for bootlegging.

Understanding the low corporate tax rate in the US

Corporate taxes, which make up roughly a third of the federal government's revenue, have been calculated using a flat 21% rate since the Tax Cuts & Jobs Act of 2017. The current rate is considered low both by historic standards (it averaged over 50% in the 1950s and 1960s) and compared to other countries.

Tax policy can have a direct impact on the national debt, with past presidents' changes to tax codes inflating the deficit.

Charting where federal revenue comes from

About 50 percent of federal revenue comes from individual income taxes, 7 percent from corporate income taxes, and another 36 percent from payroll taxes that fund social insurance programs. See breakdown in charts here.

Opponents of the federal estate tax began using the term 'death tax' in the 1940s to sway public opinion.

Explore why Americans are drinking less alcohol

US alcohol consumption fell 5% in 2025, with beer and wine leading the decline. Economists point to tighter budgets and less face-to-face socializing overall, while younger Americans are increasingly choosing not to drink.

Some US states are now revising their happy hour bans

While states like Massachusetts started banning happy hour in the 1980s as an anti-overconsumption measure, not every state has kept these bans intact. This article dives into the arguments for and against revising the happy hour ban in Massachusetts, the first state to institute such a ban.

Read why some states are considering imposing a flat tax rate that isn't adjusted by income

Wisconsin was the first US state to impose a state income tax, close in time to when the federal income tax went into effect. Many states followed suit, but nine states to this day still don't levy wage-related taxes.

Americans between the ages of 45 and 55 pay nearly 30% of all income taxes, paying an average tax rate of around 17%.

America's ice cream obsession began under Prohibition, with the street treat acting as a legal vice that helped ease the pain of the Great Depression.

Happy hour is banned in Ireland

For a country famous for drinking a lot of alcohol, it might seem surprising that happy hours are banned in Ireland. But that reputation is exactly why the country banned happy hours in the first place—a 2010 report found that alcohol use in Ireland had doubled between the 1970s and the early 2000s. Read this article to learn more.

Illinois rolled back its happy hour legislation in 2015, opting to cap reduced-price drink sales at 15 hours per week and prohibit them after 10 pm instead

In this episode of the podcast "The Right to Drink," alcohol expert and host Jarrett Dieterle explains why some states allow happy hour while others don't. The host also dives into the fight to change happy hour legislation across the US.

Tariffs are taxes levied on goods imported from abroad.

The Smoot-Hawley Tariff Act—which was passed during the Great Depression with the goal of reviving domestic industry—is among the most famous pieces of economic legislation in US history.

See a timeline of the IRS's history, including the introduction of standard deductions and the digitization of the filing process

The Commissioner of Internal Revenue was created in 1862 to take over federal tax collection after the President enacted a temporary income tax. That agency eventually became today's Internal Revenue Service.

80% of Americans are bothered that some wealthy people don't pay their fair share of taxes

That's according to data from Pew Research Center. While most people are primarily taxed on their wages, many people in America's 1% derive much of their income from investments instead, which are often taxed at preferential capital gains rates. This structure was shaped by a series of legislative cuts that began in earnest with the 1978 Revenue Act and the 1981 Economic Recovery Tax Act.

What America's 1% pays in taxes, by state

In the US, the top 1% of earners contribute 45% of all personal income taxes collected nationwide. But not all states are created equal when it comes to income tax. Some states are more dependent on the 1% than others for tax revenue. SmartAsset recently examined IRS tax return data to determine exactly how much the top 1% of earners in each state paid in taxes. Find your state here.

The Budget and Accounting Act of 1921 created the modern federal budget

Before 1921, federal funding was fragmented and ad hoc. This article traces how inefficiency and postwar pressures led Congress to pass the Budget and Accounting Act, creating a standardized, centralized federal budgeting process.

Why do long-term capital gains get taxed at preferential rates?

The 1920s defined capital gains as “unearned” taxable income—as opposed to “earned” income from jobs—and set into practice preferential tax rates for long-term capital gains that are hotly debated to this day. This historical review explores how voices in favor of preferential rates were arguing on behalf of greater market liquidity and incentive for investment activity. Learn more about the real history of capital gains tax rates here.

The Tariff Act of 1789 was one of America's first acts.

Historically, only about 1% to 2% of Americans had to pay the federal estate tax

Recent IRS data shows that between 2011-16, that number dropped even lower: The federal estate tax only impacts about 0.2% of Americans. Death taxes typically only impact the rich, and the federal estate tax is no exception.

A group of daring bootleggers created NASCAR

When Prohibition made alcohol illegal in 1920, it didn’t stop Americans from making and consuming it. The law drove the practice underground. Runners risked their lives to deliver moonshine and began racing among themselves.

Map of each state's largest tax revenue source

While America’s federal government primarily raises revenue through personal and corporate income taxes, it's a different story for each of the 50 states. This map shows how every state raises tax revenue for government activities. New York and California, for instance, raise most of that money through personal income taxes, whereas Texas and Florida have sales tax as their largest sources of tax revenue. Click here to see the map.

US states have reported over $25B in tax revenue from recreational cannabis sales and medical marijuana.

Massachusetts banned happy hour in 1984 during a surge in advocacy around preventing drunk driving

Massachusetts was the first US state to ban happy hours. The ban, which prohibits selling discounted drinks during designated times, occurred after a 20-year-old woman died in a drunken driving accident in Braintree, Massachusetts.

In 1639, Puritans in the Massachusetts Bay Colony banned toasting

Like the Anglo-Saxons and the ancient Greeks before them, the American colonists tended to party when they got to toasting. That led to a 1639 law banning the practice, which they viewed as excessive and superstitious. Alcohol remained legal, but the hope was that banning toasting might reduce excessive drinking.

JP Morgan Jr. once angered the nation with his zero-dollar tax bill

In the aftermath of the Great Depression, Congress learned that Morgan and his banking partners had avoided paying any federal income tax in 1931 and 1932. By claiming their losses in the stock market, they seemingly erased what they owed.

The debate over estate taxes centers on wealth inequality

Since the modern federal estate tax was implemented, people have felt strongly about whether or not to keep it. Much of the debate boils down to equality: Proponents say the tax creates better income equality between the rich and poor, while opponents say it's an inequitable tax only placed on the wealthy.