Taxes Helped Create the Baby Boom

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Most taxes influence behavior.  At its most fundamental, this is the basis for “supply-side economics.”  As the Wall Street Journal observed several years ago, different taxes can be expected to have different supply-side impacts.  Among other factors, the available of close substitutes for the activity being taxes will influence the extent to which the volume of an activity is altered.  I want to focus on how taxes helped create the baby boom.

[pullquote]In 1944, a new wartime “cabaret tax” went into effect, imposing a ruinous 30% (later merely a destructive 20%) excise on all receipts at any venue that served food or drink and allowed dancing. The name of the “cabaret tax” suggested the bite would be reserved for swanky boîtes such as the Stork Club, posh “roof gardens,” and other elegant venues catering to the rich.[/pullquote]

Specifically, I’m talking about the upsurge in the U.S. birth rate after World War II.  Most people assume that returning U.S. forces were anxious to settle down and start a family.  There was undoubtedly some added inducement based on their experiences during the war.  As Dr. Johnson once observed, “Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”

A Tax on WHAT?!?

But there was another factor.  According to an op-ed column by Eric Felten in today’s Wall Street Journal, there was a “cabaret tax” of 30 percent imposed in 1944.  Mr. Felton describes the tax thus → → → → →

The purpose of the tax was to raise revenue for the war effort.  Ostensibly, the rich were to be soaked (sound familiar?).  But the good ol’ Bureau of Internal Revenue (now the IRS) weighed in shortly after the tax bill was passed, saying,

“A roof garden or cabaret shall include any room in any hotel, restaurant, hall or other public place where music or dancing privileges or any other entertainment, except instrumental or mechanical music alone, is afforded the patrons in connection with the serving or selling of food, refreshments or merchandise.”

In other words a tax originally aimed at the wealthy was expanded to cover virtually anyone who went out to dance.  Again, this should sound familiar.

One impact of this tax not explored by Mr. Felten is that fewer couples went out to dance.  They stayed home instead.  And since they were young and newly-married, they entertained themselves as best they could.  The result: the postwar baby boom.

The Rest of the Tax Story

There was one large loophole, however.  Clubs that featured only instrumental music (no singing) and did not allow dancing were exempt.  Mr. Felten describes this as the beginning of the bebop era. No singing, no dancing, just instrumental music.

Everyone should know the rest of the story.  A tax imposed to finance the war effort somehow did not get repealed after the war was over.  The tax rate was reduced to 10 percent in 1960, fourteen years after the end of the war.  It was finally eliminated in 1965, just short of its 20th anniversary.

The next time you wonder why many of us support automatic sunset provisions in laws, think about this tax.  (A sunset provision is a specific date on which the legislation expires if it is not renewed by another bill passed in Congress and signed by the President.)  “An unlimited power to tax involves, necessarily, a power to destroy,” Daniel Webster made that statement before the U.S. Supreme Court in McCulloch v. Maryland (1819).  Similar sentiments were voiced by Chief Justice John Marshall writing for the majority.  Can’t repeat that too often.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.