The optimal amount of crime is not zero.

For tax evasion, there’s an optimal level of enforcement, and an optimal level of crime. You can’t “wipe out” the black market. You can reduce it to a tolerable level. There’s an optimal size of the black market, probably consisting, as suggested below, of “relatively small violators.”

There is still moonshine being made in the mountains of North Carolina, I imagine, but not enough to matter – not enough to be an economic threat to the commercial liquor market that’s regulated and taxed. For law enforcement to scour the mountains every week in search of that last moonshiner would be hugely expensive to the point of being silly and counterproductive. No one I know buys non-tax-paid liquor, and you can’t find it on Craigslist. It took a while after repeal of alcohol prohibition for the black market in liquor to die down.

Before repeal, President Roosevelt’s team put it this way:

The illegal industry must make a substantially higher gross and net profit on its sales than the legal industry. If it does not, it will not be profitable to run the risks involved. . . . As between legal and illegal products of substantially similar price the buying public will have greater confidence in and will prefer to buy the legal product.

It seems reasonable to suppose that a more drastic price competition by the legal industry will be necessary in the early post-prohibition period while the illegal industry is still organized and well financed. It would probably require a considerably higher price to revive a defeated illegal industry then it would to keep a well entrenched one in business. This price could be facilitated by keeping the tax burden on legal alcoholic beverages comparatively low in the earlier post prohibition period in order to permit the legal industry to offer more severe competition to its illegal competitor. When that competitor has been driven from business the tax burden could be gradually increased. Investigators . . . estimate that it will require three years of such competition to break the organization of the illegal industry.[1]

As the re-imposers of alcohol taxes hoped, bootlegging faded fast. “The syndicated type of illicit operation was virtually destroyed by the end of 1937, and since that time the control of production and distribution of illegal distilled spirits became largely a problem of coping with relatively small violators.”[2]

Quickly, legitimate business moved in to take the bootlegger’s place. “[O]nce it ceased to be outlawed, the alcohol industry was no longer dominated by unregulated, illicit entrepreneurs. . . . The leaders of the major alcohol industries are members of the economic establishment with an investment in maintaining order and obedience to law. . . . Now [in 1991], over a half-century since prohibition, it is easy to forget that all this was the outcome of self-conscious public policy and not the ‘natural’ result of market forces or national zeitgeist.”[3]

In 1794, when farmers in western Pennsylvania were ignoring the federal liquor tax, President George Washington, the Commander in Chief, mounted his horse and led 12,950 men (in a country with a population of 5,308,483) to make them pay tax. And they did.  That kind of enthusiastic collection of cannabis taxes seems implausible.  The public does not want such a huge effort, I think.  Some middle ground is possible.

There’s a lot of learning on the optimal rate of crime, some of it from John Donohue, my former colleague at Covington and Burling, but here’s a link that a comes up quickly:

http://sites.duke.edu/econ206_01_s2011/files/2012/05/11-Becker_Crime-and-Punishment_Lewis-Presentation.pdf.

+++

[1] Interdepartmental Findings, supra note 105, at 308-09. [Cites and cross-references are from this document: https://newtax.files.wordpress.com/2014/08/laws-to-tax-marijuana-published-version-in-state-tax-notes.pdf.]

[2] Hu, supra note 19, at 95. Hu goes on: “Mash seizures provides [sic] a fairly reliable index of illegal production. It is significant that this series showed a drop of 65 percent between 1935 and 1938. Id. at 96.

[3] Lessons, supra note 14.

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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