Rapid Tax

Since its introduction to the western world, tea has grown in rapid tax and is now the second most popular beverage in the world after water. Throughout its history tea demand has grown as a result of its good taste, health and medicinal properties and increasingly efficient channels of production and distribution.

Perhaps the most important benefit of tea for tea drinker is that aura of good feeling and stress reduction for those who regularly consume the beverage.

Tea growing and distribution became big business throughout the world as enterprising individuals and companies invested in tea plantations and distribution assets to meet the growing demand for tea. As the business grew, national governments saw tea as a valuable source of revenue. Government regulation and taxation often had a detrimental effect on free commerce and customer satisfaction however.

The growth in popularity of tea in a country like England, a country whose tea culture is well established, is a good case study on the social and fiscal influences on the consumption of tea.

During the sixteenth century in England, tea became a popular beverage mainly for the upper classes. Based upon a unique taste and realization of tea health benefits, more efficient channels of distribution and a growing understanding of the life style benefits of tea, imports grew slowly at first. Nevertheless, this growth accelerated into the 18th century.

During this time taxation, smuggling and adulteration of tea became significant factors in the English tea culture.

Considering tea a tropical luxury, the English government saw revenue raising opportunities in tea to fund a military buildup that supported expansion of the British Empire.

By the eighteenth century, tea was a hugely popular drink in Britain, but, to the ordinary consumer, it was also prohibitively expensive. Smuggling of tea became a growth industry in England as smugglers profited as they met the demand for lower cost tea by ignoring oppressive customs duties.

This created a demand among the British population for cheaper tea, and when that demand could not be met by legal means, a great opportunity was presented to those people who were less than concerned about breaking the law. From the beginning of the eighteenth century, the trade in smuggled tea began to flourish.

This was tea that was brought in illegally - it was not imported by the East India Company, and it did not pass through customs. Being light and easy to transport, tea was a very profitable smuggling commodity - even more so than alcohol in which there was also a healthy smuggling trade.

The State Needs Money

Like any state, 18th Century England was no exception to the need to raise revenue. Mercantilism was the English policy and a military presence was required to support the English role in overseas colonies and possessions. Expansion of world interests requires two things: a strong military and funds to support military activities.

The state looked to import duties and excise taxes as a way to raise the necessary funds and these taxes soon became excessive. The Government had to legitimize the tax and did so by treating tea initially as a ?luxury? that could support high duties in the eyes of the public. Later, tea was correctly classified as a ?necessity? that would only support lower levels of taxation.

Before the Tax Reform Act of 1784 for example, the price of tea was burdened with taxes and duties of over 100% of the pretax price.

In addition, although the supply of tea continued to increase as tea plantations became more productive, the price remained high as the East India Company (granted a monopoly on tea imports by the English Government) artificially manipulated supplies to maintain prices.

High Taxes and Manipulated Supply Lead to Smuggling as a Growth Industry

A pattern developed in English commerce in tea. As taxes were raised on tea imports, smuggling increased in a successful attempt to meet the underlying growth in demand for tea. But smuggling and high taxes had a direct relationship and smuggling produced a negative effect on the English economy and population at large.

Although taxation is important for raising revenue, most economists know that high taxation encouraged smuggling, and the quantity of tea being smuggled was directly linked to the level of duty levied on legal tea imports. In England, at the beginning of the eighteenth century, the government?s need to finance a war in Spain led to an increase in taxation on tea, and the price of leaves rose dramatically.

The tax was outrageous and fueled the activities of the tea smugglers. Duty was later slashed by Henry Pelham in 1745. This meant that more tea was brought in legally - the quantity passing through customs more than doubled - and the increase of tea imports on which duty was paid actually led to the government?s revenues from tea being increased.

But in the 1750s the need to finance another war led to the duty on tea being raised again. This in turn led to a surge in the business of the smugglers, which continued to flourish throughout the third quarter of the eighteenth century.

Though illegal, the smugglers had the support of millions of people who could not otherwise afford to buy tea.

Much tea was smuggled in from continental Europe, shipped into Britain via the Channel Islands and the Isle of Man. Although smuggling was widespread, in the first decades of the eighteenth century many of the smugglers themselves operated on a very small scale. Many smugglers used their own small boats and the contraband tea was then sold on to personal contacts and local shopkeepers.

It was by now widely acknowledged that the only way to tackle the smuggling problem was to make tea cheaper - in effect, to reduce the duty paid on it. So the East India Company, who had powerful allies in the British Parliament, lobbied for the duty to be lowered. The power of the corporate world was thus added to popular demand for permanent change in the tea tax.

It was when William Pitt the Younger became Prime Minister in 1783 that the work of the anti-tea duty forces finally achieved their goal. As a former Chancellor of the Exchequer, Pitt was familiar with tax policy and the impact of high taxes on tax revenue. He understood that raising the tax rate often resulted in decreased tax revenue.

Pitt slashed the tax on tea, and made up for the revenue lost by hugely increasing the window tax. This was a property tax which was much easier to enforce. The Commutation Act of 1784 reduced the tax on tea from 119 per cent to 12.5 per cent. The smuggling of tea ceased to be profitable, and the smuggling trade vanished virtually overnight. More importantly tea was treated as a necessity rather than a luxury with long term implications for lower tea taxes.

The consumption of lower taxed tea rocketed, so much so that even with the reduced rate of tax, the amount of revenue collected from tea was soon restored and eventually exceeded pre-reduction revenue. Equally important, tea became the standard beverage for most of the entire English population.

Tea drinkers had the window tax to thank in part for the boost in popularity of their favorite beverage!

Marcus Stout is President of the Golden Moon Tea Company. For more information about tea, green tea and wu long tea go to http://www.goldenmoontea.com