Since its introduction into the Western world, tea has grown in popularity and is now the second most popular beverage in the world after water. Throughout its history tea demand has dramatically increased as a result of its good taste, health and medicinal properties and increasingly efficient channels of production and distribution.
Perhaps the most important benefit for the consummate tea drinker is the aura of good feeling and stress reduction.
Tea production 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 expanded, national governments began to view tea as a valuable source of revenue. Government regulation and taxation often had a detrimental effect on free commerce and customer satisfaction however.
The popularity growth of tea in a country such as England, a country whose tea culture is well established, provides for a viable 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 on a unique taste and realization of tea health benefits, more efficient channels of distribution opened. Although the imports were initially slow, a growing understanding of the lifestyle benefits of tea accelerated this growth 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 18th Century, tea was a hugely popular drink in Britain but, to the everyday consumer, it was also prohibitively expensive. Tea smuggling 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; 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 18th Century, the trade in smuggled tea flourished.
Smuggled tea was that which was brought into the country 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 sought to import duties and excise taxes as a way to raise the necessary funds; 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, however, 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. But smuggling and high taxes had a direct relationship and produced a negative effect on the English economy and population at large.
Although taxation is important for raising revenue, most economists acknowledged that high taxation encouraged smuggling and also that 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 18th 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 deemed outrageous and fueled the activities of the tea smugglers. Duty was later slashed by Henry Pelham in 1745, which meant that more tea was legally imported; 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.
However, in the 1750s, the need to finance another war led to another increase of the duty on tea. This, in turn, led to a surge in the business of the smugglers, which continued to thrive throughout the third quarter of the 18th Century.
Though illegal, the smugglers had the support of millions of people who could not otherwise afford to buy tea.
A great deal of 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 18th Century many of the smugglers themselves operated on a very small scale. Scores of smugglers used their own small boats in which the contraband tea was then sold to personal contacts and local shopkeepers. Smuggling became a cottage industry.
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. Therefore, 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, which was a property tax much easier to enforce. The Commutation Act of 1784 reduced the tax on tea from 119% to 12.5%. Tea smuggling 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 greatly intensified, 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 the greater majority of the English population.
Ultimately, tea drinkers had the window tax to thank for the popularity boost of their favorite beverage!