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Breakingviews - Review: Tax’s weird past exposes present oddities

U.S. currency is seen in this picture illustration taken March 6, 2020.

LONDON (Reuters Breakingviews) - The authors of “Rebellion, Rascals, and Revenue: Tax Follies and Wisdom through the Ages” set themselves a daunting task: make tax history interesting. Michael Keen and Joel Slemrod mostly succeed, even managing to serve readers a surprisingly palatable dollop of economic theory in the process. The main effect of this enjoyable gallop through state levies of the past is to expose the continuing oddities of how governments raise revenue today.

One lesson is that there’s no such thing as a perfect tax. Finance ministers, monarchs, emperors and pharaohs have all faced the competing demands of efficiency, practicality and perceived fairness when trying to extract money from their subjects.

Perhaps that’s why they keep repeating the same mistakes. The English poll tax of 1381, introduced under the “boy king” Richard II, contributed to a mass peasant revolt during which rebels briefly controlled London. Over 600 years later, Margaret Thatcher’s decision to impose a similar flat-rate levy on every British adult helped end her decade-long tenure as prime minister.

Keen, a tax bod at the International Monetary Fund, and Slemrod, a University of Michigan economics professor, proffer neat yarns by the bucketload. So much so that parts of the book read like a jumbled collection of anecdotes. But at their best, the tales of historic folly and wisdom breathe life into dry principles of tax theory.

Take Britain’s 17th century levy on hearths, the floor area of a fireplace. Many citizens responded by blocking up their chimneys. King Charles II raised much less cash than he needed, while some of his subjects suffered in the cold. It’s a classic example of what economists call “excess burden” – the deadweight loss to society from distortive taxation.

The authors give a similarly lively treatment to the question of incidence, or who really ends up paying a tax. It’s rarely the same person who hands over the money. A 1990 U.S. levy on boats costing over $100,000, for example, was supposed to hit the super-rich without jacking up income-tax rates. But pricier yachts led to fewer sales, costing thousands of relatively poor boat builders in South Florida their jobs. Keen and Slemrod cite studies finding that workers indirectly shoulder between 16% and 40% of the corporate tax burden, either through lower wages or employment.

State levies are also seldom far from history’s key turning points. Sometimes they’re a cause: the Boston Tea Party, an early milestone in the American Revolution, was a response to the British crown’s cunning fiscal shenanigans designed to prop up the failing East India Company. The barons who collared King John into signing Magna Carta in 1215 were similarly exercised by arbitrary levies. At other times, seismic events in history have served as cover for fiscal revolutions: France and Russia introduced income tax shortly after the outbreak of the World War One. America massively expanded its income tax base, with the help of propaganda videos featuring Donald Duck, during the World War Two.

Now the coronavirus pandemic has prompted governments to consider new ways to raise revenue. One increasingly popular candidate is the wealth tax. The appeal of imposing a one-off, backward-looking levy is that it would be relatively free from the economically distortive effects that undermined King Charles II’s hearth tax. Windfall charges on companies which benefitted from the pandemic, as floated recently by the IMF, would have a similar logic. Meanwhile the idea of hiking taxes on capital gains, which is under consideration in both Britain and the United States, would remedy a modern anomaly. Keen and Slemrod note that many countries historically taxed such “unearned income” at a higher rate than wages. Soaring asset prices and sluggish labour markets only add weight to the case for reverting to past practice.

Other contemporary policies look like fodder for future historians of tax oddities. The so-called arm’s length principle of multinational corporate tax is one contender. It allows companies to juggle liability between their subsidiaries through internal payments, provided those dealings mimic the terms of two imaginary and unrelated trading partners. The principle has kept many tax lawyers in expensive suits but arguably made tax avoidance much easier. The enduring lesson from “Rebellion, Rascals, and Revenue” is that, when it comes to taxes, the present is no less peculiar than the past.

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