Rebellion, Rascals, and Revenue

Tax Follies and Wisdom through the Ages

Michael Keen, Joel Slemrod

• Publisher: Princeton University Press
• Year: 2021
• ISBN:
  9780691199986
• Topic: Business
• Subtopic: Taxation
• Index: Business

An engaging and enlightening account of taxation told through lively, dramatic, and sometimes ludicrous stories drawn from around the world and across the ages Governments have always struggled to tax in ways that are effective and tolerably fair. Sometimes they fail grotesquely, as when, in 1898, the British ignited a rebellion in Sierra Leone by imposing a tax on huts—and, in repressing it, ended up burning the very huts they intended to tax. Sometimes they succeed astonishingly, as when, in eighteenth-century Britain, a cut in the tax on tea massively increased revenue. In this entertaining book, two leading authorities on taxation, Michael Keen and Joel Slemrod, provide a fascinating and informative tour through these and many other episodes in tax history, both preposterous and dramatic—from the plundering described by Herodotus and an Incan tax payable in lice to the (misremembered) Boston Tea Party and the scandals of the Panama Papers. Along the way, readers meet a colorful cast of tax rascals, and even a few tax heroes.While it is hard to fathom the inspiration behind such taxes as one on ships that tended to make them sink, Keen and Slemrod show that yesterday's tax systems have more in common with ours than we may think. Georgian England's window tax now seems quaint, but was an ingenious way of judging wealth unobtrusively. And Tsar Peter the Great's tax on beards aimed to induce the nobility to shave, much like today's carbon taxes aim to slow global warming. Rebellion, Rascals, and Revenue is a surprising and one-of-a-kind account of how history illuminates the perennial challenges and timeless principles of taxation—and how the past holds clues to solving the tax problems of today.

PART I

Plunder and Power

What at first was plunder assumed the softer name of revenue.

THOMAS PAINE¹

The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare—all this and more is written in its fiscal history, stripped of all phrases.

JOSEPH SCHUMPETER²

1

Any Public Matter

The revenue of the state is the state.

EDMUND BURKE¹

UNCOVERED BY Napoleon’s soldiers in 1799, the Rosetta Stone famously held the key to deciphering ancient Egypt’s hieroglyphics. The trick, of course, is that it bears the same text in three different scripts: knowing the others, scholars could begin to understand the hieroglyphics. But what could be so important as to be worth carving out in three scripts? The answer, you will have guessed, is taxation. The Rosetta Stone describes a tax break given to the temple priests of ancient Egypt, reinstating tax privileges they had enjoyed in prior times. (So it also teaches us an early lesson: tax exemptions are as old as taxes.) But taxes themselves are far older than the Rosetta Stone. Indeed, early recorded human history is largely the history of tax. Sumerian clay tablets from 2500 BCE include receipts for tax payments.²

These relics are visible reminders that powerful rulers have always exercised their powers of compulsion to divert resources to their own preferred use. (A “tax,” to get the definition out of the way, is “a compulsory, unrequited payment to general government.”)³ Indeed, as Edmund Burke saw, that is largely what defines them as rulers. Conflicts centered around this exercise of their coercive power to tax sometimes blaze across the pages of history, playing a profound role in shaping the institutions that we all live with. More mundanely, but with almost inconceivably deep and direct impact, the exercise of taxing powers has impacted the daily lives and struggles of ordinary people for millennia, whether it is peasants handing over some of their rice crop to the local lord’s retainer in Tokugawa Japan or shopkeepers in Lagos wondering how to complete their value-added tax (VAT) return. For the ordinary masses of humanity, taxation has long been the most direct way in which government impinges on their lives. Rulers, and systems of government, are largely characterized—and their survival and development largely determined—by how they choose to exercise their power to tax. As de Tocqueville wrote, “There is scarcely any public matter that does not arise from a tax or end in one.”⁴

Over the millennia, the fundamental challenges faced by rulers aiming to extract resources to fund the state’s activities, or their own fancies, have remained largely unaltered. What has changed, and is still changing, is how they address them. This book is about those problems of taxation and what past tax episodes—dramatic and humdrum, appalling and amusing, foolish and wise—teach us about how best to shape tax systems so as to avoid calamity and maybe even do some good.

We start with four stories that provide vivid illustrations of some of the key themes of this book. Not the least of these themes (though we suspect this is rarely the purpose policy makers had in mind) is that tales of taxation can actually be entertaining.

Bengal to Boston

Not many incidents in tax history could be called “well known.” The exceptions are a few conflicts in which tax issues were at the heart of wider disputes over sovereignty. These, however, are so well known as to have become close to founding myths. So it is with the barons forcing King John (ruled 1199–1216)⁵ to sign Magna Carta,⁶ and John Hampden refusing to pay King Charles I’s ship money. But national legends are rarely quite what they are cracked up to be. Sometimes they are misremembered: “Does Magna Carta mean nothing to you?” asked the British comedian Tony Hancock, “Did she die in vain?” And sometimes the legend ignores important parts of the truth.

So it is with our first story, which is that of the American Revolution, ushered in by the Patriots of Liberty dumping tea into Boston Harbor—prompted, we are told, by oppressive British taxation. This is probably history’s best-known tax revolt. But things were not quite how they have often come to be seen, one general lesson from this book being that, when it comes to taxation, myth is often more pervasive than reality. The Boston Tea Party was actually prompted not by some tax increase, but by a tax cut—with the back story being a complex interplay between increasingly desperate policy makers and powerful interest groups, all adept at spinning their own self-interest as something noble. And the most appalling British tax oppression in the story did not occur in the American colonies. It took place in India.

The story begins in 1763, when the British emerged from the Seven Years’ War with both their empire and their debt massively expanded. In America, the colonies had been freed from French pressure on their borders. In India, the privately owned but state-sponsored East India Company had established itself as the preeminent and rising colonial power. But all this, with gains in Canada and the Caribbean as well, had not come cheap. The British had financed the war largely by massive borrowing: The national debt had risen to an alarming 120 percent or so of gross domestic product (GDP),⁷ and two-thirds of all government spending was on interest payments. It was time for Britain to set its fiscal house in order—and for the colonies to do their bit.

By 1765, things did not seem to be going too badly for the British. True, the colonists in America had not taken kindly to the sugar duties of 1764, but perhaps stamp duties, levied on legal documents and other printed materials, would work better—after all, they had worked at home for many years with no great difficulty. Prime Minister George Grenville expected them to prove “equal, extensive, not burdensome, likely to yield a considerable revenue, and collected without a great number of officers.”⁸ Moreover, the proceeds were earmarked for the defense of the colonies. It was surely only fair that the colonists, who came up with only 6d (six pence, or half a shilling) a year per person in tax, compared to 25 shillings annually for the average Englishman, should chip in more.⁹ And the news from India was spectacular. In that year, the Mughal Emperor granted the East India Company the diwani—the right to collect tax revenues in Bengal, Bihar, and Orissa. This was a truly glittering prize. The Gentleman’s Magazine thought that “the prodigious value of these new acquisitions … may open to this nation such a mine of wealth as … in a few years to … pay off the national debt, to take off the land tax, and ease the poor of the burdensome taxes.”¹⁰ In 1767, it seemed that a start on this had been made when the East India Company agreed to pay the government £400,000 a year for the enjoyment of its possessions in India.

Soon, however, things were going very badly wrong. In America, fierce opposition to the stamp duty had led quickly to its repeal. The government of Pitt the Elder (doubtless distracted by then being “seriously disabled by mental illness”¹¹) responded in 1767 with the Townshend Duties on tea and other products. This was expected to produce only about one-tenth of the revenue of the diwani. But the point was in the preamble, declaring it to be “expedient that a revenue should be raised in Your Majesty’s Dominions in America.”¹² More resistance and boycotts followed, and in 1770 all the taxes other than the 3d per pound tax on tea were removed; that remained because, as the king continued to insist, “[there] must always be one tax to keep up the right [to tax].”¹³ The protests and boycotts continued, and in March of 1770, panicked British troops killed seven locals on the streets of Boston.

1767: The British gain tax base and power in Bengal.

But things were even worse in India. The diwani was already proving less spectacular than predicted, as famine came to Bengal in 1769. The Company’s revenues there fell from £1.8 million in 1766/1767 to £1.3 million in 1770/1771.¹⁴ This reduction was smaller than might have been expected, given the depth of the famine: 20 percent of the population of Bengal may have died. But what stopped it falling further was the Company’s ruthless collection. “Indians were tortured to disclose their treasure,” reported one official of the old regime, “cities, towns and villages ransacked; jaghires and provinces purloined.”¹⁵ But these extreme measures could not prevent a massive shortfall in revenue, compounding other difficulties facing the East India Company: uncontrolled over-borrowing by its excessively entrepreneurial employees in India, massively increased military spending—and an accumulation of huge stocks of tea that it could not sell, partly because of the boycott in America. The Company’s sales to the colonies fell by nearly 90 percent between 1768 and 1770.¹⁶ By early 1772, the Company was in serious trouble.¹⁷ It held about 18 million pounds of unsold tea in its London warehouses;¹⁸ had effectively defaulted on the custom duties due on importing tea into Britain; and, far from paying a tidy sum to the government, needed to borrow large amounts from it.¹⁹ But, being at the heart of English finances (and the wealth of many of the elite²⁰), the East India Company had become too big to fail. “The monopoly of the most lucrative trades, and the possession of imperial revenues,” Edmund Burke was later to tell Parliament, “had brought you to the verge of beggary and ruin.”²¹

There were, Lord North had declared in 1768, “two great national questions, the state of the East India Company and the affairs of America.”²² And they became increasingly intertwined, with the solution to each perhaps lying in the solution of the other. To secure the financing of the East India Company, the key was to increase its sales of tea, and the American market was the main hope. The potential for its expansion was clear, but so was the obstacle to realizing it: Something like three-quarters of the tea consumed in the colonies was being smuggled in.²³ To some, these commercial problems could give convenient cover for a politic removal of Townshend’s tax. But, by now prime minister, Lord North insisted that the principle had to be maintained: This was, as Edmund Burke cattily put it, not a real tax but a “preambulary” one.²⁴

This was when the hard-pressed bureaucrats and politicians in London came up with a cunning plan. In short, they reduced the price of tea in the colonies by eliminating a tax due on tea in England, while maintaining the preambulary principle by leaving the tax charged in the colonies unchanged. The East India Company, to be more precise, had until now been required to bring tea destined for the colonies into England first, at which point an import tariff of about 24 percent was charged, and to put the tea up for auction. From July 1773, however, this tax was entirely removed for tea exported to America. For the cheapest tea, this would allow the price charged in the colonies to be cut by about 6s per pound.²⁵ Smugglers would still have the advantage of not paying the Townshend Duty, but with the East India Company also now enabled to se...