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 hutsâand, 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 dramaticâfrom 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 taxationâand how the past holds clues to solving the tax problems of today.
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 prepareâall 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 Napoleonâs soldiers in 1799, the Rosetta Stone famously held the key to deciphering ancient Egyptâs 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 âtax,â to get the definition out of the way, is âa compulsory, unrequited payment to general government.â)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 lordâs 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 characterizedâand their survival and development largely determinedâby how they choose to exercise their power to tax. As de Tocqueville wrote, âThere is scarcely any public matter that does not arise from a tax or end in one.â4
Over the millennia, the fundamental challenges faced by rulers aiming to extract resources to fund the stateâs 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 episodesâdramatic and humdrum, appalling and amusing, foolish and wiseâteach 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 âwell known.â 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 1199â1216)5 to sign Magna Carta,6 and John Hampden refusing to pay King Charles Iâs ship money. But national legends are rarely quite what they are cracked up to be. Sometimes they are misremembered: âDoes Magna Carta mean nothing to you?â asked the British comedian Tony Hancock, âDid she die in vain?â 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 Harborâprompted, we are told, by oppressive British taxation. This is probably historyâs 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 cutâwith 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 Yearsâ 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 orderâand 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 betterâafter all, they had worked at home for many years with no great difficulty. Prime Minister George Grenville expected them to prove âequal, extensive, not burdensome, likely to yield a considerable revenue, and collected without a great number of officers.â8 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 diwaniâthe right to collect tax revenues in Bengal, Bihar, and Orissa. This was a truly glittering prize. The Gentlemanâs Magazine thought that âthe 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.â10 In 1767, it seemed that a start on this had been made when the East India Company agreed to pay the government ÂŁ400,000 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 âseriously disabled by mental illnessâ11) 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 âexpedient that a revenue should be raised in Your Majestyâs Dominions in America.â12 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, â[there] must always be one tax to keep up the right [to tax].â13 The protests and boycotts continued, and in March of 1770, panicked British troops killed seven locals on the streets of Boston.
But things were even worse in India. The diwani was already proving less spectacular than predicted, as famine came to Bengal in 1769. The Companyâs revenues there fell from ÂŁ1.8 million in 1766/1767 to ÂŁ1.3 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 Companyâs ruthless collection. âIndians were tortured to disclose their treasure,â reported one official of the old regime, âcities, towns and villages ransacked; jaghires and provinces purloined.â15 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 spendingâand an accumulation of huge stocks of tea that it could not sell, partly because of the boycott in America. The Companyâs 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. âThe monopoly of the most lucrative trades, and the possession of imperial revenues,â Edmund Burke was later to tell Parliament, âhad brought you to the verge of beggary and ruin.â21
There were, Lord North had declared in 1768, âtwo great national questions, the state of the East India Company and the affairs of America.â22 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 Townshendâs 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 âpreambularyâ 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...