Appearing in the Australian, August 2021.
Rebellion, Rascals, and Revenue: Tax Follies and Wisdom through the Ages
By Michael Keen and Joel Slemrod
Princeton University Press, $45, 536 pages, ISBN 9780691199542
At first glance, a book on the history of taxation seems like something only an accountant could love. But as it turns out Rebellion, Rascals, and Revenue is an enjoyable romp, a fascinating mix of stories and insights.
Keen, deputy director of fiscal affairs at the IMF, and Slemrod, an economics professor, write with engaging authority, asserting that taxation has always been a defining aspect of government. In fact, the text of the Rosetta Stone, which allowed for the translation of Egyptian hieroglyphics, deals with a tax exemption for priests. So exemptions are as old as taxes, which is partly why the business of tax gets so complicated. Allowing deductions for dependents, for example, has often led to people claiming for non-existent children.
Some people will go to astonishing lengths to minimise their tax payments, even with tactics that cost more than the tax. In Georgian England, there was a tax on windows (used as a proxy for wealth) which led to many windows being bricked up. A tax on ships, which were assessed on width, led to vessels that were narrow and tall – and which, understandably, tended to capsize. Pretending to be dead was once a common ploy.
Governments have used this dislike of taxes to try various forms of social engineering. In Czarist Russia, Peter the Great levied a tax on beards, not for the revenue but to induce the nobility to shave. The same principle applies to carbon taxes: impose taxes to change behaviour. The results are mixed. Taxes on alcohol, cigarettes and gambling – ‘sin’ taxes – have done little to reduce consumption, in Australia or anywhere else.
A constant problem for the officials who create tax policy is working out who will eventually end up paying a given tax. Businesses largely see tax as a cost and will pass it on to consumers if possible. Taxes on consumption are an alternative but often lead to smuggling and black markets. High taxation has triggered civil unrest and even insurrections, although there are often underlying causes as well.
The invention of the income tax was something of a revolution. The first income taxes were connected to wars, which are expensive undertakings. In Australia, the first federal income tax was introduced to pay for World War One (there were also state income taxes at the time). During World War Two, Canberra legislated to give itself a monopoly in the field.
Another crucial step was withholding, so that tax was deducted from a person’s salary and paid on by the employer. It effectively became invisible. A stroke of genius, in its own way.
There is now a broad acceptance that income taxes should be progressive, with the affluent paying more. This is easier said than done, and there is a continuing contest between the people who write the rules and those who are generously paid to get around them. But in the past few years tax agencies have introduced data-matching systems and AI technology, so dodging taxes is harder than it used to be.
One persistent problem is the use of international tax havens, and there is no clear antidote. Keen and Slemrod suggest that a global agency for “setting and enforcing some aspects of tax rules in the way that the World Trade Organization has done for trade” might be needed. A good idea but the devil will be in the details, as it usually is.
All this is good fun but Keen and Slemrod make some serious points. Their study of history is meant to reveal how to balance efficiency and equity in a tax system, and they come up with a list of criteria. Undue complexity undermines public faith, so the law should be as clear as possible. Using taxes for anything other than raising revenue usually creates more problems than it solves. Seeing rich people manipulate the rules so they pay very little undercuts the willingness of everyone to pay, so consistent enforcement is important.
Keen and Slemrod note that “when it comes to designing and implementing taxes, our ancestors were addressing fundamentally the same problems that we struggle with today”. Certainly, no-one likes taxes. But they are, as the saying goes, an inevitable part of life.