Saturday Snippet: The Taxman Cometh

 

Taxation has been one of the most unpopular aspects of government since time immemorial.  Whether levied in a civilized fashion, through payroll deductions and at point of sale, or extracted at the point of a spear or sword, governments need taxes to function - but those on whose behalf they're supposed to function resent having to pay taxes, particularly when they think they see others benefiting from them more than they do themselves.

In their new book "Rebellion, Rascals, and Revenue:  Tax Follies and Wisdom Through the Ages", Michael Keen and Joel Slemrod look at the history of taxation, examining examples of where it's worked and where it's failed (and, in both cases, why).

It's an informative and sometimes fascinating book, discussing many events of which I hadn't previously been fully informed.  I learned a lot.

Here's an excerpt from the opening chapter, discussing the Boston Tea Party in some detail and throwing light on the tax policies that sparked it.  It goes on to discuss taxation in an African colony that was more easily suppressed, but produced even poorer results.

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.

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.”) 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.”

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) to sign Magna Carta, 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 close to doubled, rising to an alarming 120 percent or so of gross domestic product (GDP), 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.” 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. 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.” 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”) 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.” 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].” 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 Company’s revenues there fell from £1.8 million in 1766/1767 to £1.3 million in 1770/1771. 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.” 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. By early 1772, the Company was in serious trouble. It held about 18 million pounds of unsold tea in its London warehouses; 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. 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.”

There were, Lord North had declared in 1768, “two great national questions, the state of the East India Company and the affairs of America.” 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. 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.

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. Smugglers would still have the advantage of not paying the Townshend Duty, but with the East India Company also now enabled to sell directly to the colonies, the smugglers were clearly in for some real competition. Surely the Americans would now be unable to resist buying taxed tea in large quantities. And in so doing, they would not only be sending the East India Company, and the powerful interests behind it, on the way to recovery but also implicitly accepting the British government’s right to tax them. Clever.

But this ruse was, it turned out, a bit too clever. The agents chosen by the East India Company to sell in the colonies the now extremely cheap tea were clearly going to be loyalists. And thus the British—having infuriated lawyers, publicans, newspaper publishers, writers, and other smart and influential people by the Stamp Act of 1765—were now directly attacking another powerful interest group: the savvy, powerful and respectably disreputable businessmen who had been making good money from smuggling tea, and who were increasingly aligning themselves with the patriot cause.

Men, that is, like John Hancock, “a respectable large-scale smuggler” who was the richest merchant in Boston and now closely associated with the patriot agitator Sam Adams (as well as subsequently and proverbially supplying the first—and largest and most flamboyant—signature of the Declaration of Independence). Not only could the American merchants no longer hope to sell smuggled tea, they could not even hope to sell the legitimate British tea. The happy thought in London was that these measures would undermine not only the commercial interests but also the influence of these powerful men. But they misjudged. Hancock chaired, and Adams inflamed, the meeting at the Old South Meeting House on December 16, 1773, which ended with the Sons of Liberty throwing 35,000 pounds of cut-price tea into Boston Harbor. Tea shipments were refused in Philadelphia and Charleston, and tea parties erupted again in Boston and New York. From there, under the banner of “no taxation without representation,” riot proceeded to revolution.

There is irony in this. The modern American Tea Party, vociferously opposed to all but minimal taxation, takes its name from what was in effect a violent protest against a tax cut. There are also lessons. It might be too much to conclude that “as it turned out, [the Sons of Liberty] were not just against taxation without representation—they were against taxation, period.” But the Boston Tea Party was evidently about more than just tax rates.

The Boston Tea Party, and the Revolution, were ultimately about sovereignty. The overt exercise of authority for its own sake in the form of the tax on tea simply evoked and crystallized resistance. But these events were also about the power of interest groups, which, like the smugglers in the American colonies, can be ingenious in amassing support even from groups whose own interests—like those of the average Bostonian tea drinker—would seem to point in quite the opposite direction. And, as with other calamitous tax episodes, it was largely about the way in which taxes were implemented. Or, perhaps more to the point in this case, about their being implemented at all. Smuggling was a normal part of life for the colonists (as it was for many of their English brethren), and Britain’s consistent attempts to stifle it were not taken well: When the smuggler-hunting Royal Navy vessel Gaspee ran aground in 1772, the locals simply set it on fire. Discontent is also more likely when there is little support for the way in which tax receipts are spent. So it did not help that the proceeds of the Townshend Duties were earmarked for the extremely unpopular purpose of financing British political appointees in the colonies and establishing commissioners of customs, who acted without juries.

Freed of the British, the new American government, soon faced its own tax revolt. In 1791, Treasury Secretary Alexander Hamilton imposed a tax on whiskey (considered a somewhat sinful luxury) after finding that tariffs did not meet the revenue needs of the fledging federation. Not entirely by chance, the tax tended to favor larger distillers, a powerful lobby group. But it enraged another interest: whiskey-distilling farmers in Western Appalachia. These small rural distillers refused to pay the tax; tarred and feathered tax collectors; and, finally, resorted to armed rebellion and bloodshed. The new American government reacted in much the same way as had the British—with force. But with a different outcome. In 1794, troops led by President George Washington easily quelled the rebellion.

The British did learn some lessons from the American Revolution. In 1931, Mahatma Gandhi challenged the legitimacy of British rule in India by scooping a teaspoon of salty mud, boiling it in seawater, and thereby producing illegal untaxed salt. His actions clearly paralleled those of the Sons of Liberty at the Boston Tea Party. This time, however, there was no punishment from the British comparable to the “Intolerable Acts” of 1774 that were leveled at post–Tea Party Boston. Even Gandhi noted that the British showed great restraint. In the next story, however, they showed almost none.

Never Such Disgrace

This is a story of taxation at its most appallingly oppressive: targeted at a vulnerable and oppressed group, offensive not just in its amount but in how it was collected—and also reflecting the use of taxation as a means of social engineering.

In 1896, the British established a protectorate over Sierra Leone, appointing district commissioners to oversee indirect rule by the local chiefs. To pay for this, and for a planned railway, Governor Frederick Cardew announced the introduction, on January 1, 1898, of a tax on all houses—a hut tax. Such taxes were widely used in colonial Africa, part of the motivation being to induce the native population to participate in the cash economy in order to be able to remit the tax: an example, and we will see plenty of others, of a tax deliberately intended not only to raise revenue but also to change behavior. The chiefs, while proclaiming their loyalty to Queen Victoria, politely protested. Cardew responded by reducing the tax and introducing some exemptions (including for Christian missionaries). But then he proceeded with the tax anyway.

Collection soon ran into trouble. Chiefs were imprisoned and put to work breaking stones for refusing their role in collection, to their great humiliation. “Since the time of our ancestors,” said one, “there has never been such disgrace to one of our Chiefs as this prison dress which I wear.” Fighting broke out first in the north, as the British moved to arrest a chief and regional leader, Bai Bureh, who was viewed, perhaps wrongly, as instigating resistance. But he was, in any case, a respected and hardened warrior, who had once fought for the British and knew their ways only too well. (When Cardew offered £100 for Bai Bureh’s head, Bai offered £500 for Cardew’s.) Soon it became a guerilla war, with British columns ambushed on the jungle paths and fighting multiple engagements each day. The British responded with the systematic torching of towns and villages—thereby destroying the tax base itself. Rebellion broke out in the south, too, and there the conflict was even more brutal, marked by the massacres of several hundred Europeans and Africans in European dress.

By November, however, the rebellion was flagging. Bai Bureh was betrayed, captured, and exiled to the Gold Coast (now Ghana). Ninety-six of his comrades were hanged. With that, what was called by the Colonial Secretary Joseph Chamberlain (destined to reappear later in this book) “a general rising against white rule,” fizzled out. The suffering had been immense. Even Cardew came to be haunted by “[t]he thought of … the gallant officers and men who have fallen, of the devoted missionaries who have been sacrificed, of the Sierra Leoneans who have been massacred and”—an afterthought perhaps being better than nothing—“of the many natives who have been killed.”

This conflagration came to be known as the Hut Tax War. But there was more to it than the hut tax. Though the resistance did not aspire to remove the British, the fight was nonetheless largely about an affront to local customs and honor. Taxing huts was seen as directly undermining property rights: “Paying for a thing in our country,” one chief explained, “means you had no original right to it.” And it came along with the usurpation by the district commissioners of judicial and other powers that had rested with the chiefs (including, perhaps not incidentally, the revenue they received from exacting fines). “The king of a country however small, if he cannot settle small matters, is no longer king.” Not least, the aggressive implementation of the tax by the Frontier Police—sometimes ex-slaves taking revenge on their former masters—created antagonism. As so often, this conflict, while directly associated with taxation, reflected other, deeper sources of tension. And ham-fisted implementation can be as provocative as the tax itself.

A royal commissioner, sent to find out what had gone wrong, recognized the powerful mix of causes behind the war. Resistance arose, he said, from the “sense of personal wrong and injustice from the illegal and degrading severities made use of in enforcing the Tax,” which was in itself “obnoxious to the customs and feeling of the people.” He recommended that the hut tax be abolished, the police force brought under control, and the authority of the chiefs increased. The hut tax, however, was not removed. It was simply reduced to 3s. Bai Bureh, meanwhile, became an enduring national hero in Sierra Leone: a hospital and football club are named in his honor, and in 2013 he was pictured on the 1,000-leone banknote.

This revolt was far from being the only one prompted by colonial hut taxes. In German East Africa, 2,000 people are said to have been executed for nonpayment. Possibly the most bizarre colonial tax conflict, however, centered around dogs—who will make a surprisingly frequent appearance in our stories of taxation.

This was the armed resistance by the Maori of Hokianga County in New Zealand to a tax on every dog in the district (as well as a “wheel tax” based on a vehicle’s tire width). This tax was also seen as infringing the autonomy of the indigenous people. Troops were mustered. But things ended, happily, without (human) bloodshed. Not, however, before the leader of the resistance, Hone Toia, made one of the more memorable utterances in tax history: “If dogs were to be taxed” he prophesied, “men would be next.”

Another dog-tax episode, however, ended far from peacefully. In 1922, the Bondelswarts, a nomadic group in German Southwest Africa (now Namibia), rose up against an increase in the dog tax that had been imposed in 1917. This tax was no small matter, as dogs were central to their pastoral way of life, used for hunting and protecting their livestock from vermin. The South African government, exercising its postwar mandate in the area, used aircraft to bomb the group into submission—one of the first instances of the deliberate bombing of civilians—and ultimately, more than 100 Bondelswarts were killed. Eyebrows were raised at the League of Nations, but nothing was actually done.

The Hut Tax and Dog Tax Wars of Sierra Leone and New Zealand show how tax revolts, and their lasting consequences, are sometimes as much about the way in which the government treats taxpayers, and the claim to sovereignty underlying their exercise of coercion, as they are about how much the taxes aim to extract. In less bloody times, the concern has often been with mere intrusiveness. This is a recurrent theme in the story of taxation. For instance, later in this chapter we will get a taste of the resentment felt under the later Stuarts of tax officials’ rights to enter people’s homes to count their fireplaces. This is echoed by today’s concerns that, in the digital age, governments may come to know more about us, for tax and other purposes, than we would like.

The book goes into much more detail about other incidents, and is very educational to those who've never thought much about the relationship between revenues and freedom.  Recommended reading.

Peter