While reading Keen and Slemrod’s chronicle of the Hone Toia – the leader of Māori of Hokianga – you can almost hear the crowds howling in resistance to a colonial tax on dogs, as their leader, Hones Toai, presciently predicted that “[i]f dogs were to be taxed, men would be next”. But it is not only the skilful telling of this and many other tax stories by two of the most experienced public finance economists of their time that sustains the interest of this book for more than 500 pages; it takes more than the entertainment of countless historical tax tales to produce a book on tax that actually pleases the reader.1 What makes this both so intriguing and worthwhile is how it draws out common threads of tax principles and practice that have underlain tax systems for thousands of years. Through the links they establish, we learn why tax polices – how and how much to tax – were chosen, and why they failed or prevailed. Borrowing Schumpeter’s words: “We learn to understand why we are as far as we actually are and also why we are not further”. (Schumpeter 1954: 4).
Keen and Slemrod start by reminding the reader that the power of rulers, ancient to modern, is associated with their power to tax. This sets the scene for the rest of the book, which guides the reader throughout the evolution of tax principles that eventually shape today’s landscape. The notion of ‘tax as plunder,’ which they find in Herodotus, illustrates one of the earliest tax lessons – even understood by powerful plunderers: plunderers need to show some restraint, so as not to preserve some base for future plundering, Rules also learned early to prefer taxes that have the least effect on their supporters, or potential opponents: there is not a huge difference between the Athenians’ poll tax on foreigners and today’s intense debate on taxing profits of foreign multinationals, as the authors recognise. Ultimately though, taxing outsiders simply did not raise sufficient revenue.
Before income taxation, taxes used to be conveniently imposed at the borders on crossing goods, on land, and, on various items consumed largely by the rich, such as the ‘hat tax’ in the 19th century in England and a tax in the early 20th century in Curaçao on crossing a bridge while wearing shoes (which the rich apparently avoided by removing their shoes when crossing). But these taxes were imperfectly associated with individual circumstances and their income.
So there emerged the income tax, whose roots in France, the UK and the US Keen and Slemrod revisit. It becomes clear that each has its unique background and the details of these three experiences teach us important lessons: it was ensuring the confidentiality of a taxpayer’s total income in the 1803 income tax, for instance, that made Prime Minister Henry Addington’s reformed income tax so much more successful in England than Pitt the Younger’s better-know first attempt. It is a pity though that the book leaves out the spread of Addington’s fame to other states, including the Prussian state – with the failure of 1812 reform and the following class tax of 1820. In the words of Grossfeld and Bryce (1983): “The Germans eventually adopted and developed the income tax so thoroughly that they regarded it as their own”.
The book continues to surprise the reader with what we learn from tax history. Recapitulating the debate around the Corn Law (tariffs on grains) on food prices in England before repealing it in 1846, leads us to the origin of the theory of ‘tax incidence’ (i.e. who ultimately pays a tax). Between the historical lines, the book frequently conveys the message that the tax incidence is unrelated to who is legally obliged to remit it. The name of the tax is another angle that prompts thinking about the burden of the tax. For instance, calling a tax on financial transactions a ‘Robin Hood tax’ – as creatively done by civil society organisations following the global financial crisis – does not necessarily mean that the tax falls on rich bankers and the wealthiest. That lesson was already clear from the experience of having an employers’ tax on female servants in 18th century England, the burden of which apparently fell not on the employers but, in the form of reduced wages, on the servants themselves. Nonetheless, the name of a tax – irrespective of the legal definition of what constitutes a tax or a fee – can matter for its political fortune. For example, the authors contrast calling the US estate tax a ‘death tax’ in the late 1990s before it was reduced in 2002 with an alternative such as ‘life subsidy’, which triggers a thought experiment: What if the death tax label had not been not conjured?
Reflecting on the balance between fairness and efficiency of taxation naturally leads to a gentle account of Frank Ramsey’s contribution to tax theory, followed by accounts of key issues in tax design, both old and modern, covering taxes excess profits, the mobility of the tax base across borders, mailbox (shell) companies, and how countries use taxes to compete. Reading about the century-old debate on international tax rules and predictions dating back at least to Adam Smith makes us fresh-eyed readers of today’s headlines about the Panama Papers and LuxLeaks.
Who would have thought that a tax on beards in 1698 in Russia under Peter the Great was a precursor of the now much-needed tax on carbon dioxide to lower CO2 emission? Keen and Slemrod find plenty of precedents for using taxes to influence behaviour, beyond the objective of raising revenues. To learn more about creativity in relation to taxation (whether in the tax itself or how to avoid it), Chapter 9 is a must-read, and it is a fascinating one! The entertainment of how to build a tax-efficient (but maybe not seaworthy) ship or how to avoid a tax on fireplaces provides a simple explanation of what to non-economist can seem a baffling concept: ‘excess burden’ – a fundamental concept that captures a tax distortion (i.e. the ‘new cost’ generated by a tax).
Technology has been used to collect taxes dating back to the State of Chu in 323 BCE and Faraaon Egypt. One of the key lessons that emerges in the book is that technology per se does not fundamentally change tax principles, but rather enhances tax enforcement. And it enables adopting previously non-administrable tax policies. Nowadays, millions of VAT e-invoices can be inspected using machine learning techniques, and drones can be used to identify properties with swimming pools for tax purposes. Yet, technology is no panacea. Upgrading tax administration toolkits and processing massive information for strengthening implementation can be challenging by itself. Simultaneously, tax evaders are becoming more sophisticated. The ending chapter looks forward to the future of tax systems, not with a speculation but based on a profound summary of lessons from thousands of years of taxation.
There is no way to do justice to this book in a few paragraphs, and the brief overview presented here does not attempt to – it is certainly incomplete. Yet, the book is evidence that artificial intelligence and smart apps that summarise a book in 15 minutes have limits too, because reading this book is itself the reward and joy through a rich learning journey rather than looking for an end punchline or a few minutes synopsis.
1 As the book quotes: “To tax and to please, no more than to love and to be wise, is not given to men." — Edmund Burke, 18th Century Irish political philosopher and British statesman.