The new book Rebellion, Rascals, and Revenue uses strange and fascinating stories of taxation to entertain and, along the way, convey principles of taxation that are too often left to dry textbooks. Its authors, economists Michael Keen and Joel Slemrod, focus on the issues of fairness, creeping complexity, the burden of administration, and unintended consequences of well-intentioned taxes from ancient times to today. Dozens of financial anecdotes are included, ranging from why the British introduced the first income tax in 1799 to Peter the Great’s tax on beards. There’s even speculation about how taxes might be levied in the future.
Keen is the deputy director of the Fiscal Affairs Department at the International Monetary Fund. Slemrod is a professor of economics at the University of Michigan. Both have been awarded the Daniel M. Holland Medal by the National Tax Association for their lifetime contributions to the study of public finance, and both are past presidents of the International Institute of Public Finance. The JofA recently caught up with Keen and Slemrod to find out more about the book and how it might interest CPAs.
What’s your book’s central message?
Michael Keen: Kings, emperors, princes, and today’s governments have always struggled with fundamentally similar problems — how to raise taxes in ways that are at least fair enough for them not to end up on the wrong end of a revolt, and in ways that don’t do too much damage to the tax base. Although the technology of taxation has changed markedly, in many ways the objectives and the deep constraints that governments have faced have not. Our ancestors were as smart as we are in thinking of ways to raise — and avoid — taxes. They just did so in very different circumstances.
One of history’s most famous tax revolts was the Boston Tea Party. You say it happened because the British cut the tax on tea.
Keen: The tax on tea when it arrived in the Colonies was there not so much to raise revenue but as a matter of principle to show that if the British government wanted to levy taxes in the Colonies, it could. Needing to sell tea more cheaply and rescue the too-big-to-fail East India Company, the British cleverly removed a tax on the tea paid in London and kept the tax levied on the Colonies. But this proved too clever: Cutting the price of taxed tea threatened to put powerful smugglers, including John Hancock, out of business. Like other governments undertaking tax reform, Britain underestimated the power of the interest groups it was taking on — and lost.
What are some of the most revolutionary changes in tax history?
Joel Slemrod: The biggest tax success story of recent times is the VAT, the value-added tax. It wasn’t levied anywhere until 1960. Now it raises about a third of all revenue worldwide. Over 160 countries have it, with the U.S. being the prominent exception.
Keen: The income tax was a landmark in tax history — the culmination, so far, of centuries of attempts to figure out who were the wealthy and where their money was. The obvious indicator in agricultural societies was land, which the Romans and Egyptians went to huge lengths to value and tax. Other and subtler indicators came to be used as societies grew more complex. Britain, where I’m from, added a tax on fireplaces because richer people had better-heated houses. But people hated this because an inspector had to enter your house to count fireplaces. So the government decided to tax windows, which also indicate well-being but can be counted from the street. To us, taxing windows may seem quaint, but — even though it led to many windows being bricked up — it was actually a smart response to the constraints that the government faced. And now we use income as the standard indicator of material well-being. But we all know income can be quite different from ability to pay tax — so maybe one day we will find a better measure of well-being.
What are other notable ways people have avoided taxes?
Slemrod: In other places, such as Poland and Vietnam, property tax liability was measured by street frontage. The result was tall, skinny houses that maximized the ratio of living space to tax liability. In 19th-century Britain, ships were taxed on the basis of the deck’s square footage, which led to ships with deep hulls in order to maximize the ratio of cargo space to deck space. This reshaping of ships was good for tax planning but not, sadly, for seaworthiness.
What do we learn from such episodes?
Slemrod: Wise tax policymakers should anticipate that individuals and businesses will respond to tax changes to minimize their tax burden, often with socially undesirable consequences. They should think ahead about how to minimize such unintended consequences and ponder what enforcement measures should accompany reform to ensure it can be implemented equitably and efficiently.
When people in the future look back, what will they say are the follies of today’s tax systems?
Keen: The principle of arm’s-length pricing. The idea of taxing multinationals by trying to figure out what one subsidiary company in a multinational hypothetically would have charged an unrelated company in some other hypothetical situation that quite possibly logically never could have arisen will surely seem decidedly quaint or even foolish.
Slemrod: The idea of a tax return. In 20 years, each taxpayer will have an account in the cloud like a frequent flier account. You’ll see what activities have increased your tax liability and where payments have been extracted. We might even see the demise of the tax year — in today’s world, 365 days is an inherently arbitrary period of time over which to assess income.
How else might taxation change?
Keen: Tax administrators will probably get more involved in delivering benefits. We will see much more the integration of the tax and spending (income support) sides. The capacity to affect people’s well-being over a long period of time while responding to their short-term needs is clearly where we’re headed.
Slemrod: Many countries now have prepopulated tax returns. After the tax year is over, your tax return is emailed to you filled out because those governments have most of the information needed to calculate your tax liability. This will surely become commonplace, though a lot of Americans may not be happy about this for privacy reasons.
What’s new in tax evasion and enforcement?
Slemrod: America’s FATCA law — the Foreign Account Tax Compliance Act. To address suspected tax evasion, it effectively requires foreign financial institutions to report to the IRS information on Americans’ foreign accounts by subjecting foreign institutions that fail to comply with a stiff penalty.
Another recent example is that the threshold at which the Form 1099-K [Payment Card and
Third Party Network Transactions] applies has drastically changed. Starting in 2022, the new rule applies to any business with aggregate payments of $600 and vastly expands the IRS’s information reporting into small businesses.
Some taxes are not so much designed to raise revenue as they are to change behavior. What’s your favorite example of that?
Slemrod: When Peter the Great wanted to westernize Russia in the late 17th century, he was infuriated that many of his nobility had long beards, which was not the French and British style. So he taxed beards: Sporting a beard in public required buying and wearing a token that said, “I’ve paid my beard tax.” Taxing beards rather than simply banning them made sense. Those nobles who really loved their facial hair could remit the tax and keep it, while those that didn’t love it that much would shave.
Keen: That is pretty much the same logic that leads most economists to prefer carbon taxation of some form to regulation. It ensures that CO2 emissions will be cut, in order to escape the tax, where cutting is easiest, not where it is hardest. The tax gives the free market a helping hand.
Tax fairness has been a constant issue either via progressive taxes or poll taxes. There seems to be no ideal solution.
Slemrod: Yes, in part because social attitudes toward fairness vary over time and across countries. But trying to get right how the tax burden should be shared is an enduring challenge.
Keen: One thing that has become clear is that people dislike poll taxes: taxes, that is, which are the same amount for everyone. But policymakers don’t always learn their lesson. England’s 14th-century poll tax led to a hugely violent peasants’ revolt, whose suppression required courage from the boy King Richard II and a good deal of violence. Six hundred years later Margaret Thatcher again introduced a poll tax, prompting riots in Trafalgar Square and massive noncompliance. Not long after, she was forced to resign. Tax follies, it seems, do sometimes repeat themselves.
Rebellion, Rascals, and Revenue: Tax Follies and Wisdom Through the Ages, by Michael Keen and Joel Slemrod, Princeton University Press, 2021. $29.95