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Thursday, May 21, 2015

For Good and Evil: the Impact of Taxes

“The utopian, immanent, and continually frustrated goal of the modern state is to reduce the chaotic, disorderly, constantly changing social reality beneath it to something more closely resembling the administrative grid of its observations.”

James C. Scott

If you've been reading the Flophouse then you know that taxes are a frequent topic here. Frankly, I am less interested in the mechanics of taxation than I am in what I have heard referred to as the sociology of taxation.   Underneath all tax issues, I am learning, are a host of social and psychological factors.    

The Australian Tax Office (ATO) has done some fascinating research about this and Ken Devos in his book Factors Influencing Individual Taxpayer Compliance Behaviour does a fine job of summarizing their work.  In particular, the discussion around "tax moral" - how taxpayers view taxes in light of their beliefs and societal norms - was illuminating.  Any lawmaker or citizen who says that the feelings of the citizenry around taxes don't matter because "the law is the law" is delusional.  The lower the tax moral, the lower the rate of voluntary compliance, which means less tax revenue.  Not simply because people don't pay, but because more and more tax money must be diverted to administration and enforcement.

Perceptions, ethics, and social systems matter.   The battle for hearts and minds and wallets is conducted in the political arena where different interests squabble over the meaning of "fair" or "equitable".  For every tax or tax system there are attempts at persuasion - mostly transparent morality tales that paint the uncooperative citizens or the greedy grasping government in the blackest possible terms.  

When I picked up Charles Adams' book For Good and Evil:  the Impact of Taxes on the Course of Civilization, that is exactly what I was expecting - a polemic on good and evil taxes and tax systems - all the more since I had a vague impression that Mr. Adams was something of a libertarian.  Whatever his ideology, he did a very good job of putting those opinions firmly in the background.  A careful reading of the text will expose them, but they are not the focus of his book.

Instead Adams tells a series of stories about taxes, tax systems and strategies going back to antiquity.  It is not a definitive history of taxation by any means, but it is not a bad place to begin thinking about the historical context and to see how the social, psychological and even religious context around taxation has always mattered a great deal.

How interesting to read that taxpayers in the Middle Ages had "God on their side."  Unjust or excessive taxation on the part of kings was a sin and incurred the wrath of God.  Conversely, a king who taxed justly and modestly would enjoy peace, prosperity and be "blessed with many sons."

New (or unheard of) taxes were particularly odious.  This principle was called exactio inaudita (which we can summarize as "no new taxes")  and greatly limited the raising of revenue by royalty.  Europe's rulers were daunted by this until they found a population that, in their eyes, did not have God on their side - the Jewish people - and laid that burden upon them.

Taxes played a role in the spread of Islam. The jaliya was a tax on Jews, Christian and other non-believers.  Since Moslems did not pay it, the fastest and easiest way to relieve one's tax burden was to convert.

Adams point out that this was very close to the Greek practice of taxing foreigners, not citizens. In ancient Athens foreigners paid a monthly tax called the metoikion.  The opposite of modern citizenship-based taxation, and completely contrary to the notion that taxes are a responsibility of citizens, only non-citizens (metics) were consistently and directly taxed.  Citizens themselves were only directly taxed in extraordinary emergency circumstances like war - the eisphora.  Not only were these taxes canceled once the reason for them was over, "if there was any booty from the war it was used to repay or refund the eisphora."

Those who rail against international tax competition in our day should know that, far from being a new phenomenon brought on by 20th century globalization, it has a long and venerable history.

Around the 4th century B.C., says, Adams,  the island of Rhodes became a thriving center of banking and commerce. Internally, it was politically stable.  Externally, it successfully avoided becoming embroiled in other countries' conflicts.  Rhodes was also a port of call for ships coming from the east to deliver cargo to Rome and Greece.  The port charged a 2% harbor tax "based on the value of the cargo, even if the cargo remained on board."  When Rhodes found itself in conflict with Rome, the Romans attacked them indirectly by creating another port in 166 B.C. on the isle of Delos which, in addition to possessing good facilities and services, was tax free.  The result?
"The trade of the east immediately bypassed Rhodes and went to Delos.  In one year trade declined by 85 percent.  Annual tax receipts, which normally had run about 1 million silver drachmas, declined to 150,000."
Which just goes to show that "harmful tax competition" has at least  a 2,000 year-old pedigree.

"Tax habits could be to civilization what sex habits are to personality.  They are basic clues to the way a society behaves."  Ideas about what is "fair" and "equitable" change - surely the Christians of the middle ages in Europe found taxing the Jews to be very fair indeed, and the Athenians had no problem exempting their citizen-selves from any direct tax obligations.  What do today's most pressing tax issues tell us about the societies in which we live?

For the most part, Adams tells his stories straight without manipulative moralizing.  He believes that taxes can be a force for good, are necessary for civilization,  and have "built great nations and brought much good to their inhabitants."

But he also argues that there are taxes and tax systems so bad that they actually undermine the civilizations they are meant to support.  Tax systems that are overly complex and ultimately unenforceable generate contempt, not revenue.   Governments that approach their citizens or subjects with arrogance, and rely mostly on compulsion to fill their coffers, fare badly as avoidance and evasion become rampant.  And anyone who believes that harsher laws and draconian punishments are the only proper response to widespread non-compliance should take a few moments to look at the ATO research.

And while we are speaking of punishment -  if it is good, right and necessary for taxpayers to be under threat, then surely a case can be made that governments and their agents need it too in order to be properly motivated and compliant with their responsibilities to those they govern.

In ancient Egypt under the pharoah Haremhab "a tax-collecting scribe found guilty of overcharging a taxpayer was sentenced to have his nose cut off, followed by banishment to a desolate part of Arabia."

With that kind of punishment, and if we could convince the US Congress that taxing simply and coherently would "bless them with many sons", the bureaucrats and lawmakers just might find the motivation to undertake that politically dangerous but desperately-needed tax reform.


No Fatca said...

Tax to punish the "haves" is not right. Tax is already high enough for everyone.

Mick J said...

Thanks Victoria for posting all these matter about taxation.
I used to support the left in the past until I started my own business facing and all these Health care, IRS spying and minimum wages in real life.
America can still be the greatest country in the world if she gives back its citizen back freedom and privacy. Happy Memorial Day to all.

Tim said...


This has been an issue I have been thinking about for a long time. However, I have been drifting away from focusing solely on taxes and instead thinking about people's feelings towards law enforcement and government in general. One of the weirder factoids I have found is that the French Gendermarie and the Massachusetts State Police are the two "oldest" National/State Police forces in the world. The MSP in particular predates the FBI, RCMP, Cabarneri and a whole bunch of other police forces. You wouldn't think of fairly Anglo-Saxon Massachusetts of the 1800's have much in common with France but it did. In fact the MSP has a long paramilitary tradition just like the Gendermarie using terms like Troops and Barracks. Up until the 60s Troopers lived at the Barracks while on duty.

On the otherhand almost all other US states bar the rest of New England and Alaska have rejected an MSP/Gendermarie militarized/centralized police force instead preferring more civilianized sheriffs and constables. Massachusetts for example has more state police that Washington does(In WA they are not State "Police" but the kinder gentler State "Patrol").

**In a strict sense I would maybe even argue the MSP are more powerful than the Gendermarne. The Gendermarne don't have a lot of presence in urban France while the MSP have a big presence in
Boston and at Airports/Seaports.

***I forgot Norman Rockwell's famous painting.

Coffee Tax said...


I read recently a few countries are proposing getting rid of cash so they can monitor and collect taxes more efficently. Money under mattress will be worthless.
Fatca is a step towards that.
A good news is Malaysia has delayed its reporting to FATCA. May be more countries can start to do the same.

Victoria FERAUGE said...

@No Fatca: Well, it's relative. There are places where people don't mind high taxes because the benefits are clear. They SEE where their tax dollars are going and they agree more or less on how the money is being spent. I never minded high French taxes because I got my money's worth.

@Mick J, Small business owners really take it on the chin. My stepfather has a consulting business in SEattle and I used to do his books. It was pretty crazy 20 years ago, I can't imagine what it must be like now.

@Tim, Very interesting. I like the idea of expanding one's vision and thinking about things in context.

@Coffee Tax, I used to work for Brinks' and saw up close just how expensive Cash Management is. And, as you pointed out, governments are not all that keen on cash either - makes it much easier to hide income. I went to a doctor once in France years ago and she had two prices - a low one for cash and another for credit cards and checks. :-)