Cambridge University Economic History Professor Martin Daunton has pulled off the astounding feat of writing not just one, but two books about the history of taxation that are not only thoroughly researched and thoughtful but are written in such a lively style and illustrated with so many wonderful quotations, cartoons and graphs as to actually be a pleasure to read.
In Trusting Leviathan: The politics of taxation in Britain, 1799-1914 (Cambridge University Press 2001), Daunton examined how the British state dealt with the contraction in public revenues after the Napoleonic Wars and the process of what Daunton termed “normalisation” of taxation in Britain. With this volume, able to be read on its own as well as read as a continuation of the earlier book, Daunton extends the story through the start of the Thatcher years. CFR readers will appreciate the history for the light it sheds on conditions during the offshore world and Cayman’s formative years as well as its elucidation of the roots of current British tax policy in past policy choices. Britain’s struggle over the proper mix of direct and indirect taxes during this period also raises points worth considering as the UK struggles with its own revenue gap as it simultaneously plays a role in Cayman’s conversation over the appropriate structure of taxation.
The reader of Just taxes will come away having learned three interesting and important things. First, there were some quite crazy ideas about taxation floating around Britain during the period covered by this book. For example, the Labour Party sought to stimulate economic productivity in the 1920s “by extracting a ‘vast amount of unappropriated revenue’ from parasites who extorted ‘an annual tribute from contemporary labour’” by increasing death duties and wealth taxation (p 144, quoting Parliamentary Debates from 1925). Stimulating productivity by confiscatory taxation of its rewards suggests a fundamental lack of understanding of human motivation. Such ideas remained popular into the 1960s, when “Labour wished to cut off the flow of income to private owners of assets as a means of preventing the accumulation of large fortunes” by taxing dividend payments at punitive levels. (p 319) Given such muddled thinking, it is not surprising that British tax policy managed such feats as marginal rates over 100 per cent at times. And with such policies entrenched in tax law, it is no wonder that potential British taxpayers sought shelter in the Channel Islands, Barbados or Cayman, suggesting that one powerful force behind the rise of the modern offshore world was British tax policy.
Second, until Mrs. Thatcher, the resistance to politicians’ tax policy ideas came mainly from within Treasury, where the bureaucracy resisted all change almost reflexively and often successfully. Daunton repeatedly describes how Treasury frustrated both Labour and Conservative tax policies by dragging its heels and complaining about administrative difficulties in a fashion of which Yes, Minister’s Sir Humphrey Applegate would have heartily approved. Only Churchill, Chancellor from 1924 to 1929, and Hugh Dalton, Labour’s Chancellor after World War II, “had the time, force of character and politically astute vision to shape the fiscal constitution.” Unfortunately, “such men were exceptional”. (p 19)
In general, Daunton concludes, Treasury managed to ensure that there was little discussion of tax fundamentals. “Officials were highly competent in explaining what could not be done, defending the status quo, and frustrating change. Their approach found faults with any new scheme, without considering in depth the shortcomings of the present system.” (p 359)
Importantly, Daunton makes clear that the pre-Thatcher Conservatives offered only weak intellectual resistance to either Labour or Treasury. For example, he notes that “Conservative tax policy between 1951 to 1964 was characterised by tinkering, a process of ‘continual movement and little change’.” (p 277, quoting S. Steinmo, Taxation and Democracy: Swedish, British and American Approaches to Financing the Modern State (Yale University Press 1993), p 149). Although the Heath government laid some of the foundations for what became Thatcher tax policies, the Conservatives did not find their intellectual voice on this issue until the end of the 1970s.
Third, the reason for the lack of interest in challenging the structure of the tax system was that “most people seemed more interested in increasing government expenditure than in reducing tax rates.” (p 274) Even the right side of the British political spectrum during this period was unwilling to take measures to reduce the scope of government. Although Daunton focuses on the revenue side, he quite capably shows how the demands for revenue created by government expenditures and growing programmes like the National Health Service influenced the debate.
After finishing Just taxes, the reader is left with a deep appreciation of the degree to which British politicians and civil servants sought to control British society through the tax system, endlessly tinkering with the mix of direct and indirect taxes, rates, exemptions and hundreds of other details. Small battles over particular provisions consumed both the political class and the civil service, while the larger issue of financial freedom remained both unarticulated and unexamined. Prof Daunton is no libertarian, but it seems unlikely that anyone can read his detailed descriptions and the many quotations from internal Treasury and political party documents without experiencing a degree of distaste at the intellectual arrogance shown by mandarins and party theorists alike. Many of both seem to have seen their roles as unconstrained by either human nature or economic theory, with the only limits to their vision the ability to write legislation implementing it.
Moreover, the British debates over the role of indirect taxation involved arguments that will resurface in offshore jurisdictions where indirect taxes predominate. Moreover, revenue hungry governments in Britain and elsewhere will likely dust off some twentieth century ideas about taxation. Daunton’s history will provide a guide to how those ideas fared in earlier battles over taxation.