Everyone knew that the key to British success was trade. Between 1700 and 1780 English foreign trade nearly doubled. Between 1780 and 1800 it trebled.114 The key variables behind Britain’s rise to global pre-eminence as an industrial power were a strong navy, economic protectionism (or mercantilism as it was called), and a proper tax system. All of these required an uncommonly strong state. Once these were achieved, economic liberalism, of a pragmatic kind, became associated with Britain. Elsewhere, liberal thought in the course of the nineteenth century had undergone a major transformation, becoming far more étatique (statist), recognizing, for better or for worse, the intimate connection between politics and capitalist social relations. The first who attempted to theorize this nexus had been Karl Marx, but he was far from being a lone eccentric battling in a sea of philistinism, as some of his followers (and perhaps Marx himself) thought. Marx was a man of his era, grappling with a conception of the state that was not entirely dissimilar from that of many of his liberal contemporaries. And even those liberals who advocated a strongly non-interventionist state did so on the grounds that a free market would promote industrialization better, and would improve the conditions of the life of the majority.
Such improvements were no longer attributed to fate or God’s will but to politics. By the early 1900s most of the press, including most conservative newspapers, agreed that only an industrial society could support a large population and secure national defence. Once the newspapers began to equate industry with national prestige they became pro-industrial. An industrial policy had become a central part of national identity. And the main way to fund it was taxation.
6
Taxation
Taxation is no novelty. Taxes or duties were collected in Ancient Egypt, Greece, and Rome. According to the legend, Lady Godiva (who did really live in the eleventh century) rode naked into Coventry to convince her husband to abandon the excessively high taxes he levied (thus combining some form of early feminism with tax protest). Clause 12, the key section of Magna Carta (1215), required the king to levy taxation only with the ‘general consent’, meaning that of the nobility and the clergy. In other words taxation was about political power.
As Edmund Burke lucidly explained in his Reflections on the Revolution in France (1790): ‘the revenue of the state is the state. In effect, all depends upon it, whether for support or for reformation … the revenue, which is the spring of all power, becomes in its administration the sphere of every active virtue.’1 This statement needs to be qualified for the twentieth century, since a state massively involved in production, as was the Soviet Union, made tax-raising of lesser importance (the main mechanism there was a turnover tax, similar to VAT). In Europe in feudal times, in the absence of a centralized state, lords confirmed their membership of the dominant class by claiming exemption from taxation (the ‘privilege’). Peasants paid taxes to landlords in exchange for ‘protection’ while the connection between landlords and the sovereign was, in the final analysis, a matter of military strength and political alliances.2 The obligations (rent) due by peasants to landlords were far more burdensome than the taxes workers pay now. Those who today complain of the high rate of taxation might consider that in 1755 French peasants had to provide the value of 33 per cent of their product to their lords. François Quesnay in his Tableau économique (1766) set the figure at 40 per cent. In the Middle Ages in Austria, Russia, and Prussia, peasants spent two-thirds of their working time meeting their feudal obligations.3 In the 1780s, in villages in Galicia (Austrian Empire) peasants could pay up to 85.9 per cent of their gross product to their landlords.4 Other studies suggest that, towards the end of the nineteenth century, the Christian peasants in Macedonia kept only 37 per cent of their product and paid the rest to their Muslim landlords and to the Ottoman government.5
Needless to say, peasants did not like paying taxes, and at times their anger erupted in violent protest. Thus the 1381 poll tax in England was widely evaded and led to revolt.6 But peasant turmoil rarely, if ever, turned into serious revolutionary uprisings. The great revolutions of the past – the French, the American, and even the English Civil War – were sparked by the anti-tax resentment of the middle classes – not of the peasantry. Although no one is overjoyed at the prospect of paying taxes, taxes cannot really be levied in any significant amount without the consent, however grudging, of those who are taxed. One might almost say that democracy and taxation go together. The modern state, even when run by aristocrats, in order to be able to raise revenue, had to pander to the bourgeoisie. To obtain bourgeois consent the governing class had to allow some form of representation or consultation.7
That taxes were a delicate matter and that they could antagonize people was abundantly clear to Machiavelli, who advised the Prince (see Chapter 16 of The Prince, ‘De liberalitate et parsimonia’) to avoid being too spendthrift, because this would require taxing the people, and to ‘do everything he can to get money’ (fare tutte quelle cose che si possono fare per avere danari), thus soon making himself ‘odious to his subjects … and he will be little valued by any one’ (odioso con sudditi, e poco stimare da nessuno). The point is to be careful with funds at first, make sure that there is plenty of money in the state’s coffers, and then have enough resources to defend the state against aggression or pay for projects without having to tax the people unduly. In other words: have a large budget surplus.
In his Second Treatise of Government (1690) John Locke wrote that ‘they must not raise taxes on the property of the people, without the consent of the people, given by themselves, or their deputies’.8 Jean-Jacques Rousseau in the Discours sur l’économie politique (his entry in volume 5 of the Encyclopédie of 1755) held a similar view, noting that ‘taxes can only be legitimately levied with the consent of the people or of its representatives’.9 The French Déclaration des droits de l’homme et du citoyen (1789) devoted two out of its seventeen articles to taxation (Articles 13 and 14). It should be said that the principle of equity (taxes should be proportionate to the ability to pay) existed already under the Ancien Régime.10 In the modern era, taxation became central to government policies and to the relation between the individual and the state, since it transformed private earnings or wealth into a public or state resource. Without taxation there can be no economic policy. There can be no defence. There can be no state education or pensions or welfare or public-health measures or road-building or major infrastructure.
In 1919, Max Weber, discussing the modern state in his much-discussed lecture ‘Politics as a Vocation’, famously defined it, echoing Hobbes’s Leviathan (without mentioning him), as ‘a human community that (successfully) claims the monopoly of the legitimate use of physical force within a given territory’.11 But to use force it is necessary to be able to pay for this: no funds, no monopoly of force. The two are intrinsically linked. To privilege the ‘legitimate use of violence’ as the central concept defining the modern state is to downplay the fact that the fundamental economic instrument at the disposal of the state – a ‘proper’ state, that is, one with an efficient bureaucratic machinery and a reasonably high degree of legitimacy – is taxation. Taxation is a procedure whereby the state takes money from citizens in exchange for services deemed to be in the collective interest. As Oliver Wendell Holmes Jr (of the US Supreme Court) is supposed to have said, ‘Taxes are the price we pay for civilized society’ (1927). Even genuine free-market liberals who have a jaundiced view of taxation regard it, at best, as a necessary evil. Jean-Baptiste Say, a classical liberal with a pronounced anti-tax bias, did not deny the necessity of taxes: the best taxes, he wrote, were the lowest, the most equitable, the most useful or moral, and those that were the least unfavourable to production.12
So people pay taxes. Why? Compulsion and fear of penalties, of course, play a significant role. Many taxes are unavoidable since they are embedded in the price one pays for goods (duties tax, excise tax, value-added tax) or deducted from one’s pay. The history of taxation is full of examples of attem
pts to introduce taxes on all kind of items: in 1535, Henry VIII introduced a ‘beard tax’, as did Peter the Great of Russia in 1698 (in order to modernize the country). England, France, and Scotland, at different times between the eighteenth and twentieth centuries had ‘window taxes’ (a tax on the number of windows in one’s home, leading to some windows being bricked up to avoid paying it). In 1784 a ‘brick tax’ was introduced in Great Britain to help pay for the American wars (leading to an increase in the size of bricks).
The principle that taxes are necessary in order to obtain public goods is not seriously challenged. Those who evade taxes are freeriders who would admit that if many others behaved the same way, all would suffer. It follows that tax compliance is not only due to coercion but also to some degree of trust in the state.13 I pay because the state is, in a way, ‘my’ state and I trust it will deliver the services I require: borders will be protected, criminals will be pursued, order will be maintained, rules will be enforced, rubbish will be collected, schools will be funded and, more recently, pensions, welfare, and healthcare will be provided. Thus tax collecting is a good index of the success achieved in the development of a national community; a ‘failed’ state is a state unable to collect taxes, a state where tax collectors are open to bribery, where ordinary people conspire with others to avoid paying taxes, and where tax evasion is seen as acceptable and legitimate.14 The breakdown of law and order leading to civil disorder is only the final manifestation of the fiscally failed state. As Joseph Schumpeter wrote in a famous essay (‘The Crisis of the Tax State’, 1918): ‘If the tax state [Steuerstaat] were to fail … the modern state would itself change its nature; the economy would have to be driven by new motors along new paths; the social structure could not remain what it is … everything would have to change.’15
Some taxes are easier to levy than others. Successful states are those able to raise a wide range of taxes, not only taxes on property, goods, and commodities, but also taxes on income. Taxation depends on a widely diversified system of collection that will not hurt people unduly. As Jean-Baptiste Colbert, Louis XIV’s great Finance Minister (1665– 83), is supposed to have said, L’art de l’imposition consiste à plumer l’oie pour obtenir le plus possible de plumes avec le moins possible de cris (‘The art of taxation consists in plucking the goose so as to obtain the maximum number of feathers with the minimum amount of screams’).16
The British state was able to extract taxation thanks to an extremely centralized system that encountered very little opposition at home.17 In the eighteenth century the country moved from the inefficient tax system of the Restoration to a system marked ‘by the orderly collection of public moneys by a predominantly professional body of state officials’.18 By then the British fiscal system had become more efficient than any of its counterparts on the continent.19 Britain was, by that time, the most successful tax state in Europe. English superiority in this matter was due to the relatively weaker position of the English monarchs (as compared to monarchs elsewhere) vis-à-vis their subjects. This forced them to make concessions towards enhancing the fiscal powers of Parliament. In France this happened only in 1789. By then it was too late.20 The Netherlands, richer than Britain in the eighteenth century, had a fragmented political structure and thus no national taxing authority.
None of this means, of course, that the British were enthusiastic taxpayers. Thomas Mortimer in The Elements of Commerce, Politics and Finances (1772) – subtitled ‘designed as a supplement to the education of British youth’ – while defending the necessity of taxation (‘It is the duty of good subjects to pay all taxes legally imposed, and never to defraud the public revenue’), added ‘I am sorry to say that British subjects too generally make light of this obligation’, and added later that ‘all taxes, of what nature soever, are paid, in every kingdom, with bad grace’.21 British taxation met far greater resistance from those who had settled in the American colonies, who no longer trusted remote London to use public revenues to their advantage and who were themselves distant enough to resist compliance. It was the beginning of the American Revolution.
Britain became engaged in important aspects of state-building following the Act of Union with Scotland (1707) and with Ireland (1801). Having been, in Elizabeth I’s days, a second-rate state, militarily speaking, it became a major naval power in the course of the eighteenth century. An important component of British success was the soundness of its finances. It could tax more and better, and because it could do so, it could also borrow cheaply, since a state’s best collateral lies in its ability to levy taxes. Contemporaries were aware of this. Immanuel Kant pointed out that the credit system made wars possible because it enabled countries to borrow. This ‘ingenious system,’ he added, ‘invented by a commercial people in the present century, provides a military fund which may exceed the resources of all other states put together’.22 This ‘commercial people’ were, of course, the British.
Taxation enabled the British state to make its weight felt in the conduct of international trade by subsidizing exports. Taxes on expenditure, such as levies on salt or beer or certain other items of consumption, had been around since the time of the Roman occupation. But Britain introduced direct income tax only in 1799, during the Napoleonic Wars, the first Western country to do so (the absolute first, almost 1,800 years previously, was China when the emperor Wang Mang, founder of the Xin Dynasty, introduced a 10 per cent tax in ad 10).23 By 1815, taxation in Great Britain was higher than anywhere in the world, largely because of the costs associated with the Napoleonic Wars – wars that were regarded as inevitable and necessary by British taxpayers (i.e. by the middle and upper classes). British taxes on revenue remained relatively high even afterwards, though they declined gently (as a percentage of GNP) until around 1880, thus making them more acceptable. Then they started to rise again. This suggests that the British government achieved a reasonably high level of trustworthiness among taxpayers throughout the nineteenth century. Income tax, after all, is very expensive to extract unless the vast majority of taxpayers comply voluntarily; and they are likely to do so if they regard the tax as ‘fair’ and the money well spent.24
A further reason for the acceptability of taxes in Britain, however, was that those who were subject to direct income tax (reintroduced in 1842) had been able to vote in parliamentary elections since the Reform Act of 1832. Taxpayers had been enfranchised and could have voted (and did vote) for a tax-cutting government keen to dismantle the fiscal-military state that had arisen during the Napoleonic Wars.25 In other words, one was all the more willing to pay taxes if one could vote for lower taxes. Indeed, radicals who wanted to extend the suffrage assumed that the newly enfranchised electorate would vote for lower taxes. Those who feared democracy warned that the poor would use their newly acquired political power to ‘rob the rich’ and redistribute wealth radically. There was also the issue of privacy: one had to declare one’s income, let the state pry into one’s financial affairs. The liberal feminist Harriet Martineau was horrified:
for, while every tax is disagreeable … there is something transcendently disgusting in an income tax which not only takes a substantial sum immediately out of a man’s pocket, but compels him to expose his affairs to a party that he would by no means choose for a confidant.26
In fact, income tax was regularly renewed not because it was popular, quite the contrary, but because the alternative (indirect taxes) would have had even fewer supporters. Once again war intervened to help the state to raise money: the Crimean War (1853–6) saved the income tax. The war was won, the expenses incurred did not cause great hardship, and the economy did well. This entrenched income tax once and for all. Lord Palmerston, when out of office, had opposed income tax; once he became Prime Minister he became its champion. If the people wanted Britain to win wars, he explained with a candour few contemporary politicians exhibit, they must be prepared to pay for them.27 In 1913 the United Kingdom spent (per capita) on the navy almost three times more than Germany and Fran
ce, though France spent more than anyone else on the army (and three times more than Russia).28 The result was that on the eve of the First World War, Britain had the mightiest navy in the world.
It was not all a matter of consensus – coercion was applied too. The British state was stronger than its counterparts on the continent and hence better able to inquire into people’s incomes and force them to pay. Other states, such as the French, had to rely more, for tax-gathering purposes, on the formal display of wealth.29 Nevertheless, even in the United Kingdom the prevailing form of taxation was the unfair but more easily obtainable tax on consumption rather than tax on income (unfair because those on low income spend a greater proportion of their earnings on consumption). In 1900, 68 per cent of the revenue of the British state came from taxes on expenditure against only 10.3 per cent on income, a third of what it would be in 1979.30
The Anxious Triumph Page 25
