The Anxious Triumph

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The Anxious Triumph Page 26

by Donald Sassoon


  Those on the continent who looked up to Britain as a haven for freedoms and liberties did not always realize that such liberties came, literally, at a price. Tax-raising was a fiendishly complicated business then as now. Among philosophical liberals, there was no doubt that the rich should pay more tax than the poor. Adam Smith thought so. In fact, he thought that it was not ‘very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion’.31 Jeremy Bentham and John Stuart Mill both thought so too.32 But, contrary to the present situation, many on what was then ‘the left’ were less favourable to taxation than ‘the right’. The radical Thomas Paine in The Rights of Man (1792) denounced taxation:

  If, from the more wretched parts of the old world, we look at those which are in an advanced stage of improvement we still find the greedy hand of government thrusting itself into every corner and crevice of industry, and grasping the spoil of the multitude. Invention is continually exercised to furnish new pretences for revenue and taxation. It watches prosperity as its prey, and permits none to escape without a tribute.33

  The moderate Burke, on the other hand, in his Reflections on the Revolution in France (1790), declared that prosperous states were those who succeeded in keeping a proper balance between revenue and taxation, but he was far from being against taxation.34 Montesquieu in De l’esprit des lois (1748) wrote that taxes are what citizens pay to protect the money they keep.35 Intelligent politicians, such as Sergei Witte, Russian Minister of Finance (1892–1903) and long-time reformer, knew perfectly well that a sound fiscal policy required, in a country such as Russia, a prosperous and healthy peasantry – though tireless attempts to improve the conditions of rural life were unsuccessful, to the detriment of fiscal policy.36

  France found it difficult to levy a tax on income. A debate on direct income tax started in 1870, but most French politicians were bitterly opposed to it (out of fear of being voted out) and preferred to tax things rather than income. Adolphe Thiers, President of the nascent Third Republic (1870), regarded an income tax as a socialist measure, a tax on the rich, a piece of demagogy.37 French taxation remained antiquated and unfair, because it was based overwhelmingly on indirect taxes (including a tax on windows, established at the time of the Revolution, abolished in Britain in 1851, but in France only in 1926). These failings were often remarked on by the German press, which railed that the Third Republic was manifestly unable to come to grips with modern taxation.38

  The French government led by Léon Bourgeois from 1895 to 1896 tried to introduce a progressive income tax under the notion of solidarisme along with social reforms but the opposition in parliament was too great. Compared to Imperial Germany and Imperial Britain, republican France remained a low-tax country until the First World War. As a percentage of GDP, French taxation declined between 1880 and 1913 from 11.2 per cent to 8.9 per cent whereas, in the same period, German taxes went up from 10 to 17.7 per cent, Japanese from 9 to 14.2 per cent, and British taxes from 9.9 to 13.3 per cent.39 Matters changed only in 1914 when Joseph Caillaux, the Finance Minister, after years of fighting for a general income tax finally succeeded in obtaining it in July 1914 with war looming.

  The question had been debated for over forty years.40 The Caillaux proposal had been approved by the Chamber in 1909, but it was turned down by the Senate.41 What had perturbed the French senators and the people they represented (the richer members of society) was the prospect of a strong state snooping on one’s private affairs. Much of the struggle faced by Caillaux was about this anxiety, harbinger of things to come, since the actual size of the tax proposed was relatively small and the exceptions numerous – thus many farmers had been exempted because the majority of deputies hailed from rural constituencies; and professionals had been exempted because many deputies were professional themselves.42

  Before the Second World War taxation was still low in developed countries: around 10 per cent of GDP.43 By 2007 it averaged 35 per cent, ranging from 28.3 per cent in the United States to 48.7 per cent in Denmark.44 High-tax countries (where taxes constitute between 25 and 50 per cent of GDP) are usually democratic countries with extensive individual freedoms.

  Where industrial development was state funded, as in Meiji Japan, farmers and landlords bore the brunt of taxation and agriculture was made to pay the cost of industrialization. The peasants were the chief victims of the Meiji changes. The abrupt transition from what was regarded as the feudal period consisted of exposing agriculture to the forces of the money economy by permitting the sale of land. No real land reform took place, but the new land tax (implemented in 1879) fell on the owner of land and not on the cultivator and had to be paid to the central government. The land tax was an unusually high proportion of government revenue (69.4 per cent in the period 1885–9), thus contributing in no small measure to social strife in the countryside.45 By 1900 the land tax had dropped to 25 per cent of state revenue; even the tax on alcohol produced more.46

  At the end of the nineteenth century most states were not strong enough to be able to expand the range of taxes collected; they were weak or under the tutelage of foreign powers, or forced into unequal terms of trade, or had to pay high interest rates for foreign loans, or had poor internal markets.47 Britain, Japan, and France were exceptions. Romania was closer to the norm. Politically speaking, this was a relatively modern country: it possessed a parliament, held elections, had a constitution, and had a relatively free press, but its economy could not provide an adequate fiscal basis for its development. In other independent eastern European countries before the First World War (such as Bulgaria, Montenegro, and Serbia), since parliament was reluctant to increase taxes, the state used force to obtain the money it needed. Parliamentary power was debased as deputies sought favours from the bureaucracy on behalf of their electorate.48 So weak was the Romanian state that the hundreds of laws passed in the last two decades of the nineteenth century to encourage economic development failed to improve the unimpressive performance of the economy.49

  The problem with weak states is that they do not dare to tax their citizens or to enforce taxation. They fear no one will support new taxes in the hope of greater benefits in the future. Before unification, for example, the southern Italian states, previously under the Bourbon kings, had a very low level of taxation. Unification meant that southerners were going to be taxed more. The consequent rapid growth of banditry in the south at the end of the nineteenth century was partly due to high taxation.50 In the Ottoman Empire, in the second half of the nineteenth century, political weakness manifested itself in the empire’s inability to raise taxes. It tried to meet its ever increasing financial obligation by printing money and selling bonds in London, Paris, and Vienna and was forced to borrow more at ever increasing interest rates. By 1875–6 the empire had, to all intents and purposes, defaulted. In 1881 the European creditor countries seized effective control of the Ottoman finances by establishing the Ottoman Public Debt Administration. This was quite effective, but the substantial problem remained: the Ottoman was a failed state, unable to establish a proper taxation system, and by the time the First World War broke out it was once again on the verge of bankruptcy.51 It did not survive the war.

  Weak states, unable to raise sufficient revenues from taxes, resorted to their own commercial monopolies. Thus in Tsarist Russia, in the decades leading to the First World War, only a fraction of total state revenues were collected from direct taxes, much lower than in Britain, Germany, Austria-Hungary, and even France, then still without an income tax. Much of the rest came from indirect taxes on various products, or from the state monopoly on the sale of spirits.52 This monopoly was created after agonizing discussions. As Sergei Witte explained in his memoirs, Tsar Alexander III had been concerned about alcoholism in Russia (vodka production was virtually uncontrolled) and resolved to ‘effect a measure, absolutely unprecedented and vast in scope’, namely the establishment of a state monopoly on vodka.53 Nikola
i Bunge (Finance Minister, 1881–6) thought this was unpractical. His successor, Ivan Vyshnegradsky (Finance Minister, 1887–92), was equally unenthusiastic. But the next Finance Minister, Sergei Witte, managed to tax vodka. As he reputedly wrote: ‘I transferred the entire vodka traffic into the hands of the government.’54 The connection between alcoholism and mortality is seen starkly in the death rate in Russia: in 1861 it was higher than in western Europe one hundred years earlier, and it was still double that of western Europe on the eve of the First World War.55 And, one should add, the situation is still dire today.56 Vladimir Kokovtsov, Finance Minister under Witte and Pyotr Stolypin (and later Prime Minister himself), introduced an income tax and abolished the redemption payments still extant from the days of the Emancipation Decree (November 1905). The main opposition to income tax came from landowners, who wanted taxes to be under the tutelage of the zemstva (the forms of local self-government they dominated). Taxation had become a major factor in Russia’s political battle.57

  China had taxed its people for two thousand years. The Imperial State was seen as a gigantic bureaucratic machine run by unenlightened despots. Tax resistance was rife.58 The central government’s main tax revenue was from custom duties, which was almost entirely dependent on China’s commerce with the rest of the world.59 In the nineteenth century the collection of taxes was still farmed out, and the supervision of tax collectors was so unsystematic that it was impossible to know how much was collected since some of it never reached the central government but was shared with ‘officials, bandits, provincial politicians, secret societies, warlords, and others …’60 The weakening of central authority during the Taiping Rebellion (1850–64) made matters even worse.61 As Jonathan Spence explained, the Imperial Court, the bureaucracy, the provincial officials, and the merchants each had their own interests to safeguard, making it difficult to develop the kind of co-ordinated policies that had been so successful in Japan during the Meiji Restoration.62

  As states expanded their functions, they also expanded their fiscal systems. The development of the welfare state inevitably contributed to an increase in taxation. As Richard Musgrave, author of The Theory of Public Finance (1959), for long the standard textbook on fiscal matters, explained in 1997, as if to warn an increasingly vociferous anti-tax lobby: ‘like it or not, government and its public finances are here to stay’. Taxes are needed to repair market failures, to address issues of distribution, to help in the conduct of economic policy. Taxes may not be popular, he added, but they are indispensable ‘partners to the market system’.63

  The systematic increase in taxes has continued throughout the modern period, reaching heights that would have horrified the Victorians. Not even the neo-liberal counter-revolution associated with Reaganism and Thatcherism reversed the trend: the OECD average of tax revenue as a percentage of GDP, which was 25.4 per cent in 1965, went up to 34.1 per cent in 2011. Even in the United States, home of a strong anti-tax movement, the percentage barely changed in that period.64 Capitalism, especially effective capitalism, needs the oxygen of taxation.

  7

  Laggards and Pathbreakers

  The path to industrialization was undertaken at different speeds in different countries and, in some countries, even the preconditions for industrialization were difficult to establish. In 1500 the leading region had been central and northern Italy. Then economic leadership passed on to the Dutch Republic. By 1700, Dutch per capita income was twice that of Great Britain. Then, by 1820, the country (by then no longer the Dutch Republic but the United Kingdom of the Netherlands) was overtaken by Britain. As Eric Hobsbawm put it:

  There was a moment in the world’s history when Britain can be described, if we are not too pedantic, as its only workshop, its only massive importer and exporter, its only carrier, its only imperialist, almost its only foreign investor, and for this reason its only naval power and the only one which had a genuine world policy.1

  By 1900, the United States had become the world economic leader.2 In 1870, however, the United Kingdom was still well ahead of everyone else.3 It manufactured half the world’s pig iron, 3.5 times more than the USA, four times as much as Germany, and five times more than France.4 And it was, of course, way ahead of countries in the ‘periphery’. Such wealth caused envy. Charles Masterman in The Condition of England (1909) was splenetic against the English rich and their arrogance:

  When the Englishman goes abroad, the customs of the country, the opinion of the people amongst whom he lives, count for nothing. He comes to Biarritz to live his life, the traditional English life, made up of bounteous feeding, of violent physical exercise, of clubs, and of bridge … all just blandly tolerant of the occasional presence of the native inhabitant in this frontier post of Empire.5

  Self-satisfaction had preceded actual industrial development. Already in 1740 the Scottish poet James Thomson penned the lyrics of what would virtually become the anthem of the Royal Navy in which freedom from tyranny appeared to be Britain’s particular advantage over all others nations:

  The nations, not so blest as thee,

  Must, in their turns, to tyrants fall;

  While thou shalt flourish great and free,

  The dread and envy of them all.

  Rule, Britannia! rule the waves:

  Britons never will be slaves.

  At that time Britain did not yet rule the waves, but it did soon after and not just the waves but world commerce and industry. Such supremacy had not been inevitable. Matters could have gone differently. At the end of the seventeenth century the economies of the Dutch Republic, England, and France were at a similar level of development. Even in the eighteenth century the British were not as rich as the Dutch; the country was not as large in size or population as France; and it did not have an empire the size of Spain’s. Yet, already in 1750 less than half the population of England was employed in agriculture. To reach that stage, western and northern Europe had to wait until the second half of the nineteenth century, and southern Europe (Italy, Spain, and Portugal) had to wait until the twentieth century.6 Britain became a pathbreaker because it innovated technologically and because it was able and willing to borrow innovations made elsewhere and exploit them commercially far more than other countries.7 Obstacles to industrialization (political, religious, geographical, etc.) were few and the country had luck too: huge known coal resources.

  Unlike many of the continental states Britain possessed a large homogeneous market with no internal barriers to trade (unlike the still-to-be unified Italy, though the German states benefited from a customs union, the Zollverein). British urbanization was rapid: in 1831 less than one-tenth of the population lived in sizeable urban centres; by 1901 it was one-quarter.8 Yet the country was not in constant turmoil even demographically. Between 1851 and 1911 the proportion of those employed in manufacturing and domestic work in Victorian Britain was fairly stable but it doubled in absolute numbers, and employment in agriculture dropped drastically, while the numbers of those employed in public service and the professions increased.9 The remarkable stability in the proportion of the working class disguises major internal shifts such as those from textiles to other sectors of manufacturing such as steel.10 The sector that was really growing was that of the public sector and white-collar workers in general.

  Abroad, British economic growth was widely seen as a direct result of what came to be called ‘Manchester’ liberalism, the main force lobbying for the repeal of the Corn Laws and the transformation of Britain into a Free Trading Nation – even though, as we have seen, Britain was truly liberal in foreign trade only in the second half of the nineteenth century. Richard Cobden, the main spokesman of the Anti-Corn Law League (founded in Manchester in 1838), became known throughout Europe and was much admired by Frédéric Bastiat, who translated many of Cobden’s speeches (see Chapter 5).

  But it was not just free trade that excited Europeans. Britain seemed to win on many fronts. Since the Reform Act of 1832 it had become the most democratic and freest coun
try in Europe. Thanks to its industries and its exports, it offered the prospect of increasing wealth for all its inhabitants. Compared to other countries (France, prone to regime change, the United States and its civil war, China and the Taiping Rebellion, and the not yet united Italy and Germany) it was internally secure and politically stable. Its main internal threat, the Chartists, had been quelled, with relatively little violence, by 1850.

  And, last but not least, the British state, after the Glorious Revolution of 1688 and the consolidation of true parliamentary rule, was not in conflict with the requirement of capitalist accumulation. England was an authentic modern capitalist country, one where the role of the state consisted not in defending the interests of a particular dynasty (as was the case, say, in pre-revolutionary France) in alliance (or in conflict) with a landowning class, but in enhancing the country’s economic performance.

  Britain was admired for its alleged economic liberalism, but this did not lead other countries to adopt the doctrine in practice. In the nineteenth century the continental theorists of the minimalist state – the progenitors of today’s ‘neo-liberals’ – were regarded, by most politicians, as eccentrics. Throughout most of Europe, in Hungary as in Poland, in France as in Germany, in Italy as in Russia, the consensus among the elites was that industrialization required the strengthening of the nation state; liberal political institutions (fair trial, secure rights, some form of democratic representation) were part of the deal, the economically minimalist state was not. The objective of reformers was to weaken, even eliminate, the restrictions of traditional society and on these ruins build a strong state. Everyone seemed to understand that in order to ‘import’ the British Industrial Revolution one should not ‘adopt the official policy – or, rather, the lack of policy – which was associated with the pioneer episode in industrialisation’.11 The historical task of the modern state, of the state that wished to become ‘modern’, was to promote capitalist growth: the British policy of laissez-faire was a luxury they could not afford.

 

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