The authors of this book pulled off an incredible feat: writing a book on taxation which is exciting. The tome spans many types of taxes, and many facets which the modern taxpayer and collector might be interested in.
What the book also does, is offer hope. Hope for improved, fair and efficient tax systems. And ultimately, a fair and prosperous society.
What tricks do the authors have up their sleive you ask? Well, they fill the book to the brim with historic events and funny anecdotes, all from the perspective of taxation. This includes the opening of the book:
"The Rosetta stone famously held the key to deciphering ancient Egypts hieroglyohics. [It] describes a tax break."
There are a couple of key lessons and principles about taxation which return throughout the book. Some of these might sound a bit abstract, but hey, your fault for decideding to read a blog on economics. So let's dive in!
Tax lesson 1: beware of distortionary effects on behavior
Every tax that you implement will influence people's behavior, as they will try to avoid paying the tax, to avoid maintaining their administration, or to stop other activities because they are too busy paying taxes and maintaining their administration. The funniest example must be the window tax, which was an ingenious idea: tax collectors could assess your wealth by simply looking at your house. Unfortunately, this also caused windows to be removed and bricked up. A similar effect happened in Amsterdam when houses were taxed based on how wide they were. You can guess the result.
Tax lesson 2: No taxation without representation
This beautiful slogan was coined during the American revolution, and voices the frustration of groups which are taxed but take no active role in deciding what can be done with that tax money. This was a big deal when the Americans wanted to decide what Britain did with their tax money, but it remains a big deal today as well. Various minority groups, regions or social classes might not feel heard by politicians, thereby losing faith in the legal system, but also in the use of their taxes. Avoiding taxes suddenly seems a lot more justified when you see too many examples of the tax money being used to the benefit of other groups. While this risk should be mitigated, it certainly won't solve the problem of tax avoidance, which may be even higher in the most represented social groups.
Tax lesson 3: Taxation can be done without tax
There are many ways in which governments can earn and redistribute money besides taxes. Firstly, governments regularly borrow or create money. This causes the burden to fall relatively equally across society, but it creates macroeconomic and political vulnerabilities. It is not easy to evaluate the consequences of large monetary policy, otherwise central bank inflation expectations wouldn't be off so often.
Another approach governments can take is to auction or sell off powers and rights. The most funny one being tiny island of Tuvalu selling off the rights to a domain name .tv FOR AROUND 10% OF THEIR TOTAL ANNUAL GDP.
Finally, governments can also prohibit market players from making use of certain powers and rights, thereby accruing monopoly profits on certain assets. For example, it is illegal for anyone except for the China Salt Industry Corporation to sell salt for household use in mainland China.
Tax lesson 4: Broaden the base, lower the rate
Given tax lesson 1 (you still remember that one right?), economic folk wisdom says to prefer taxing many types of activities and assets a little bit than to single out a single activity or asset. By broadening the base, the incentive to avoid taxes and the burden on any particular group may be lowest. Moreover, given that the impact of policy is difficult to predict, trying to stricly control tax incidence may have just as detrimental effects as controlling prices.
Therefore, regardless of your moral stance, we should both tax consumption (what people take out of the economy) and tax income (a measure of what they put in). In the meantime, we should avoid taxing business inputs to stimulate the economy, and not lose sight of fairness and efficiency.
Incidence depends on the relative responsiveness of demand and supply, and they move in mysterious ways. The only asset which superficially seems to have a truly inelastic supply is one that we see all around us: land. The physiocrats argued that all taxes are ultimately taxes on land and are born by landowners. Winston Churchill even gave an example to illustrate this: poor people moving into an area with social services may cause rents to increase, leaving all equal off and the landlords better. But in practice, land taxes have not found a strong footing yet in government policy, and I look forward to diving deeper in this topic in the future.
Tax lesson 5: real-time and audited reporting
Most visions for tax transformation come from the country next door, and currently, there is a big chance rolling throughout the world. While the 20th century was arguably the century of VAT, the 21st century may be the century where frequent information reporting revolutionises how we think about taxes and subsidies. Because why should we limit ourselves to controlling financial flows only once every year?
While work is becoming increasingly flexible, allowing people to change jobs and schedules like they change their appartments, there is no fundamental reason why taxes should lag behind. Other than that governments are often the ones lagging behind.
While many governments already made the jump to enforce real-time invoice reporting, cryptocurrency systems are meanwhile leading the charge in real-time tax systems. Cryptocurrencies run on a type of mining/staking rewards, and there is a cambrian explosion of types of real-time information tracking and frequent payouts which these systems use.
Richer information doesn't just allow governing systems to collect and distribute taxes more frequently, but also to the right entity. For example, we can get away from taxing earnings at the corporate level, and attribute them to underlying shareholders. Imagine checking your bank account, and seeing not just your assets and debt, but also a dynamic tax and subsidy number. Let's hope the tax amount doesn't increase whenever you have a fortunate day.