Keen and Slemrod Tax Wisdom and my tax proposals

If anyone is doubtful that taxation is an interesting and important topic, I suggest they read the recent book Rebellion, Rascals, and Revenue: Tax Follies and Wisdom Through the Ages by Michael Keen and Joel Slemrod. 

The authors are experienced tax experts, but they explain public finance not through dry mathematical equations but through interesting anecdotes and stories. They present numerous unusual taxes and charges that have been applied over the centuries. For instance, a bridge that people without shoes could cross for free while the shoed (shod?) would pay toll. 

The book covers all the important topics to do with taxation and alternative forms of government funding. It even contains a lot of puns in the section title headings, and I wonder if there were some that I didn't get. 

For those interested in finding out more, perhaps while waiting to get hold of your copy of the book, the authors spoke about some of their favourite examples from the book in a video: 

Tax Wisdom

One feature of the book is that towards the end they review some of what they have taken-away from their years of study and engagement with tax systems throughout the world. They end with their thoughts about where tax might be heading in the future. 

I was pleased (relieved) to see that several of their recommendations and predictions included several things that I have attempted to do with my own tax reform proposal, which I have called the CLIPH-Rate tax, set out in my book Rethinking Taxation. 

I thought I would flag up a few of them here: 

New technology

Keen and Slemrod highlight that the use of big-data could be game changing in uncovering tax avoidance and evasion. I agree. 

This, plus greater integration between taxation and the financial payments system, should create a lot of opportunities to do things differently. João Félix Pinto Nogueira has recently argued that there could be a different model of taxation in the future, and I think this is right.

I believe that the use of real-time calculation (as is now applied in the UK) allows a different way of doing tax. And it needn't just be applied to payments from employers. (In the UK this income tax withholding is called real-time PAYE, but there are similar systems with different names in other countries.) 

All financial transfers could be taxed in real-time based on the recipient's current tax-rate. By current I really do mean current - the tax authority could update their tax rate and inform the financial institution to withhold the correct amount on all transactions. 

Integrating real-time tax calculations into all payments means that there would no longer be any need for payments between taxpayers and the tax authority. Any corrections could be applied at the next payment to that individual. 

Of course, this could include "negative tax" payments to increase someone's payment if they have paid too much tax in the past or if they receive additional support from the government, for instance because they have a very low income or require some extra support due to their personal circumstances (disability for instance).  

Integrate the tax and earnings subsidy systems

This leads onto the next suggestion. Running a real-time system with negative tax rates for low-earners, means that the tax system can be integrated with the benefit system, and used to make payments to recipients. 

A potential problem with this is that support systems tend to need to react swiftly in order to ensure that people in difficulty (for instance who have lost their income) can survive. 

However, I think that using technology and providing a Guaranteed Work Programme (which I think should be offered alongside my proposal), it should be possible to ensure that everyone has continued access to an income. Some special benefits could continue separately, while others would be rolled into my proposed single-tax system, and payments could be triggered regularly if needed. 

Extend the tax period beyond a year 

Keen and Slemrod highlight that 365 days is a rather arbitrary amount of time for taxation calculations. Given that it is the time it takes for the Earth to go around the sun, reflects agricultural seasons, and is  the basis of calendars, 365 days is more sensible than a 250 or 450 day tax year. 

Nevertheless, any given year may not be reflective of the taxpayer's overall situation. As Vickrey and others noted long ago, a longer period would be more appropriate. Indeed, where the tax system is progressive, as I believe it should be, this becomes all the more important. Large payments would then be averaged over many years, rather than included within a single tax year. 

I have therefore proposed, a little like Vickrey, that we should apply a lifetime average tax calculation. This has many advantages, but requires a different way of calculating taxes. 

This allows more progressive tax rates, because these rates would be applied across many years of life. As well as being fairer to those who have fluctuating incomes, and more accurate, this means that people would have no incentive to artificially arrange their payments to occur on one date rather than another in order to fall into a particular "tax year." 

Tax economic rents very highly

One worry about taxation is that it will discourage productive behaviour, but this is the case for some taxes more than others. 

Economic rents occur where the owner of something (their land, spare money, their skills/talents or whatever) gets a higher return from employing it than they would require in order to put it to that use. 

Taxes on economic rents are an ideal tax in this regard because they do not impact on economic behaviour. A landlord will rent out their premise to the highest bidder, whether they get 100% of that amount or 50%. Perhaps at a certain point they would decide it is not worthwhile to rent out their premise and leave it unoccupied, but that would mean that they wouldn't be getting any return on their ownership.    

They are also an ideal tax because they tend to be progressive - it is almost by definition the economically fortunate who have the opportunity to generate economic rents. The less fortunate don't have anything on which to generate rents. 

In practice, it is hard to know what rents are ex ante (before the fact). So a pure rent tax is something that exists in theory and not in practice.

However, I believe that my Hourly Lifetime Averaging system would achieve tax rents well by proxy. This is because:

• It taxes all income, earned and unearned in a very progressive way 
• It reduces the tax rate for those who provide their time into the economy through working (or get some credit for not being able to do so)

Tax leisure 

To put it differently, the system I propose taxes leisure. 

This relates to another piece of tax wisdom in the book. Actually, in the book the suggestion is to tax complements to leisure. Taxing the things that people would like to do if they weren't working would make working relatively more appealing. 

I go one step further and just tax the leisure directly. As I note above, the hourly averaging system rewards people who work more hours with a lower tax rate (at least up to a maximum point). 

So someone who has received a lot of income without doing much work (a wealthy heir for instance), would face a very high tax rate (at least until they have worked a lot of hours). Meanwhile, someone who works for a low wage would have a low--possibly negative--tax rate. 

Both have an incentive to work, and the heir can be taxed at much higher rate than under any other system, and the low-paid worker will be able to get a more generous income supplement that won't be as harmful to the economy.  

If someone retires earlier, or works part-time rather than full-time, they would face a higher tax rate on their unearned income. There is nothing wrong with working less, of course. There is more to life than working. However, the wealthy and talented can afford to work less while the poor cannot. Hourly averaging would incentivise everyone to work longer. 

It also retains the incentive to work in higher productivity ways too, since people will always benefit from having a higher income as well. It takes account of hours at work and income, rather than simply income alone. 

Final Thoughts

I don't know what Keen and Slemrod would make of the CLIPH-rate tax. I can imagine they would consider it too idealistic to introduce such a major change, since piecemeal reforms are always easier. They might also argue that it would be hard to administer (they have two chapters on tax gathering and the difficulties in collecting accurate information from people who benefit from hiding this). 

However, it was reassuring from my perspective that the conclusions of the book pointed in the same direction as the proposals that I made a few years ago. :-)

Book Review: Political Philosophy and Taxation

I was pleased to be asked to review a book on Political Philosophy and Taxation for the British Tax Review, and I wanted to provide the text here on my blog for the benefit of those who do not have access to the journal. 

Legal disclaimer: This material is (a slightly edited version of) the review first published by Thomson Reuters, trading as Sweet & Maxwell, 5 Canada Square, Canary Wharf, London, E14 5AQ. It was published in the British Tax Review as "Political Philosophy and Taxation (Springer, 2022), by Robert van Brederode (ed.) (2022, 5, pp662-5)" and is reproduced by agreement with the publishers. 

Review of Political Philosophy and Taxation, by Robert van Brederode (ed.) (Springer, 2022)

As someone who teaches an introductory course on political philosophy, I was pleased to be asked to review this work,  which really is—as it claims—the first book providing a comprehensive overview of political philosophy and taxation. The textbook for the course I teach (Wolff, 2015) begins with the suggestion that political philosophy might be about “Who gets what?” and “Says who?”  Put like this, the link between political philosophy and taxation is abundantly clear. 

There are, no doubt, many ways to structure such a book. It could be organised by topic like the abovementioned textbook, which covers the key topics of:

1) The nature and justification of the state.

2) Who should rule? Should we have democracy, and if so what kind?

3) Liberty and rights.

4) The distribution of property.

5) Justice for everyone, everywhere? (On whether Western political philosophy has ignored or excluded any important groups or perspectives.) 

Again, all of these topics are relevant to taxation, particularly property and distributive justice. However, unlike the above textbook, this book is organised around different schools of thought within the Western tradition. The subtitle of the book describes it as a history of political philosophy. The book does indeed provide a detailed intellectual history of several influential schools of (Western) thought on the topic, explaining how key thinkers from those schools approached the topic of taxation, situated within their wider philosophical projects. This is a sensible move. Experts in different schools of thought can then take turns in summarising each, indicating where key thinkers have said anything relating to taxation. 

One question this raises is whether the book is an exercise in intellectual history or directly one of the philosophies and their implications. The first and last chapters by the book’s editor are certainly not intellectual history, but rather direct interventions in debates. The other chapters tended to fit the historical brief more closely, reporting on the relations between various thinkers and their views of taxation.  Two, acknowledged, exceptions were Chapter 8 on legal positivism and the final chapter (11) where the editor provides his own proposal for radical tax reform. There is a good case for organising the book by historical school, though that places additional pressure on the introductory chapter, a point to which I will return. 

Interestingly, most of the authors are not obviously primarily political philosophers, given their departmental affiliations. However, they all clearly know their respective schools of thought very well indeed, often because they use them in their own research on taxation. Certainly, taxation is inevitably a multidisciplinary topic, hence the need for all who write about it to have a good understanding of political philosophy. 

Which “schools of thought” should be included in such a book? The book contains a lot of the ones I would expect, but I found some of the choices surprising. One thing to make readers aware of is that the book leans libertarian, which is clearly the editor’s own approach given the chapters he has authored (the first and last). Perhaps that is a perk of being the editor, but I think it should have been made clearer at the outset, or, perhaps even better to avoid these strong interventions given that they did not fit with the stated brief of the book. 

There are several chapters that are more left-leaning (on socialism, egalitarianism and feminism), so the book still provides a good overview of most of the relevant views of taxation. However, questions can be raised as to whether there was a need for chapters on conservatism, classical liberalism and libertarianism, plus the two non-historical chapters, given the overlap between them. 

I think that the libertarian leanings of the book could give a false impression of the way that contemporary political philosophers would approach taxation. I undertook a poll of 78 philosophers on the topic and one third approached the topic in a liberal egalitarian way (including myself). Thirty per cent took a socialist approach and about 15 per cent consequentialist, most of whom selected “centrist or progressive” rather than classical liberal.  Seventy per cent of responses indicated that liberal egalitarianism represented the dominant approach. A lot of the debates within this school were mentioned in the introduction but not actually presented in the book (except in passing). (For more on the literature see Pedersen) 

There would have been a case for a chapter on luck egalitarianism, and indeed Ronald Dworkin (2006) has an entire chapter on tax justice in a book which was not referenced at all.  

Another omission I thought was discussion of Aristotelian-inspired views (perhaps other than in the chapter on conservativism), which are particularly to be found in theories of desert, participatory democracy and communitarianism. Natural desert is a distributive theory, a rival to Nozickean libertarianism, utilitarianism and the various forms of egalitarianism (see Campbell, Miller). Desert theory is not at all popular with political philosophers—it had no advocates in my poll.  However, there is an argument that desert is the common approach of the public (see Shiffrin).  There was a section on desert in the introduction, but this was a very misleading discussion, presented as an attack on luck egalitarianism, a view which is neither desertist nor—we recall—represented in the book. 

Desert might also be relevant to those who believe that political decisions should be made democratically as a representation of the views of the common good, or as an expression of their views or values. Communitarianism was mentioned as an example of a view opposed to libertarianism in the introduction  but not again in the book. The final chapter did have “Democracy” in the title, but this did not present a history of the arguments for and against democracy, which go back to Plato’s Republic, but was in fact highly opposed to democracy. Agreeing with anti-democratic libertarians that “an electorate that is uninformed, underinformed, or misinformed”  will mean that majority rule “opens the door for the misuse of power to the detriment to the interests of others”.  “Majority democracy violates the principle of equality as it is based on coercion of the many”,  which apparently means that a decision by the majority to impose taxation would violate the “principle of liberty”.  These apparently inviolable principles are neither explained nor referenced.

Philosophy of colonialisation and race is another possible approach that could have been included, though this has methodological affinities with feminism and intersectionality as mentioned in the chapter on feminism. The historical-school approach taken also creates the problem that important contemporary debates are omitted, about global justice for instance. 

Most of my criticisms are of the introduction, as I’ve hinted above, which represents a missed opportunity. The first words of the introduction are “liberal individualism” but what is this and why start with it? Perhaps because methodological individualism was the starting point of Hobbes’ political thought, which later begat liberalism (though Hobbes was no liberal). If the book is written for newcomers to political philosophy it should have explained what that subject is, perhaps mentioning disagreements over method, such as whether liberal individualism is the right approach. Another important thing to cover is to explain the philosophical topics and disputes that bear on taxation, and perhaps to explain some common terminology. These are mentioned, but too obliquely for the complete novice who knows little about the subject. 

The introduction is very long, but far too much of it is spent attacking views that will be presented later in the book. There are seven pages criticising Murphy and Nagel (2002) on “everyday libertarianism,” even though their argument is presented in three pages near the end of Chapter 9 (pp.335–338).  I can understand that their arguments should be presented, since they are very important. However, the introductory chapter should really ease newcomers into the discipline, not simply attack the dominant views. 

The introduction began and ended with a key point that I would expect to find; why have a book on political philosophy and taxation? Some good points were made here, but more could have been added. The book is quite advanced, but it should be useful for graduate students and academics whose work relates to taxation. Tax practitioners may also benefit from considering political philosophy, though they might need to read an introductory text first. However, political philosophers too could be interested in reviewing what different schools of thought have to say about taxation. Those looking to write about tax will also benefit from having the dispersed writings of thinkers compiled together in one volume. 

Overall, as a political philosopher with a focus on taxation, there was little difficulty in selling the importance of a book with the title Political Philosophy and Taxation on me. The chapters were capably written by experts, and I learned a lot from it. Indeed, I found myself wishing that this very useful resource was available when I began my PhD on the topic nearly 15 years ago. 

References:

Campbell, T. (2002). Justice. Palgrave.

Dworkin, R. (2006). Is Democracy Possible Here? Princeton University Press.

Miller, D. (1999). Principles of social justice. Harvard University Press.

Murphy, L., & Nagel, T. (2002). The Myth of Ownership: Taxes and Justice. OUP.

Pedersen, J. (2020). Distributive justice and taxation. Routledge.

Sheffrin, S. M. (2013). Tax fairness and folk justice. Cambridge University Press.

Wolff, J. (2015). An introduction to political philosophy. OUP.