This article is taken from our FREE daily investment email Money Morning.
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I’ve written another book. It comes out tomorrow.
And, if you don’t mind, I thought I’d use today’s Money Morning to tell you about it.
It’s called Daylight Robbery and it’s all about tax – about the past, present and future of taxation. That might not seem the most alluring of subjects, but I promise you it is.
The strange allure of tax
You can look back through history, take any notable event, and, lurking in there somewhere, there is almost always a tax story, without which things might have been very different.
Jesus Christ was only born in Bethlehem because Mary and Joseph were there to pay taxes. Taxation paid for man to take his first steps on the moon. In Britain, income tax was introduced as “the tax to beat Napoleon” and in many ways it did.
The US Revenue Act of 1942, described by Time magazine as, “the biggest piece of machinery ever designed to separate dollars from citizens”, brought income taxes to ordinary Americans for the first time. Those taxes paid for the US war effort, which was what swung World War II in favour of the Allies.
I argue that tax has in fact shaped the course of history.
Every war, from ancient Mesopotamia to modern Iraq, was paid for by some kind of tax. Taxes make wars possible. If you want to end war, end taxes!
The aim of every conqueror, from Alexander the Great to Napoleon and beyond, is to take control of the tax base: the land, the labour, the produce and the profits. Conquerors plunder and then they tax.
Every revolution and revolt has inequitable taxation at its heart. “No taxation without representation” was the cry of the American revolutionaries. Ruinous taxes levied by the tsar against peasant farmers led to the Russian Revolution. Perhaps most explicitly of all, the Philippine Revolution began with the Cry of Pugad Lawin, exhorting rebels to tear up their tax certificates.
From Spartacus to Boudicca to Robin Hood to Mahatma Gandhi, the greatest rebels in history were usually tax rebels.
History looks different when viewed through this lens of taxation.
Taxation is as old as civilisation itself – probably older – and in all the years since men first came down from the Zagros mountains to settle on the fertile plains between the Tigris and Euphrates rivers, there has never been a civilisation without taxation. Taxation is inevitable.
Rulers will always expropriate the labour, the produce and the profits of people for the greater good of society.
Some see taxes as “a necessary evil”, as Winston Churchill put it – the price we pay for a civilised society. Others see them as theft.
Both points of view are right. And the art of taxation is surely to cause as little disruption as possible to people’s lives – as Louis XIV’s infamous finance minister put it, to pluck “the most possible feathers with the least possible hissing”.
But Louis XIV’s finances were a mess. His successors adopted his poor habits and his contemptuous attitude towards his subjects’ wealth, and the eventual result was the French Revolution. We should be wary of taking said finance minister’s advice.
The evolution of tax and the state
Taxes should not be about milking the system for everything you can. They should be fair. Today’s tax systems are anything but. Labour is taxed heavily, capital barely at all. The result is a society skewed towards asset ownership.
Ten percent is the ancient proportion – the tithe. The number goes all the way back to ancient Mesopotamia, and was adopted across ancient cultures, whether Chinese, Egyptian, Indian, Greek, Roman, Carthaginian, Phoenician or Arabic.
We tend to think of the tithe as a tax paid to the church, but the distinction between god, king, ruler, church and government was not always clear, and often they were one and the same. Some scholars argue that ancient cultures arrived at the figure of one tenth because we have ten fingers, and calculations were often made using one’s fingers. It is a natural number.
Just like taxes today, tithing paid for wars and defence, for buildings and infrastructure, for the lavish lifestyles of leaders, but also for alms. Almsgiving is an essential feature of just about every religion – indeed, I would say it is a part of human nature – and one of the main roles of the church through history was to provide the contemporary equivalents of welfare, healthcare and education, responsibilities that have now largely passed to government.
That 10% figure lasted right up until the 20th century. In 1900, government spending was much lower and taxes played a far less prominent role in our lives. In the US, it was around just 7% of GDP; in the UK, it was 9%; in France, 13%. Of nations in the modern era, Sweden in 1870 had the lowest spending, at just 5.7% of GDP.
These low rates of tax ended with World War I and have never been seen since. At least not in the West. Countries such as Hong Kong and Singapore kept their taxes below 15% of GDP in the second half of the 20th century, and their economies consequently boomed.
In authoritarian or totalitarian societies such as Soviet Russia or North Korea, people have virtually no ownership of their labour, their produce or their profit. Government takes it all. On the other hand, in ancient Greece, many taxes were voluntary.
The developed world today sits somewhere in the middle of those two extremes. Excluding inflation (itself a form of tax), if you are a typical American, roughly 38% of everything you ever earn is taken from you in taxes. In the UK, 45%. In France, the figure is an eye-watering 57%.
Ultimately, tax is power. Whether king, emperor or government, if they lose their tax revenue, they lose their power. This rule has always applied, from the first king of ancient Sumer to the social democracies of today. Taxes are the fuel on which the state’s operations run. Limit taxes, and you limit ruling power.
Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by me, on Audible and elsewhere. If you want a signed copy – and what could make a nicer Christmas pressie? – you can order one here.