(This item originally appeared at Forbes.com on March 20, 2018.)
Donald Trump recently mentioned the possibility of “Phase 2” of his tax reform plans, which I (along with T.R. Reid) think is a splendid idea. Since it would be nice to discuss the topic with a little more expertise than happened the last time around, I will recommend some reading material to get prepared, namely: For Good and Evil: the Impact of Taxes on the Course of Civilization, by Charles Adams. This book came out in 1993, which means that many people today haven’t heard of it. I think it should be elevated to a short list of all-time economic classics of the twentieth century, and is absolutely required for anyone who wants to know anything about the topic. I recently re-read it, and I’m sure I learned more the second time.
Adams shared my view that the rise and fall of empires can often be explained in large part by the Magic Formula, which is: Low Taxes and Stable Money. A country that has the Magic Formula soon finds itself rising above its neighbors; a country that goes in the opposite direction withers and crumbles under a constant press of domestic difficulties. Adams acknowledged the influence of Stable Money, but his main focus was of course on taxes, and he explored the idea from the beginnings of history up to the present day. The book is wonderfully written and full of insights — as you may have guessed, Adams was not an economist, but a practicing tax lawyer.
Adams began with Egypt of the Pharaohs; moved on to the ancient Israelites, Assyrians and Babylonians; the Ancient Chinese, and the Ancient Greeks. In one example after another, societies thrive under low taxes, and crumble under high taxes. The freedom-loving Greeks held to the principle that all direct taxation was a form of tyranny. Many undertakings, including public buildings and the powerful Athenian navy, were organized on the basis of the volunteerism. At least, they did so for a while. Athens eventually became the tax tyrants of all Greece, demanding heavy taxes from all other Greek states as part of the Delian League. When some Greek city-states revolted against the heavy dues, the Athenians invaded their land, killed all the men, and enslaved all the women and children, leaving the realm depopulated. This did not make very many friends, and eventually, an alliance led by Sparta rose up to put an end to it.
The Roman Republic thrived at first under low taxes. Its first imperial acquisition was Sicily, an unexpected bounty from the war with Carthage. The low existing tax rate of 10% of the harvest was continued after the conquest. Repeating a pattern seen many times in history, the low tax rate produced happy, productive citizens and abundant revenues (in the form of wheat), and Rome could nearly live upon the produce of this tax alone. In time, however, Rome’s taxes became oppressive as the abuses and corruption of Rome’s tax-farmers produced unrest and difficulties throughout the early empire. Caesar relieved some of the heavy taxes, but after his death, taxes soared higher again under Brutus and Mark Anthony. Caesar Augustus, the great genius of government, completely reformed the tax system, eliminating the hated tax farmers throughout the empire and slashing tax rates to single-digit levels. (He also enacted a coinage reform that maintained a nearly-unchanging value of the silver denarius for the next two centuries.) The Golden Age of Imperial Rome commenced. In the third century, however, taxes again became oppressive. Eventually, small farmers sold themselves into slavery to large landowners to avoid the taxman. The large landowners had enough influence that they too could avoid taxes. This formed the basis for medieval manorial serfdom throughout post-Roman Europe.
More exquisite tales follow from the medieval period, the Muslim empire, the empire of Spain, the extraordinary Elizabeth I of England who apparently made taxes voluntary, France of the Ancien Regime, the U.S. Revolutionary War and Civil War, Napoleon, the rise and fall of the Dutch empire, and a long narrative of British tax history from the Magna Carta to the twentieth century — all of it worthy of several re-readings.
But, I would like to focus on just one idea among many in the book, which may serve as an illustration of how these stories and principles from the past may help us today.
Today, the idea that taxes should be “progressive,” or have graduated rates with higher rates on higher incomes, seems so axiomatic that even low-tax enthusiasts embrace it without question. Even today’s “flat tax” proposals have a generous basic deduction, while the “fair tax” camp has a “prebate.” This idea is straight out of Karl Marx’s Communist Manifesto of 1848:
A heavy or graduated income tax is necessary for the development of communism.
We have largely forgotten the basic tax principles of the nineteenth century — principles based on detailed study of history. Adams described an idea common among those of the Founding generation: They insisted that taxes should be “uniform” — that is, the same rate applying to everyone. The equivalent today would be the payroll tax (but without an upper limit on income), which has a single rate from the first dollar earned, or a sales tax. This is mandated in the U.S. Constitution in Article I Section 8, which says:
all Duties, Imposts and Excises shall be uniform throughout the United States;
James Madison, the primary author of the Constitution, explained in The Federalist No. 10 that in a democracy, the majority would over-tax the minority if they were allowed to. The “uniform” clause would prevent that from happening. A British writer expressed the idea in 1845:
The moment you abandon the cardinal principle of exacting from all individuals the same proportion of their income or of their profits you are at a sea without a rudder or compass and there is no amount of injustice and folly you may commit.
Britain imposed its first long-term peacetime income tax in 1842. It had a single rate of three percent, and, like a payroll tax today, was levied on all income. Also like a payroll tax, it could be levied “at the source,” so people didn’t have to file a tax return, and did not have any deductions, exemptions, or other complications. In effect, it was an indirect tax. Given these parameters — that it fell upon all taxpayers “uniformly” — it is not surprising that the rate was never very high, reaching 1910 without ever exceeding six percent. In 1910, following the socialist dogma then ascendant, graduated rates were allowed for the first time, which in turn required a tax return to determine how much income would be taxed at what rate. Just as James Madison predicted, the many were soon happy to tax the wealthy few, and tax rates were never so low in Britain again.
The Sixteenth Amendment removed the Constitutional requirement to apportion direct taxes among the states according to population (rather than income). However, it said nothing about the “uniformity” clause. The first income tax law, with graduated rates, immediately resulted in a Supreme Court challenge in 1916. To the shock of legal experts, the Court said only that the claim that the Constitutional requirement of “uniformity” barred the adoption of graduated rates had “an absolute want of foundation in reason.” The topic was taken up again in the 1950s, when the Yale Law Journal argued:
The principle of equality in taxation is in itself so just and so reasonable, and so generally has it been acquiesced in, that no argument is needed to sustain the position that the legislature in deliberately violating this principle does nothing else than convert what purports to be a statute law into an exercise of arbitrary power, which in reality is no law at all. When the question is put, does a graduated tax conform to the rule of equality, but one answer can be returned.
What is the right tax rate? The number 10% comes up over and over again throughout history. Confucius recommended it in the sixth century B.C., and Mencius did too in the fourth century B.C. The Taoists shared the same opinion. The Hebrew tithe of 10% served for centuries, continued by the Christian churches. In the 1920s, Treasury Secretary Andrew Mellon once said that he hoped to reduce the U.S.’s top income tax rate to 10%, but President Hoover had other ideas.
It’s a wonderful book, and shows where we could very easily go wrong, especially as the burdens of existing entitlement programs gradually get more severe. We will have to fix the entitlements, and cut spending, but also, keep taxes low.