Paul Frijters suggests it’s time to stop relying on accounting to get the rich and powerful to pay their dues.
The Romans extracted tributes from their provinces, such as regular grain supplies from Egypt and horses from Spain. China’s men paid tributes of women and produce to buy off the Mongols in the North. In general, in historical times, tributes were a normal way for weak regions to buy off the threats of stronger entities. The tributary system gradually made way for accounts-based taxation systems where any entity (individual, family, business, organisation) owed the state a proportion of its revenues, incomes, and profits.
A strong reason to suspect tributes are going to return to the tax instrument mix is the gradual failure of accounts-based tax systems to get taxes out of the rich and powerful. Accounts have become incredibly complex, with the US income tax regulation for instance now including over 70,000 pages of which the actual legislation is only about 3,000 and the bulk of the rest is case law. Legal systems have become a way for big players to tie up the state and smaller companies indefinitely in proceedings whilst they avoid their payment obligations. International trade treaties are now often drawn up by special interests, which both hide their lack of tax obligation, as well as use them to set up international legal structures that bind the hands of future governments to tax them.
Whenever some countries try to get international agreements, tax havens and governments-on-the-payroll combine to scupper the exercise via impossible demands, such as unanimous agreement between all countries. A lot of tax-related legislation, from patent laws, to inheritance laws, to religious tax exemption, to tax deductions and so on, should now be understood as favours from politicians to vested interests. To be blunt, the rich and powerful have well and truly beaten the tax system which now is only truly getting significant streams from the middle classes.
To be blunt, the rich and powerful have well and truly beaten the tax system which now is only truly getting significant streams from the middle classes.
Most tax analysts and tax authorities have not yet woken up to this reality and cling to the idea of the magical regulation that can nail down the rich and powerful via internationally agreed upon rules. They have found decade after decade that there are always countries willing to frustrate those efforts, and moreover that the rich and powerful outgun them in terms of expertise. After all, a good public servant in the tax department could make maybe $200,000, while that same person could easily make a $1 million a year in the private sector. So the big brains are not on the side of the angels.
Tributes can help here because they are not based on accounts. A tribute is a straightforward demand that is made under threat of punishment, with no rights of appeal or legal redress. Neither the Romans nor the Mongols allowed their tribute-paying counterparts the opportunity to tie them down in courts or definitional niceties. So tributes bypass the legal system, any demands for consensus-based international cooperation, captured accounting systems and the rest.
The most recent attempt in this direction was the French Digitax: a supposed 3% levy on estimated revenue made by (largely) major American internet providers. The Americans were so dismayed at this that Trump threatened the French with an all-out trade-war to get it off the table. So it disappeared from the table, with the outright French capitulation in early 2020 sold to the press as “to give a chance to negotiations until the end of the year”. Two years later; no Digitax.
Still, the French in my view hit upon the right track: to no longer base taxes of the rich and powerful on documents provided by the rich and powerful themselves, but upon what one oneself expects they can pay. That is the way to go because all it needs is a reasonable guess about revenues made in a country, coupled with a credible threat of some harm (like criminalisation of the directors and banishment from the territory of its activity if the tax is not paid).
All it needs is a reasonable guess about revenues made in a country, coupled with a credible threat of some harm.
Tributes make tax authorities look for credible threats to hold over the rich and powerful, such as bans on the local Internet and international arrest warrants. In different sectors it would need something else to have a credible threat. A state needs control over the Internet to makethreats on technology companies. It needs physical power to makethreats towards companies doing physical trade in the country. And it needs international cooperation to extend those threats to big territories, making it harder for big organisations to ignore the tributes demanded.
Given how large institutions and very rich people can simply ignore what small countries demand, tributes might be expected first to arise in large countries or blocks of them. In some sense we are seeing that already being played out in particular ways, such as the habit of the Americans to demand billions out of companies by threatening their directors with criminal punishment for some wrong-doing (like BP in the case of oil spills, or recently Big Pharma in the case of opioid-peddling). The EU too is using threats of criminalisation to get some money out of the big and rich – but only a trickle of what it could get.
Tributes will lead naturally to tensions between countries, with tax havens complaining, large countries that do the bidding of their own rich and powerful complaining even more loudly, and layers of professionals, including tax advisers, accounts, and regulators, complaining the loudest. Still, state imperatives outweigh them all: countries need taxes to function. And in an age where the rich and powerful own nearly everything, taxes must be levied on them. That moment can be postponed, but not avoided lest the state itself folds.
Frijters, Paul; Gangl, Katharina and Torgler, Benno (2021) How to Tax the Powerful and the Sophisticated? In: Erdogdu, M. Mustafa; Batrancea, Larissa and Cevik, Savas, (eds.) Behavioural Public Finance: Individuals, Society, and the State. Routledge International Studies in Money and Banking. London, New York: Routledge ORCID: https://orcid.org/0000-0001-6009-3358]