Of Rule and Revenue

6. Introduction of the Income Tax in Eighteenth-Century Britain

C H A P T E R V I Introduction of the Income Tax in Eighteenth-Century Britain The revenue of the state is the state. In effect all depends upon it, whether for support or for reformation. . . . Through the revenue alone the body politic can act in its true genius and character, and therefore it will display just as much of its collective virtue, and as much of that virtue which may characterize those who move it, and are, as it were, its life and guiding principle, as it is possessed of a just revenue. Edmund Burke Reflections on the Revolution in France Capitation taxes, if it is attempted to proportion them to the fortune or revenue of each contributor, become altogether arbitrary. The state of a man's fortune varies from day to day and, without an inquisition more intolerable than any tax renewed at least once every year, can only be guessed at. His assessment, therefore, must, in most cases, depend upon the good or bad humor of his assessors and must, therefore, be altogether arbitrary and uncertain. Adam Smith The Wealth of Nations The introduction of the direct income tax in 1799 marked an important turning point in British fiscal history. The income tax reflected a major transformation in prevailing economic thought and fundamentally altered the individual's relationship to the central state. It provided the state with both an enormous new source of revenue and access to information regarding individual wealth and lifestyle that had never before been available. Over time, increased revenues permitted the state to extend its provision of 122 Income Tax in Eighteenth-Century Britain 123 collective goods, ranging from social insurance and welfare programs to the roads and communication systems that are the infrastructure of modern business. Consequently, the power of the central state was enhanced as citizens became more dependent on it. Every level of British society, from the upper class to the working class, from center to periphery, felt the impact of this fiscal revolution. This chapter1 demonstrates that the imposition of the income tax rested on the creation of quasi-voluntarycompliance, that is, the extraction of tax payments without constant resort to direct coercion. An income tax is too expensive to administer in the absence of citizen acquiescence. Quasivoluntary compliance requires the evolution of institutions providing assurances that the tax will be "fair," equitably assessed and administered, and used to promote the common good. The case of the 1799 income tax also demonstrates that even rulers reluctant to maximize revenue are compelled to choose policies that increase returns to the state. William Pitt the Younger instituted the income tax as a last resort. All the evidence points to his distaste for the tax and his preference for alternatives. In what follows I take up several propositions deduced from the theory of predatory rule: Once the specialization and division of labor evolve to create large-scale markets and relatively widespread wealth, all rulers will, ceteris paribus, seek to institute that most lucrativeof all taxes, the income tax. Only insufficient bargaining power and high transaction costs would constrain rulersfrom implementing this policy. Given that the relative universality and invasiveness of the income tax creates significant opposition, the imposition of the tax will correlate with (1)increasing state expenditures on collective goods that citizens seek or, at least, accept as government responsibility; and (2) the evolution of institutions of rule that give rulers significant fiscal policymaking power. Given that an income tax is unthinkable until the transaction costs of measuring and monitoring income are sufficiently low, its imposition will correlate with the evolution of an efficient administrative apparatus. Given the political difficulties of imposition and the high costs of monitoring the income tax, its introduction will correlate with the establishment of institutions that create quasi-voluntary compliance. The Roman Republic had a form of progressive head tax administered by the gens. The Medici experimented with the scala in fifteenth-century Florence. The idea of an income tax was hardly new, but an income tax is 1 Written in collaboration with Stephanie Todd. 124 Of Rule and Revenue exceedingly expensive to administer. The transaction costs of estimating income and monitoring payments are extremely high, even in cash economies . The opportunities for agent corruption and abuse are very great, especially in societies without an elaborated bureaucracy. Finally, the income tax requires detailed examination of individual financial records, a practice that citizens...