Bizarre and weird, but fascinating. These are the words Michael Keen uses to describe the history of taxation, which he wrote down in cooperation with Professor Joel Slemrod in their book “Rebellion, Rascals, and Revenue: Tax Follies and Wisdom Through the Ages”. On 27 July, ZEW President Professor Achim Wambach welcomed the two authors Keen, deputy director of the Fiscal Affairs Department of the International Monetary Fund (IMF), and Slemrod, professor of business economics and public policy at the University of Michigan, to the virtual #ZEWBookTalk organised by ZEW Mannheim and MannheimTaxation. In addition, they addressed current developments.

Screen capture of ZEW President Professor Achim Wambach, PhD, and the authors Keen and Slemrod.
ZEW President Achim Wambach (top) in conversation with US economists Michael Keen (left) and Joel Slemrod (right).

At the beginning of the #ZEWBookTalk Michael Keen said that taxes have rarely sparked a war. However, after Chilean companies had started mining valuable nitrates at the Bolivian Atacama Desert, Bolivia continuously raised export taxes. This let to a conflict which lasted years and eventually triggered the so-called War of the Pacific. As a result Bolivia became landlocked. “Taxes sometimes change the map of the world,” said the IMF’s deputy director. The book by the US economists contains many historical anecdotes like the one about the War of the Pacific.

Both in the past and in the present, taxation is a matter of fairness. In the past, some governments developed bizarre methods to achieve fairness through taxation. As an example, Joel Slemrod cited the window tax in 18th and 19th century England and France. More windows meant higher taxes. The idea behind it was the following: The number of windows in a house correlated strongly with its size and the wealth of its owners. However, the window tax led to the number of windows being reduced and rooms being bricked up, Slemrod said. Another important aspect of taxation is that it elicits a behavioural response.

Minimum tax is no conceptual breakthrough

Keen emphasised at the end of the discussion that there have been “conceptually radical innovations” in recent years. As an example, the US economist mentioned the destination-based cash flow tax proposed by the Republicans in 2016 and the minimum taxation promoted by the Organization for Economic Cooperation and Development (OECD). His colleague Slemrod, on the other hand, is critical of the minimum tax. “I’m just not sure that so many countries are really willing to give up their tax sovereignty.” Nevertheless, he concedes that the minimum tax is a conceptual breakthrough. ZEW President Wambach also viewed the minimum tax with scepticism: “Currently, the effective tax rate in Europe is not much lower than it would be after the introduction of a minimum tax.”

“Economists know surprisingly little about the incidence of individual taxes”

In the following debate, ZEW President Achim Wambach focused on recent developments and how taxation effects individual households. Too little is known about the economic consequences of tax changes. In the US, for example, it is still unclear whether workers or the companies themselves will benefit from the reduction in corporate taxes under Trump. Keen and Slemrod also see a so-called incidence problem.

The Trump administration’s tax reform is not the only example of obscure effects of taxes. The often-discussed financial transaction tax, which some call the “Robin Hood tax”, is another case of unclear tax incidence. Taxation can be instrumentalised to win votes. “Politicians and lobbyists have an incentive to conceal incidence issues,” Keen said. Therefore, researchers need to learn more about tax incidence and the specific impact of taxes.

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