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On Wednesday, President Biden announced his $2 trillion infrastructure package, and part of the plan includes raising taxes on corporations and “high earners.”
It’s just the latest example of a government struggling to calibrate taxes so that they land fairly on the most well-off — an effort that has memorably backfired.
Back in 1697, the British crown wondered what it could base a tax on that would (fairly) require poorer citizens to pay less and wealthier ones a bit more.
The answer? Windows.
The number of windows in a person’s house seemed like a decent gauge of wealth, because richer people tended to have more of them, especially in crowded cities like London where light and air were at a premium.
The well-intentioned idea quickly went awry, however.
Poorer residents living in rural farm houses with several windows began complaining that they were being taxed more than higher earners living in modest apartments in pricey London.
The tax also set off a frenzy of residents bricking up their windows to avoid paying — an unfortunate result that can still be seen on some UK buildings today.
Some creative citizens covered their windows with loose bricks or mud temporarily until after they’d been counted. The tax even touched off a philosophical debate over what exactly constituted a “window,” forcing the government to clarify in 1747 that the definition was two or more panes in a frame.
This and other amusing historical anecdotes are collected in “Rebellion, Rascals, and Revenue: Tax Follies and Wisdom Through the Ages” (Princeton University Press), out April 6.
The book, written by Michael Keen, deputy director of fiscal affairs at the IMF, and Joel Slemrod, a University of Michigan economics professor, aims to use history to shed light on how the modern-day tax system works — as well as its potential pitfalls.
“We found that we were both fascinated by these weird, historical tax episodes,” Slemrod told The Post. “We tried to make learning about principals of tax policy fun.”
In the following anecdotes, the authors offer some home truths about taxation, such as “the biggest costs of taxation may be the ones you can’t see.”
But above all, the major lesson, Keen says: “Taxes are not boring.”
You can believe it’s not butter
Margarine was created in the 1860s by a French chemist, who combined oil with milk to produce an inexpensive spreadable substance. In the 1870s when margarine arrived in the United States, it soon ran afoul of the dairy industry, which feared the low-cost alternative.
The industry lobbied state governments, and soon various laws were introduced that helped stifle margarine sales.
“In 1886, the Federal Margarine Act slathered a special 2 cents per pound tax on margarine and imposed annual license fees on margarine producers of $600 a year; wholesalers owed $480 annually, and retailers had to remit $48 for the right to sell margarine,” the authors write. By 1937, 31 states taxed the butter substitute. Some even added crazy regulations to differentiate margarine from butter, including requiring it be dyed pink.
“After all, for a business, owing no tax is better than owing some, but better still is a tax only on one’s competitors,” the authors write.
A similar battle is underway today between mom-and-pop stores and giant retailers such as Amazon and Walmart.
With the rise of chain stores in the early 20th century, some states began passing a chain-store tax, starting in the 1920s.
The tax, however, backfired. Instead of curbing chain stores, it helped create megastores, after retailers discovered it made more financial sense to combine several outlets into one superstore — thereby minimizing the chain-store tax.
Now it’s not just chain stores that threaten local retailers, it’s online sellers. And until recently, states were not allowed to collect sales tax on vendors in other states, partially fueling the rise of companies like Amazon.
The laws began to change in 2018, and now many states collect their share of online sales.
Professional ‘lady rejectors’
Levying taxes has long been a way for governments to encourage desirable behavior — for instance, marrying and having children.
Unmarried men in ancient Greece and Rome were taxed, as were British bachelors from 1695 to 1706. Some states in the US even had a similar policy into the 20th century.
But what about those men who were unlucky in love? Were they to be “doubly cursed, embraced by the taxman but spurned by womankind?” the authors write.
In some places, bachelors were made exempt from the tax if they could prove they had asked a woman to marry but were rejected.
In Argentina around 1900, the tax gave rise to “professional lady rejectors” — women who, for a fee, would swear to authorities that a man had asked for their hand and that they had refused.
“Exemptions are as old as taxes themselves,” Keen told The Post. “This illustrates the difficulties we get into when we create them.”
In today’s world, the exemption for religious organizations is one example that can create problems. Because contributions to them are potentially tax deductible, “phony churches are created as tax dodges,” the authors write.
Take the infamous Phoenix Goddess Temple, an Arizona brothel-church that in 2011 was raided for offering sexual services in return for “donations.” Hallelujah.
A clean shave
In 1698, Peter the Great set out to modernize Russia, bringing it closer to European nations he admired.
One of the reforms he introduced was an annual beard tax. The tax was aimed at the Russian aristocracy, who often wore whiskers, as opposed to the clean-shaven European elite.
Anyone who wanted to sport facial hair was required to buy a “beard token” — a copper and silver coin that read “the money has been taken.”
Like the bachelor tax, the beard tax was a “form of social engineering,” the authors write, meant to encourage a particular behavior — and it worked.
One modern-day equivalent is the heavy tax placed on cigarettes, as governments try to encourage citizens not to do a particular thing via their wallet. New York City, for example, puts a nearly $6 tax on each pack, and “since 2000, 48 states and the District of Columbia have passed 145 state cigarette-tax increases,” the authors write.
Ships that sank
Starting in 1773, fees were charged to British ships. A vessel was hit with port and lighthouse taxes based on a formula that took its length and width into account, but not its depth.
This oversight spurred the Brits, in the name of tax avoidance, to build ships that were thin but had deep holds. “Apparently this makes ships unstable, and they tended to sink more than one might like,” Keen says.
British merchant ships were not wholly seaworthy, but they were at least tax efficient, the authors write. This effect — of tax laws negatively changing people’s behavior — is an “unfortunate and costly side effect that you’d like to avoid,” Slemrod says.
Something similar is happening today, only with motor vehicles. Since 2009, passenger vans imported into the United States have been subject to a 2.5 percent tariff, but cargo vans are slapped with one of 25 percent.
“Ford responded by importing the five-passenger Transit Connect, subject to the lower tariff, and then ripping out the backseats, flooring, and rear windows, and adding a new floor,” the authors write.
This conversion apparently takes just 11 minutes.
What’s next, a COVID tax?
“If you happened to own a coal mine, or be an arms manufacturer,” the authors write, “the outbreak of the First World War was pretty good news — at least for your pocketbook.”
But should companies get rich on the back of tragedy?
During the first and second great wars, many governments thought not. The US, the UK and other countries imposed an “excess profit” tax on any company that brought in earnings over a certain threshold. Rates were as high as 80 percent.
The tax was so successful that by war’s end, it was generating one quarter of the US government’s revenue and more than one third of the UK’s, the authors write.
Economists were doubly happy with it, because it was not so burdensome that it changed the way companies behaved.
In the wake of COVID-19, the idea of an excess profit tax is being raised again.
“Zoom has made a lot of profits, and there are articles saying the company paid zero federal tax,” Slemrod says. “The optics of that are really bad.”
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