Taxes and Funding Public Policy
Don’t tax you, don’t tax me; tax that fella behind the tree.
—Senator Russell Long
Taxes are what we pay for civilized society.
—Oliver Wendell Holmes, Jr.
Government in some form goes back to the start of civilization and funding government from some source was a first consideration (Presumably, a golden age existed before governments, lawyers, and accountants.). Priests, war lords, or kings and queens needed funds to provide defense, build palaces, attack the nearest neighbor, or store food for the upcoming winter. Accounting was there to keep track of the tribute, booty, tithe,1 or tax. Early taxes no doubt were in the form of goods—so much wheat, barley, cattle, or beer. The concept of taxes needed to fund public goods (goods and services provided to society such as military security and water) is an obvious one, as is the concept of individuals not paying what was due the government if possible—with a big assist from the accountants. Tax evasion probably started the same day the first tax was announced.
The collapse of the Roman Empire led to local anarchy, which eventually resulted in feudalism—basically, lords depended on sharing the bounty provided by the peasants in the dubious exchange for protection.2 Poor peasants as the weakest economic and social link (i.e., virtually no ability to resist—peasant revolts happened but usually with bad outcomes) continued to provide most of the taxes in the forthcoming centuries. Success as measured by heredity continuity and kingdom expansion required massive funding, with novel tax sources a prominent feature. The Domesday Book of 1086 provided William the Conqueror a wealth census mainly for tax purposes, handy for funding wars and building castles but not so much for public health or education. Beginning with the Normans, England as a tax source usually meant the need to fight wars to defend the king’s claims on French land and the French throne, plus the continuing invasions of Scotland, Wales, and Ireland.
When Britain became a superpower through a gigantic colonial system, effective navy, and the application of mercantilism, government finances became paramount and not just to fight the French. Key funding sources were taxes and credit (meaning a functioning capital market and banking system). The periodic fights (and occasional civil wars) resulted in a strong Parliament with authority over taxes. The Chancellor of the Exchequer had to present a national budget annually to Parliament beginning in 1760, including estimated expenditures and recommended taxes. Shortly after that (basically at the end of the French and Indian War), those tax levies included the American colonies and that meant trouble.
Land owners and capitalists (perhaps the 1 percent) continually built greater wealth, while most taxes fell on the middling classes. Conveniently, the holders of wealth ran the government (by definition, plutocrats). Landowners favored the poll (head) taxes as the most efficient—everyone pays the same amount regardless of wealth; customs duties were favored for similar reasons. Capitalists favored only customs duties on imports (that is, foreign competitors). Duties on products such as tobacco and alcohol fell mainly on the poor and thus favored by the wealthy. Eventually, Parliament decided that taxes on the wealthy could not be avoided.
Soon after Britain declared war on France following the French Revolution, additional taxes were declared beginning in 1793. The first national income tax in Britain was in the 1799 Tax Act.
Four different categories of income were taxed, each requiring a separate tax schedule: landed property; funded property and tenant duties; annuities and dividends; and all other income (which included trade, manufacturing and professional). Taxes were raised, changed, and reduced until Napoleon was finally defeated at Waterloo in 1815. This first “modern income tax” expired in 1817.3
Concepts and Theories of Taxes
A general perspective on taxes is to determine public spending and how to pay for these goods and services. A balanced budget is consistent with the concept of “interperiod equity,” that is, current taxpayers should be responsible for current services. However, there are capital goods that could last years or even decades. It would be reasonable to pay for these over the life of these goods, usually using bonds under the related concept of “intergenerational equity.” Many governments (such as many state and local governments) have balanced budget requirements of various kinds. National governments typically don’t, because they issue their own currency, deficit spending stimulates an economy (especially useful during a downturn), plus other potential advantages. Determining the amount of cash available is one. A government issuing its own currency makes bankruptcy relatively difficult. Multiple (often conflicting) policy issues make decision making more complex, especially when citizens want more services but not more taxes.
Adam Smith, the father of classical economics, developed four maxims of taxation in The Wealth of Nations, conveniently published in 1776. The best known Smithian concept was ability to pay, revenue based on tax-paying capacity. Ability to pay implies vertical equity, usually interpreted as the wealthy paying a higher tax rate. The argument was rich people kept a good set of books to determine income and generated plenty of cash to pay taxes when due. Other tenants included taxes being equal or equitable, taxes should be certain and not arbitrary, plus taxes should be convenient and easy to collect.
The term “fairness” is widespread and often interpreted as a philosophical concept similar (or identical) to justice—moral rightness based on ethical, legal, or rational tenants. As with the philosophical definition, the term has alternative means when used for taxes. During the Civil War fairness was viewed primarily by region and profession. Western farmers favored income taxes on the wealthy merchants of New England, New York, and other middle states. Wealthy northern manufacturers and merchants favored customs duties on imports. During the Civil War both income taxes and customs duties were used as well as taxes on documents and goods (mainly pharmaceuticals and matches). The need for revenues was too great to ignore any possible tax source.
The overall amount of taxes collected became a political or philosophical argument, with certain groups favoring decreasing taxes under virtually all circumstances. Grover Norquist’s Americans for Tax Reform, for example, promoted the taxpayer Protection Pledge, to be signed by politicians to oppose any increase in marginal income tax rates. The Tea Party wing of the Republican Party carried this tradition forward.
Revenue breadth is another consideration, relying on multiple taxes or revenue sources which: (1) spreads the burden across multiple groups, (2) has a portfolio effect especially useful if certain taxes drop precipitously (say, during a recession), and (3) makes analysis more complex and therefore harder to criticize. Research at the local level indicates that greater revenue breadth leads to higher revenue levels and greater stability.
The benefit principle suggests taxes based on public goods received, a perspective given less consideration in part because other (nontax) revenue sources like customs duties, charges for services, or licensing fees are likely a better fit. Public goods are generally available to everyone, suggesting a disconnect between taxes paid and direct benefits. However, the benefit principle works reasonably well for many specific taxes such as a gas tax for road building and Social Security for retirement.
Horizontal equity requires economic equals taxed at the same rate. Tax rates on income, sales, property, and so on generally are at the same rates (with income taxes progressive, but at the same rate within income groups). However, there are various methods that change this equation. The major one on income taxes is the capital gains rate, usually about half the ordinary tax rate. Virtually anyone with a major tax liability prefers a capital gains rate. Some groups have been quite successful in receiving this rate, such as “carried interest” for private equity and hedge fund executives.
Other objectives can be used as part of tax policy, such as income redistribution, economic stabilization, promoting or discouraging various activities, and other concepts of fairness. Taxing rich people at a higher rate has long been a tax objective, beginning at least by the Civil War when the rich seemed to be getting much richer because of the war. Most recently, higher income, wealth and inheritance taxes have been proposed on the extremely wealthy because of perceived widespread income inequality. Sin taxes were early and often. The Jamestown tax on tobacco was America’s first tax. Taxes on tobacco and alcohol products were among the most common excise taxes from the beginning.
A rationale for corporate income tax is a cost of doing business given the advantages of the corporate form. An alternative argument is to avoid the potential for investors to otherwise avoid taxes on corporate income and retained earnings. Not everyone agrees who pays for corporate income taxes. Investors would pay through lower incomes for the corporation and therefore lower dividends. However, economists often claim that taxes are passed on to customers through higher prices. Alternatively, employees might bear the burden through lower compensation—especially executives with much of their pay tied to performance.
Institutional structure can be an important considerable, although often ignored. When no records exist, it can be hard to determine taxes—one reason income taxes were initially levied on the relatively wealthy having adequate supporting records. Effective taxes on wealth require a comprehensive census, such as the Domesday Book of William the Conqueror. Payment in cash requires a working banking system and available currency. Many categories of tax collections become inefficient with widespread bribery, smuggling, and other forms of corruption. Powerful interest groups can limit the amount of tax payable by their members.
Government structure within the United States is fragmented, meaning different levels of government have unique rules and policies and rely on specific tax sources which tend not to overlap (e.g., the federal government relies on income and payroll taxes, states on sales taxes, and local governments on property taxes). Enforceability limits types and amounts of taxes and specific mechanisms to enforce the taxes. Alexander Hamilton as Secretary of the Treasury relied on customs houses and coast guard clippers to enforce tariffs. The Internal Revenue Service (IRS) uses self-reporting by taxpayers, records submitted by employers and others, agents and audits to enforce income tax rules.
American Taxes
American colonists’ opposition to taxes proved a major cause of the American Revolution, with the Boston Tea Party probably the most well-known act of defiance. But independence did not stop the outrage: Shays Rebellion about high Massachusetts taxes was a factor in the need for a Constitutional Convention in the 1780s. One of the first taxes under the presidency of George Washington, on whiskey, led to the Whiskey Rebellion in the 1790s.
However, colonial taxes came early and often. The first tax was a poll tax in Virginia (1719, payable in tobacco), a mere 12 years after the founding of Jamestown and a year before the landing of the Pilgrims. The various colonies experimented with all sorts of taxes and fees, including sales and excise taxes, fines, charges for services, and tolls. Lotteries added to the gaming spirit. With plantation owners in the south politically dominant, poll taxes and indirect taxes such as customs duties were most common. Southern plutocrats favored a weak central government, presumably to prevent interference with slavery.4 The New England colonies initially taxed food produce and various professions. New York started with excise taxes and customs duties, then added property taxes.
The government of the American Revolution and beyond was guided by the Articles of Confederation, which provided no tax sources except those given by the states. Instead, costs were paid with paper currency (resulting in the term “not worth a continental,” with the value falling to almost zero as the war dragged on) and various notes payable. When customs duties were voted on as a federal tax source, Rhode Island voted it down (major changes required a unanimous vote of all 13 colonies). With massive debt, a depression and no revenue, the prospects for Americans were bleak.
Enough of the ruling class opted for major changes that a Constitution Convention was convened in 1787, initially to improve the Articles of Confederation. Instead a new Constitution was created, voted on, approved in 1788, and George Washington became the first president in 1789. The Constitution split political power between the states and federal government, giving the feds the right to levy tariffs and indirect taxes, specifically the power to “collect taxes, duties, imposts, and excises” (Article II, Section 8). The states were given the right to raise direct taxes. Until World War I, state and local government taxes remained much higher than federal levies.
It was up to Alexander Hamilton as the first treasury secretary to create a viable fiscal system when the economy was in depression and the government broke, with a $77 million national debt. Relying mainly on customs duties he was raising about $4 million annually early in the 1790s, a little over a dollar per person. This was enough to fund the limited federal government, although not enough to make a dent in the national debt. Customs duties remained the major federal revenue source until World War I.
Whiskey Rebellion
Hamilton recommended an excise tax on spirits to reduce the national debt, which passed in 1791. Western farmers raising wheat could most easily bring the produce to market by converting the wheat to whiskey, one of the few ways to generate cash. Consequently, they referred to it as the “outrageous whiskey tax.” The tax hit distillers rather than consumers in part because the tax was based on distillery capacity rather than the amount of whiskey produced. The farmers who distilled whiskey only after harvest season paid a much higher tax than professional distillers (conveniently, the group favored by Hamilton).
Farmers in western Pennsylvania resisted, making it next to impossible for federal officials to collect the tax. Open conflict started when U.S. marshals tried to serve writs to the delinquent distillers in 1794. Washington responded first with peace commissioners and then the militia. The rebels dispersed before the militia arrived, but several men were arrested (all were eventually acquitted or pardoned). Putting down the Whiskey Rebellion demonstrated the will of the government to enforce federal laws (and discouraged early ideas of secession). Given the disquiet, the excise tax was soon reduced and later repealed.5
Income Taxes
The Industrial Revolution brought manufacturing and big business into focus as the primary engines of economic growth. Public policy initially meant protecting manufacturing based on the infant industry argument (protect new industries from foreign competition)—thus customs duties served the duel function of providing most federal revenues and protecting domestic industry. It was not until the Tax Act of 1909, the 16th Amendment and World War I, that business and personal income taxes became major tax sources.
The first national income tax occurred during the Civil War as Treasury Secretary Salmon Chase became desperate for money to fund the massive war machine. Federal expenditures rose to over a billion dollars for fiscal year 1865 (when a billion was real money). Funding was mainly by borrowing and paper currency; however, enough money had to be paid by taxes to make creditors confident of repayment. As stated by Thaddeus Stevens, Chairman of the powerful House Ways and Means Committee: “the capitalists must be assured that we have laid taxes which we can enforce, and which we must pledge to them in payment of the interest on their loans, or we shall have no money.”6
A major consideration of the tax-writing committees (House Ways and Means and Senate Finance Committee) was fairness, partly related to regional differences. Western and border states largely depended on agriculture and were hard-hit by customs duties and other regressive taxes. Progressive income taxes would be paid mainly by rich industrialists and merchants of the Northeast. Another related factor was the use of multiple tax sources to raise the most revenue without widespread discontent, related to revenue breadth. As stated by Representative Justin Morrill of Vermont (later chairman of the Ways and Means Committee): “The weight must be distributed equally … a tax proportional to his ability to pay … in a just proportion to the means and facility to pay.”7 The expectation was taxpayers were willing to pay more tax if considered reasonable to the various groups.
Despite being from a wealthy family, Chairman Stevens favored an income tax based on “ability to pay” and no opposition existed from the Ways and Means Committee. Instead, debate centered on rates, exemptions, and various technical details. The final bill was an income tax on those earning over $600 (meaning only high earners would be subject to the tax), with a two-tier tax of 3 percent on incomes from $600 to $10,000 and 5 percent over $10,000, going into effect for fiscal year 1863. Income taxes also would be withheld from federal employees making over $600. The Congressional forecast for collecting income tax of $6.2 million in 1863, about 4 percent of projected revenue of $163 million. In other words, a trivial sum seemingly to project fairness without undue harshness on the wealthy. The tax also required a new bureaucracy within the Treasury Department, called the Office of Internal Revenue (OIR).
Former Massachusetts Governor George Boutwell became the first Commissioner of Internal Revenue. Aided by three clerks, Boutwell developed the necessary tax forms and bureaucracy needed to collect the new taxes. Collectors and assessors were appointed to collect taxes from all 185 collection districts, assisted by various administrators in Washington and field offices, some 4,000 employees. Boutwell issued hundreds of rulings in just a few months on the job. The 1862 Tax Act was ambiguous, requiring the OIR to determine what was taxable income and allowable expenses (roughly “cost of production”); allowable expenses included rent, insurance, employee wages, and freight.
Actual income tax collections proved much less than expected, $38 million in the first 10 months or about 45 percent of projections.8 Tax rates were raised, collections rose, with progressive rates up to 10 percent on incomes over $10,000. For fiscal year 1866, income tax collections totaled almost $73 million. The largest revenue source in 1865 was customs duties, over $179 million. Total revenues during the war period (1862–65) totaled $763 million, about 23 percent of total federal expenditures—enough to give creditors confidence to buy bonds.
When the war ended, expenditures dropped and federal surpluses rose even as taxes were lowered. The income tax was rescinding in 1872 and customs duties again became the main source of federal revenues until World War I. The OIR remained and became the IRS in 1953.
Post-Civil War Republicans preferred legislation favorable to business, including regressive taxes and laissez faire legislation. Progressive movements favored farmers and labor, including a progressive income tax, antitrust legislation, protections for labor, and elimination of government and business corruption. Democrats favored a progressive agenda and under Democratic President Grover Cleveland passed a new income tax in 1894, but this was declared unconstitutional by the Republican-dominated Supreme Court. Other reform legislation including antitrust and regulation of railroads were sustained by the courts although often in diluted forms.
Republican President Theodore Roosevelt was a progressive and continued a reform administration, although without major changes to tax laws. His hand-picked successor, William Howard Taft, modestly lowered customs duties with the Payne-Aldrich Tariff Act of 1909, while adding a corporate income tax as a revenue substitute; corporate income tax was set at 1 percent of taxable corporate profits over $5,000. The quest for a new personal income tax was also set in motion. The Act, in addition to new laws and IRS mandates, established the rates and rules—creating a host of accounting issues. Taxable income was calculated after allowable business deductions including depreciation expense (not an allowable expense during the Civil War—in part because accountants were struggling to figure out how fixed assets wore out and what to do about it).
The resolution proposing income taxes on individuals passed Congress in 1909, early in Taft’s administration and sent to the states for ratification. The required three-quarters of states ratified the 16th Amendment in February 1913 at the end of Taft’s administration (a total 42 states ratified the amendment): “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived .…” The 16th Amendment was followed shortly by the Revenue Act of 1913, which superseded the 1909 Act. Only the wealthy paid much tax: a 1-percent rate was assessed on incomes over $3,000, rising to 7 percent on incomes above $500,000.
Under progressive Democrat Woodrow Wilson legislation on business followed, including the Clayton Antitrust Act, creation of the Federal Reserve and the Federal Trade Commission—all passed in 1913. World War I followed the next year, which the United States entered in 1917. Taxes zoomed higher, especially income taxes, which from then on replaced customs duties as the number one federal revenue source. The personal income tax rate continued upward, from 15 percent in 1916, to 67 percent in 1917, and 77 percent in 1918 (capital gains were taxed at the same rate those years). Corporate rates also rose, but peaked at 12 percent in 1918. Despite the high taxes, federal deficits were huge ($9.7 billion in 1917 and $87.8 billion in 1918).
High tax rates meant the IRS had issues to resolve. Depreciation was allowed as an expense in 1909, but only straight-line depreciation could be used. Depreciation rules have continued to change ever since—accelerated methods would not be allowed until the late 1940s.9 Inventory methods were another problem, with last-in first-out (LIFO) prohibited in 1919 and not allowed until the late-1930s. Accountants at the time competed with attorneys to represent clients before the IRS and courts. Attorneys sued, claiming accountants were “practicing law.” It took several court cases over decades to finally allow accountants to provide tax services before the IRS (especially Bercu in 1948 and Sperry vs. Florida in 1963).
Republicans regained the White House and Congress in 1921 and would not relinquish it for a dozen years. Expenditures fell and the top individual income tax rate dropped to 25 percent in 1925. The Roaring Twenties was a period of big business and high tech, included electric utilities, airlines, radios, and automobiles. Little regulation of business and Wall Street led to considerable abuse, market manipulation, and widespread fraud. It all came crashing down in 1929 and reform had to wait until the New Deal of Franklin Roosevelt. Attempting to achieve a balanced budget, Roosevelt increased tax rates, with the top individual tax rate at 77 percent in the mid-1930s. This and other actions sent a recovering economy back into recession and the United States did not pull out of the Great Depression until World War II. The tax increases did not end the budget deficits either; they remained every year of the 1930s and throughout the war years.
The Roosevelt years involved other tax issues. The Social Security Act of 1935 introduced Social Security as a limited retirement plan, which included payroll taxes on both employers and employees. The War years required massive taxes and the top tax rate zoomed to 94 percent. To make tax collection more palatable, tax withholding was introduced in 1943, replacing the previous quarterly installments of earlier years. Income taxes were no longer only for the rich; almost all wage earners paid taxes. By withholding income and payroll taxes with every paycheck, few protested the high taxes.
Post-World War II Taxes
The post-World War II period came with a more muscular and activist federal government. This was partly because of military threats from the Soviet Union and satellite states as well as increased domestic social programs. Tax rates remained high, but somewhat more palatable with greater deductions and various tax breaks for both individuals and corporations. Payroll taxes rose as benefits became more generous and people lived longer. Medicare was added with an additional payroll tax in 1965. Other new social programs like Medicaid were funded out of general revenues. Transfer payments increased in popularity as monies were shipped from the federal government to state and local governments, in part to partially fund federally mandated programs.
State and local revenues generally depended on multiple sources which could be substantial. Around 1900:
state revenues averaged about $2.50 per person, while local revenues averaged $12 each. The largest single state tax was sales tax (35 percent of taxes) and property tax the biggest for local governments (89 percent). By 1950 state revenues were $92 per capita and local, $106. States increased revenues more rapidly than local governments over the first half of the 20th century. Sales taxes continued to be the largest revenue source (about 60 percent of taxes and 34 percent of revenues), but states also collected over $1 billion in income taxes. Spending was diverse, with major categories being education (9 percent), highways (14 percent), and public welfare (10 percent). In 1950 local property taxes still were almost 90 percent of taxes and 44 percent of local revenues. As with states, spending was diverse. The largest spending category was education (34 percent of expenditures or $38 per capita), followed by highways (10 percent), and public welfare (8 percent).10
The role of the federal government remained large after World War II as the United States struggled as the major western superpower facing off against the Soviet Union in the Cold War as well as providing increasing domestic services. Federal revenues remained about one-fifth of gross domestic product (GDP), while expenditures were usually somewhat higher. Although tax rates remained high in the 1950s and well into the 1960s, budget deficits remained problematic.
Congress continued to giver various subsidies and tax breaks to both corporations and individuals (lobbying and political contributions helped lubricate the process) for various productive and not so productive reasons, making the tax code increasingly long and complex. Maintaining a lower tax rate required specific behaviors and a battery of tax attorneys and accountants proved useful. Senator John Kennedy pledged reduced tax rates as a presidential candidate and the Kennedy and Johnson team delivered as the top tax rate dropped to 70 percent in the mid-1960s.
Lower tax rates became a continuing campaign pledge over the years and, as president, Ronald Reagan reduced the top tax rate to 50 percent in the early 1980s and the Tax Reform Act of 1986 dropped the top rate to 28 percent (with a 33 percent “bubble” for some unfortunate taxpayers, including me)—paid in part by eliminating most deductions. Corporate rates fell to 35 percent. Reagan also pledged deregulation and reduced federal spending. Spending reduction proved elusive with the result that budget deficits exploded. This led to tax increases in the 1990s under both Presidents Bush and Clinton. The top rate under the Clinton presidency at 39.6 percent was considerably lower than the 1950 but enough revenue collected to claim a small budget surplus around the start of the new millennium (a booming economy did not hurt). Tax cuts under George W. Bush lowered the top rate to 35 percent, while the Tax Relief Act of 2010 returned the top rate to 39.6 percent–the Clinton budget surplus was long gone. (The top income tax rates are summarized in Figure 2.1 (personal) and Figure 2.2 (corporate).)
Tax Evasion and Scams
Accountants assist their clients in paying the minimum amount of taxes legally due—this is called tax avoidance. Tax evasion, on the other hand, is illegal practices to reduce or pay no taxes at all. Avoiding taxes has been an American specialty since colonial times and initially focused on smuggling and bribery. After independence, Americans still did not want to pay taxes, leading to Shay’s Rebellion and the Whiskey Revolt. The higher taxes of the Civil War resulted in more evasion and The New York Times in 1868 claimed the OIR had “almost become the synonym of corruption.”11 Also of note was the takedown of the Whiskey Ring where the OIR seized over 60 distilleries and other businesses for excise tax fraud.
Tax scams are schemes to avoid taxes, often in a gray area that may or may not be illegal. Tax havens and tax shelters are key examples of potential corporate scams. Oil partnerships were common high-income shelters, with years of drilling costs (reducing current income) before any possibility of finding oil or gas. After the failure of Arthur Andersen, two of the remaining Big 4 were charged with tax shelter fraud. Both paid large fines to avoid indictment (and the government went after individuals with criminal indictments). Offshore tax havens are used both by individuals and corporations to move money and operations to avoid U.S. taxes. Corporations claim profits in low-tax countries, but can be stuck with massive amounts of cash within the foreign countries (or pay the tax to move it to the United States)—Apple famously has billions of dollars in foreign accounts.
Figure 2.1 Top U.S. individual tax and capital gains rate by year
Source for Top Individual Income Rates: Tax Foundation (www.taxfoundation.org), ordinary income (Note: Rates include surcharges and other adjustments).
Source for Capital Gains Rates: www.taxpolicycenter.org, capital gains (from 1954); citizens for tax justice (www.cfj.org/pdf/regcg.pdf), from 1913 to 1953.
Figure 2.2 Top U.S. corporate income tax rates, 1909–2016
Source for Top Corporate Income Rates: Tax Foundation (www.taxfoundation.org). (Note: Several brackets existed in various years and some of the intermediate brackets had higher marginal rates than the top bracket.).
In the high-tech financial world, derivatives are used specifically to avoid taxes, many of which were explained by Frank Partnoy. For example, an equity swap can be used to sell an appreciated stock and avoid paying capital gains taxes: “In recent years the capital gains taxes collected from wealthy individuals in the United States has been close to zero, in large part because of equity swaps.”12 Another technique identified by Partnoy was the sham trade to provide a tax loss.
The IRS has created headlines by going after famous people, beginning with Mafia boss Al Capone for tax evasion. Other famous cheats (or victims) were members of Congress including Charles Rangel, Duke Cunningham, and James Traficant, and celebrities Wesley Snipes and Willie Nelson.
Taxes Around the World
After World War I, many European governments introduced social programs funded with high income taxes on both individuals and corporations. Income tax rates dropped since then, based on a combination of conservative governments reducing social programs (such as Margaret Thatcher in Britain) plus reliance on sales taxes usually in the form of value added taxes (VAT). For example, the United Kingdom has a top corporate tax rate of 20 percent (and falling), 45 percent top individual income tax rate, plus a VAT up to 20 percent. Germany has similar rates: corporate taxes of 15.825 percent (plus additional local taxes), top individual rate of 45 percent, and up to a 19 percent VAT. France, another European Union country, also has similar taxes and rates, beginning with a 20 percent VAT. The top rate for personal income tax is 45 percent, while the corporate tax is 33.1 percent. In addition, France has a wealth tax that tops out at 1.8 percent over €16.54 million.13
America’s neighbor Canada avoided income tax until World War I, relying on customs duties as in the United States. The top marginal individual tax rate is 29 percent, while capital gains are half the individual tax rate. Corporate income tax is 15 percent. Canadians also pay provincial taxes. Similar to Europe, Canada has a VAT of 5 percent (plus sales taxes in the provinces). Australia has a maximum individual rate of 44.9 percent, with capital gains generally half the individual rate. Corporate income tax is a flat 30 percent. New Zealand has a top individual rate of 33 percent and corporate rate of 28 percent. There is a VAT (called a goods and services tax) of 15 percent.
Asian tax rates are not that different from American, European, or former British colony rates. Japan has a maximum 45 percent individual rate and capital gains are paid at the same rate as ordinary income (again a maximum 45 percent). The corporate rate is 23.9 percent. China also has a 45 percent top rate, but capital gains are 20 percent. The corporate rate is 25 percent. India has a 35 percent top rate, with most capital gains paying 20 percent. The corporate rate is about 20 percent.14