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October 11, 2005
Historical Perspective: What Goes Around, Comes Around
Joseph J. Thorndike

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Eighty-seven years ago, economist Joseph Schumpeter issued a call for the study of tax history. Fiscal systems, he declared, are central to the political and cultural life of a nation:


    The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare -- all this and more is written in its fiscal history, stripped of all phrases. He who knows how to listen to its message here discerns the thunder of world history more clearly than anywhere else. (Crisis of the Tax State, 1918)

Purple prose notwithstanding, fiscal history spent most of the 20th century on the periphery of mainstream historiography. More recently, however, scholars have taken a new interest in the subject, producing a steady stream of articles and monographs on the revenue structures of the modern state.

The new tax history has been generally national in scope, reflecting Schumpeter's conviction that taxes can tell us a lot about nations and their political development. While comparative studies are not unknown -- Sven Steinmo published a noteworthy effort more than 10 years ago -- scholars have generally respected the national boundaries that traditionally delineate political history.

Increasingly, however, the new tax history has begun to incorporate elements of a parallel historiographical trend: an interest in the transnational flow of ideas, institutions, and ideology. Scholars have begun to question the apparent divide between national narratives, instead highlighting the exchange, transfer, and transformation of ideas as they circulate around the globe.

Last month the University of Cambridge sponsored a conference on the international exchange of tax ideas, saying that "these exchanges were often crucial in shaping the national histories of taxation." In other words, we can't fully grasp the development of one nation's tax system without understanding its connection to similar systems in other countries. Organized by the Centre for Research in the Arts, Social Sciences and Humanities (CRASSH), the Cambridge conference included papers on a wide array of tax topics, but all took a firmly transnational view of their subject. As the organizers explained, contributions were designed to illuminate "how ideas about taxation are shaped, how they travel across borders, and how they are received and changed by those who receive them."

The exchange of tax ideas can take many forms. Sometimes, it's very direct, as in the late 18th century when Prussia's Frederick the Great imported scores of French tax officials to help establish a new tax regime in his cash-strapped nation. As Cambridge scholar Florian Schui explained in his paper for the CRASSH conference, the Frenchmen established a new fiscal infrastructure, known as the Régie, for their adopted country, drawing on their experience and expertise to create a relatively modern tax regime.

Usually, however, idea exchange takes a more modest route, often in the shape of a tax mission. Tax officials have long traveled from one country to another on fact-finding missions, absorbing and imparting ideas about revenue collection. In the 20th century, that process was formalized and routinized, with the United States leading the way. Perhaps the most famous example being the tax mission to Japan led by U.S. economist Carl Shoup after World War II.

Americans have also, however, been on the receiving end of tax ideas. During the Civil War, British experience with the income tax played a crucial role in shaping the American introduction of a similar levy. And in the late 19th century, German ideas about the income tax sparked vibrant debate among U.S. economists over the reintroduction of that controversial fiscal tool. Several historians, including Oxford scholar Holger Nehring, have reconstructed the influence of that German scholarship on American tax ideas.

The dynamics of idea exchange are often complex. Ideas aren't simply transplanted intact from one nation to another. Rather, they are exported, adapted, and interpreted in a variety of specific, national contexts. For example, the Shoup mission -- often described as the foundation for the modern Japanese tax system -- was only modestly successful. As historian W. Elliot Brownlee described in his paper for the CRASSH conference, Japanese political dynamics helped reshape and constrain the Shoup recommendations. The result? A postwar tax regime that was almost certainly more Japanese than American.

Even Frederick the Great's experiment with wholesale idea exchange represented something less than a clear transfer of ideas. The Régie officials resisted Frederick's plan to introduce French-style tax farming, under which tax collectors paid the crown for the right to collect taxes. Because payments to the crown amounted to a small percentage of total taxes due, they considered that a costly exchange of revenue for reliability. Instead, the Régie officials pushed Frederick to adopt a more state- centered system of tax collection, helping Prussia develop a more modern, productive fiscal infrastructure.

In other words, when it comes to the complex process of idea exchange, the most vital steps may come near the end. Ideas are invariably adapted to suit their context; efforts to import them unchanged are doomed to failure.

In the latter half of the 20th century, the value added tax may be the most striking example of a truly mobile idea. The VAT has spread rapidly and dramatically throughout the developed world. But its signal failure to breach the American border underscores the importance of national context. While broadly regarded as a modern and efficient tax, the VAT has never managed to transcend the dynamics of American tax politics. The explanation for that failure is complex, but it certainly reveals the importance of national context in the transmission of tax ideas.

In recent years, we've also heard much talk about another international tax phenomenon: the so-called flat tax revolution. But the spread of the flat tax again underscores the importance of local context. The various flat taxes enacted in Eastern Europe and elsewhere may share an ideological and rhetorical affinity for one another, but their differences are at least as striking as their similarities. Some tax income, others consumption. Some are levied at low rates, others at distinctly higher ones. And while some flat taxes, especially in the abstract, have been designed to replace existing levies, others have been added to the existing tax regime. The flat tax revolution, then, is something less than it might at first appear. While flat tax evangelists like to describe it as a powerful, transnational tidal wave, it actually represents a far more complex process of intellectual exchange.

Which is not to say that we don't still have some sort of flat tax phenomenon at work. Certainly we've witnessed a concerted effort to spread the idea, with an emphasis on the rate structure, not the tax base. However, it seems fair to say that the flat tax movement is actually a counterrevolution, seeking to reverse the progressivity revolution of the 19th century.