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October 17, 2005
What's Old Is New Again: Historical Perspectives on Tax Law & Policy
Steven A. Bank, Kirk J. Stark, and Joseph J. Thorndike

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Steven A. Bank and Kirk J. Stark are professors at the UCLA School of Law. Joseph J. Thorndike is a contributing editor with Tax Analysts.


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In 1886 the British historian Edward Augustus Freeman famously declared that "history is past politics, and politics is present history." Freeman's claim hasn't fared well over the years; few historians today would accept such a narrow definition of their field. But the bond between history and politics remains palpable, not least when it comes to tax policy.

At a conference held July 18-19 in Los Angeles, tax scholars gathered to debate a host of familiar topics, including:

  • the nature and direction of fundamental tax reform;
  • the fate of the estate tax;
  • the abuse of the charitable tax exemption and the problem of tax shelters more broadly;
  • the effect of globalization on tax policy; and
  • the difficulty of developing a sustainable tax program for countries struggling to recover from military defeat.

If the topics seemed obvious, the occasion was improbable: the 2005 Tax History Conference, cosponsored by Tax Analysts, the UCLA School of Law, and the Cambridge University Centre for Tax Law. Conceived to elicit "historical perspectives on tax law and policy," the sessions brought together leading scholars in law, history, political science, and economics. Attendance was global in scope and included researchers from England, Scotland, Israel, Germany, and Canada, as well as numerous American universities.

A variety of themes emerged from the disparate papers, which explored historical tax issues from around the world. Those themes included: (1) the relevance of resources, political systems, and cultural constraints in the development of tax systems; (2) the importance of globalization in dictating the nature and direction of both domestic and international tax policy; (3) the role of business in creating tax provisions and the effect of tax in the development of business; and (4) the generally conservative nature of the tax system, with many of its innovations geared toward preserving itself against radical change.

Resources, Systems, and Cultural Constraints

In a paper drawn from her upcoming book, Berkeley historian Robin Einhorn considered the effect of slavery and local democracy on American taxation during the colonial and revolutionary era. Einhorn concluded that colonies and states where local officials were elected and where most people were free developed more sophisticated tax structures and public policy regimes.

Meanwhile, Cambridge historian Florian Schui examined Prussian fiscal policy during the latter half of the 18th century, focusing on the activities of French revenue officers imported by Frederick the Great to remake the Prussian fiscal system. In recounting the fate of those foreign officials, Schui emphasized how French ideas were modified by Prussian circumstances. Schui credited the international transfer of tax expertise with helping Prussia develop a more modern and efficient fiscal infrastructure.

UCLA Law Professor Eric Zolt presented his research, coauthored with Kenneth Sokoloff, on the effect that inequality can have on the development of fiscal systems. Through a comparative historical analysis of North America and Latin America, Zolt concluded that differences in the extent of inequality can produce divergent political decisions about the nature and size of government, the relative use of different tax instruments, and the types and scale of government spending.

Tel Aviv Law Professor Assaf Likhovski traced the creation of a tax compliance culture in midcentury Israel. In reaction to massive noncompliance by citizens of the nascent Israeli state, he explained, officials employed various practices, techniques, and discourses to bolster compliance and create a nation of willing taxpayers. Likhovski concluded that the process of creating a tax compliance culture must be understood as part of a larger effort to create normalized, individualized, and self-policing model citizens.

Two scholars offered papers on the reconstruction of Japan after World War II, focusing on the famous tax mission headed by Columbia economist Carl Shoup. Birger Nerré of the University of Hamburg and Elliot Brownlee of the University of California, Santa Barbara, both stressed the limited achievements of that ambitious and well- publicized mission. Shoup and his colleagues offered sweeping recommendations for fiscal reform, but Japanese political dynamics combined with changing American priorities to help derail most of the program.

The Importance of Globalization

University of Michigan Law Professor Reuven Avi-Yonah examined the history of U.S. international taxation from 1918 to the present. In some respects, he observed, surprisingly little has changed over the past century. U.S. international taxation is still dominated by the need to balance the desire to prevent both double taxation and complete tax avoidance with sustaining the competitive position of U.S. businesses. Avi-Yonah suggested that globalization might prompt U.S. officials to abandon the 1920s regime and the bilateral treaties that embody it. But he raised questions about the likelihood of such a clean break with the past, suggesting that gradual reform to the existing system may be more likely.

Neil Rollings of the University of Glasgow offered a paper on the importance of tax issues during British consideration of European integration during the 1960s. While many British industrial leaders were unhappy with what they considered an unfair tax burden in Britain, Rollings noted, they differed among themselves as to the extent and importance of that burden. Rollings described differences between the British tax system and those on the continent, evaluating the impact of those differences on Britain's relatively poor export and growth performance.

Business Interests and the Tax Policy Process

Janette Rutterford of the Open University Business School explored the effect of income and corporate taxes on investor valuation of equities. Rutterford's paper compared complexities in the United Kingdom's approach with the simpler method adopted in the United States. She reasoned that the United Kingdom's approach, which confused many investors, had unexpected and complex effects on British investors' ability to value equities.

Dennis J. Ventry Jr., a visiting scholar at the UCLA School of Law, offered a provocative assessment of the modern tax shelter phenomenon, describing how it was created by tax professionals, marketed and peddled by reputable accounting firms, legitimated with opinion letters from white-shoe law firms, funded by pillars of American finance, and consumed by corporations and wealthy individuals. Ventry maintained that modern tax shelters bear no resemblance to the endemic tax avoidance efforts that have plagued the U.S. federal income tax from its inception. Ventry concluded that the most effective weapon against abusive tax shelters may be disclosure.

Indiana University Law Professor Ajay Mehrotra explored how and why policymakers have transformed the corporate reorganization rules from their origin as a narrow and formalistic exception to a modern version of elective corporate welfare. He argued that the malleability of the law allowed that tax benefit to grow incrementally over time, as supporters expanded their rationales and lawmakers broadened the benefit's scope gradually.

Change or Continuity?

Ethan Stone, a law professor at the University of Iowa, assessed the history of the unrelated business income tax (UBIT). Beginning his story in the 1940s, Stone argued that that enactment of UBIT averted wholesale reform of the charitable tax exemption. By discouraging activities that made charities look uncomfortably uncharitable, it helped protect the exemption for income derived from passive investment and business activities related to an exempt purpose.

In her study of the estate tax debate of the 1920s, tax lawyer Susan Murnane, currently a history graduate student at Case Western Reserve, examined the failure of the repeal movement so prominently championed by Treasury Secretary Andrew Mellon. Her paper examines the origins of inheritance taxation in the Progressive Era, including its relationship to the general property tax and its plummeting reputation among public finance professionals. Murnane dissected the public relations campaign that took aim at the estate tax before the Great Depression derailed plans for sweeping tax reduction.

If the anti-estate-tax crusade faltered in the face of economic disruption, other popular antitax campaigns fared better. Tulane Law Professor Marjorie Kornhauser chronicled the role of tax protest groups in striking down a tax return publicity requirement enacted in the early 1930s. Kornhauser's paper described the ability of a small, committed group to achieve dramatic political change through the use of intense, highly organized media and public relations techniques.

Rebecca Rix, another lawyer-turned-graduate student, this time from Yale, presented "The Taxing Power, My Dear, the Taxing Power: Progressive-Era Democracy, Citizenship, and State Formation." Arguing that the power tax helped shape modern conceptions of the state, Rix examined the 1923 case of Frothingham v. Mellon to help discern changing, gendered notions of republicanism and social citizenship. She concludes that the taxing power had a vital role to play in efforts to expand the federal state and its social mandate.