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Jewish World Review Sept. 21, 2000 / 20 Elul, 5760

Amity Shlaes

Amity Shlaes
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Consumer Reports

Europeans strike back at the fuel tax monster. Should Americans follow?

Popular protests show that an inexorable expansion of government fed by indirect taxation will eventually produce revolt -- THE EXTRAORDINARY thing about Britain's tax rebellion over petrol was not that it happened, but that it did not happen sooner. Britain is a relatively low tax country, at least by European standards. Its cultural antipathy to excise taxes is long-established. Dr Johnson's 1755 dictionary defines "excise" as "a hated tax, levied on commodities".

Yet the government and its predecessors felt for many years that they could ratchet up this "excise" with impunity, until 76 per cent of the price of a litre of fuel went to taxes. Even now, after the protest, there is a rush to play down the event's importance, with authorities speaking as though the whole problem were merely ensuring that Britain not take up nasty continental habits such as striking.

But what is it about tax revolts that they always seem to flare up so suddenly and powerfully? Why did the petrol siege of Britain catch everyone involved unawares?

The best explanation for both the delay and the rage comes from a school of thought known as public choice theory. James Buchanan of George Mason University, public choice's greatest scholar, says that a government - left or right - is just like any other player in the market. It competes to survive, and will even hide its size to lull citizens into accepting its growth. Picture a monster, ghastly in its benignity.

Not everyone is aware of this all the time, not even government leaders. Lawmakers may believe, for example, that they are raising petrol taxes to help the environment. But in reality, they are just feeding a growing beast.

All this may sound a bit organic and conspiratorial. But public choice theory made intuitive sense to people long before Mr Buchanan codified it. One of its most best spokesmen was Louis XIV's finance minister, Jean-Baptiste Colbert. He said that the art of taxation consisted in plucking the maximum amount of feathers from the goose with the least amount of hissing.

Public choice theoreticians would say that citizens of developed countries live with high taxes not because they like them but because government has become more skilled at concealing them. But sometimes a force outside government's control exposes the game. Then citizens start building blockades. They tend to be angry not just at specific tax rates but also because they have realised they were being tricked.

Consider another tax revolt, the American one of the late 1970s and early 1980s. Public choice theorists might say it had its roots in the second world war, when the US government first imposed the income tax on the general public. At the time, President Roosevelt promised that the levy was temporary, a measure to defeat Hirohito and Hitler.

The most important change here was not the tax itself, although it was a dramatic shift. It was the manner in which it was collected: via withholding, or deduction at source. Previously, workers had always received their full pay before tax. The few who did owe income tax wrote cheques to the government. Employers now began to do the government's work, shipping cash off to Washington before citizens ever saw it.

The trick - essentially one of marketing - worked so well that lawmakers found it easy to keep the tax long after the war to which it was dedicated had ended. In America, as in other places with automatic deductions, citizens became accustomed to reduced earnings.

Instead of hankering after their lost dollars, or even noticing increases, they fixated, sheeplike, on the small refund they received on America's "tax day" of April 15. Through the 1950s, 1960s and 1970s, the nation tolerated a level of taxes that had formerly been deemed untenable.

The income tax's graduated rate structure also helped obscure the size of the burden: workers started out with relatively low rates of taxation, climbing the tax ladder step by step.

Then came inflation. Like a wind, it quickly blew taxpayers into higher brackets - a process known as "bracket creep". It also drove up property values, generating an explosive increase in property taxes. This sudden jab made the pain of taxes real again; the result was the California tax revolt.

Although it started as a localised campaign to reduce the property tax, the California movement spread to a national anti-income tax campaign. Now that voters were awake, they fought hard against all taxes, only resting after the big Reagan tax cuts of the 1980s.

Another public choice exercise is now under way in the UK. In the British case, inflation initially facilitated tax rate increases. Rising prices and the general trend upward made discrete tax increases harder for voters to discern. Governments took advantage of the situation to slip through increases in value-added tax.

The trick worked too well. In the case of energy, it persuaded the Major and Blair governments that they could stick to their programme of dramatic increases in petrol taxes without being caught out. They were able to delude themselves that the tolerance reflected a newly eco-friendly electorate.

But then the economic weather began to work against government. This time it was inflation's retreat - rather than its advance, as in America - that ended the game.

In the 1990s landscape of generally stable prices, large increases in petrol taxes and prices stuck out. The tax increases angered not only small businessmen but also, one suspects, the oil companies, which saw government hogging most of consumer spending on energy. In public choice lingo, one would say that companies such as BP and Shell recognised the government for what it was - a competing rent seeker - and therefore did not resist strikers' blockades.

All this suggests that the tax challenge will not go away, no matter how devoutly the Blair government wishes it. Once aroused, voters are not easily pacified again.

JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.


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