Like a different era, high taxes foster resentment and suggest trouble ahead Douglas O. Walker Professor of Economics Robertson School of Government Regent University Virginia-Pilot—April 16, 2006

“Death to the gabeleurs!  Kill the gabeleurs!”

The cry of the French peasants for the heads of the tax collectors could be heard all over Bordeaux in 1635 when the Crown tried to introduce a wine tax on an already oppressed population.  The peasants meant it, and tax collectors knew that the mere mention of a tax increase could mean their end.  In the peasant tax revolts of the 1630s, just being associated with tax collectors was dangerous.  One unfortunate young clerk working for a tax collector was cut into pieces by enraged peasants and parts of his body displayed as a warning to revenue officials.  In another town, a man just suspected of being a gabeleur was beaten and had his arm cut off before being paraded through town naked on the way to his execution.

The response of the authorities was predictable.  In the face of growing unrest, Cardinal Richelieu, Louis XIII’s devious and brilliant minister, realized that even realpolitque and raison d’état has its limits when confronted with an angry mob ready to revolt at the slightest hint of new imposts.  In response, the Crown at once crushed the uprising but then wisely stepped back and decreed the death penalty for anyone spreading rumors of new taxes.  The masses were not the only ones who lived in fear of higher taxes.  Kings did, too.

It is no different today. 

The cost of the modern welfare state has risen markedly over recent decades and now, as in the days of the ancien regime, taxes are extraordinarily high, as is resentment over their growing weight.  Despite talk of tax reductions, the direct burden of taxes has been rising, and has reached 50 per cent of the gross domestic product in France and approaches 60 per cent in Norway, Denmark and Sweden.  In most European countries claims by the state are over 45 per cent of output.  In Japan and the United States exactions are lower, but taxes still take almost one-third of GDP, more if measured as spending.

And people sense the burden implied by these figures is too low.  They are right.

High as they are, tax ratios understate the financial burden on those who ultimately pay for government.  Accounting conventions inflate the GDP as a measure of money income, and hence tax ratios overstate the ability to pay.  The GDP includes accounting charges for depreciation and indirect taxes, for example, neither of which represents income distributed to anyone.  It also includes imputations for which there is no corresponding income flow, such as imputed rent on owner-occupied dwellings.  In terms of actual income, the tax burden is at least 5 per cent higher than indicated by tax ratios.

Indirect costs raise the tax burden considerably.  Compliance with the tax code is expensive, and has generated a major industry of baffled accountants and confused lawyers attempting to comply with Byzantine rules even the tax authorities do not understand.  In the case of the U.S., compliance costs are estimated to be as much as 10 per cent of tax revenue, that is, 3 per cent of the GDP. 

Moreover, the cost of government is not only output appropriated through taxation.  It is also output that would have been produced had the tax burden been lower.  High taxes reduce incentives for work, saving and investment.  Economic growth slows and unemployment rises.  The loss is difficult to measure but it must be substantial.

The burden of taxes today is now heavy and mounting everywhere, the complexity of tax systems beyond comprehension and compliance, their effect on economic performance negative and corrupting.  Like the French monarchy, contemporary governments know the mere mention of higher taxes generates deep resentment and unease.

Cheerleaders for the welfare state believe higher taxes (particularly, higher taxes on those already paying high taxes) is the solution for all funding shortfalls.  But governments are increasingly apprehensive about The Iron Law of Taxation -- high and rising taxes inevitably bring strong and growing resistance followed by evasion and rebellion.  They fear the economic effects and political consequences of raising taxes, and rightly so. 

The demands of an aging population will place an extraordinary burden on government finances in coming years.  The contribution of taxes has been exhausted.  Attention now must turn to promoting higher rates of employment, longer working hours, and later retirements.  Unemployment and welfare systems must also be reformed to strengthen incentives for participation in the economy, and adjustments necessary to gain the benefits stemming from technological advance and international trade must be made.  All this is very difficult.

But if governments decide to raise taxes instead, one can only pray today’s tax collector can run faster than the gabeleur of old.