The Cash Nexus: Money and Politics in Modern History, 1700-2000
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REPRESENTATION WITHOUT TAXATION
Representation is of course a matter of degree: there was a world of difference between the democratic republic envisaged by Tom Paine and the ‘virtual representation’ supposedly enjoyed by voteless British subjects at Westminster. Yet virtual representation in a parliament of the propertied was better than no representation in an absolute monarchy. Was it also better in a practical sense?
It is sometimes assumed by political theorists that ‘representative institutions, not absolute monarchy, [are] superior in revenue extraction’.24 This, as we have seen, was Montesquieu’s view. But, true as this was of Britain and France in the eighteenth century,25 the correlation between representation and taxation has not been universal. A representative assembly can easily act as a serious check on the state’s tax-raising capacity if the assembly does not approve of the government’s spending priorities. When Sir Francis Bacon declared that the Englishman was ‘most master of his own valuation of any nation in Europe’ in the seventeenth century, he might have added: ‘and therefore the least heavily taxed’.26 Eighteenth-century Poland was the reductio ad absurdum: almost no taxation because of representation. The nobility represented in the Sejm interpreted liberty as liberty from taxation, with the result that the country’s revenues – and consequently the size of its army – stagnated, with fatal consequences.27
Paradoxically, the overthrow of the absolute monarchy in France and the triumph of the principle that taxes must have the consent of a bicameral legislature did not increase the willingness of the populace to pay tax: the new taxes introduced by the National Assembly (the contribution foncière, the contribution mobilière et personnelle and the patente) were failures in large part because of high levels of non-payment.28 Even the British parliament sometimes succumbed to fiscal irresponsibility. The income tax was abolished with indecent haste almost as soon as the Napoleonic Wars ended – ‘amidst the greatest cheering and the loudest exultation ever witnessed within the walls of the English Senate’ – despite the fact that expenditures exceeded revenue even with the income tax.29 It is a good measure of the reckless mood of the Commons that a motion was passed that all books and records relating to it be destroyed; fortunately, or unfortunately, copies had already been sent to the King’s Remembrancer.30
Nevertheless, the course of British history between 1832 and 1918 can be understood as a parallel and in some measure complementary extension of both the franchise and the direct tax ‘net’. Until 1884 the British franchise was in fact based on rental values (essentially, freeholders, leaseholders and householders whose properties exceeded a certain rental value were entitled to vote); but liability to local taxation was also a requirement in both county and borough constituencies. Proposals for electoral reform were also frequently related, both by opponents and proponents of reform, to fiscal criteria. ‘There ought’, reasoned Gladstone, ‘to be an affinity between electoral privileges and contributions to taxes.’ If the former were to be limited so as to exclude the poor, then so must the latter be. ‘Financial feebleness and extravagance’, in short, were ‘the sure means of generating excessive demands for reform’.31 His arch-rival Disraeli went so far as to propose as one of his ‘fancy franchises’ in 1867 that all 20-shilling income tax payers be given the vote. Nor was this some subtle political arithmetic obscure to electors. A placard of the early 1860s, supporting Gladstone in his criticism of Palmerston’s costly foreign adventures, makes this clear:
TAXPAYERS!… How long will you suffer yourself to be Humbugged by PALMERSTONIANISM and Robbed by the ‘Services’, and others interested in a War Expenditure, even in times of Peace?… THE CHANCELLOR OF THE EXCHEQUER APPEALS TO YOU TO HELP HIM…. Reform the House of Commons, AND DO IT THOROUGHLY THIS TIME.32
Franchise reform, in other words, was a way of increasing the representation and power of taxpayers.
However, the expansion of the electorate tended to occur at a far faster rate than the expansion of the income tax bracket. Between 1832 and 1914 the proportion of adult males enfranchised rose from 18 per cent to 88 per cent (though around a third of these were still informally excluded because of the registration system, which depended on a prolonged period of residence in a constituency). But the number of income tax payers remained remarkably static – and low – in relation to the population. In short, while there was no taxation without representation, there was a great deal of representation without direct taxation. Under these circumstances, it is hardly surprising that there was growing pressure to increase direct taxation in the wake of the 1884 Reform Act: between 1867 and 1913 it more than quadrupled as a proportion of total revenue from 8 to 36 per cent. The standard rate of income tax rose from just 2 pence in the pound in 1876 to 14 pence in 1913.33
The significance of this link from democratization to rising direct taxation was not lost on contemporaries. Lord George Hamilton noted the way the 1884 Reform Act led to an increase in public pressure for higher naval spending: ‘The great addition to the electorate … had, to a large extent, swamped the old niggardly and skinflint policy of the Manchester School…. [T]he mass of the recently enfranchised escape direct taxation out of which new burdens of expenditure were mainly defrayed; but independently of this personal consideration, the wage earning classes are very proud of the Navy.’34 As Prime Minister, Salisbury took a similar view. The 1884 Act, he argued, had substantially diluted the representation of income tax payers in the Commons. Consequently, there was bound to be pressure for increased expenditure from those MPs representing tax-exempt sections of the electorate. Warning his Chancellor against financing new naval spending exclusively from income tax, Salisbury observed astutely: ‘It is dangerous to recur to realised property alone in difficulties because the holders of it are politically so weak that the pernicious financial habit is sure to grow.’35 It was not only Conservatives who thought this way: the Liberal Robert Lowe foresaw a conflict of interest between an enlarged electorate and the taxpaying élite during the debates on the 1867 Reform Bill. Such fears had respectable intellectual progenitors in Bentham, Tocqueville and John Stuart Mill.36 By 1913 it was almost the conventional wisdom that (in the words of Sir Bernard Mallett): ‘[in] the modern democracy … policy may ultimately [be] controlled by, and in the interests of, the majority of an electorate consisting mainly of the poorer classes, while revenue is obtained mainly from a minority of wealthier persons.’37
Because the First World War increased the number of income tax payers by more than the number of voters, its effect was to lower the ratio of voters to taxpayers slightly, from 7 : 1 to 6 : 1. However, subsequent electoral reform between the wars – principally the lowering of the female voting age – pushed the ratio up even higher than its pre-war level: by 1935 it was more than 8 : 1. In the words of the authors of the definitive history of modern British public spending, ‘The widening of the franchise increased the political importance of the group most likely to believe that public expenditure should be increased for their benefit, but that the necessary revenues should be raised from others (the richer) by such means as a progressive taxation.’38 Perhaps the surprising thing in the light of this figure is that there was not more pressure to increase public spending in response to the Depression; we shall return to this conundrum later. The tendency since the Second World War has been for the ratio of voters to income tax payers to fall from more than 2 : 1 after the war to an equilibrium level of around 1.7 : 1 – in other words, a situation in which there are roughly 70 per cent more voters than income tax payers. That ratio has varied only slightly since the mid-1960s.39 What it means is that – contrary to the claim that in the welfare state ‘universal suffrage is combined with almost universal income taxpayer status’40 – British democracy enfranchises more than eighteen million people who do not pay income tax (though needless to say they nearly all pay at least some indirect tax). In addition to those workers whose earnings fall below the income tax threshold, that figure includes the unemployed, other we
lfare recipients, poor pensioners, the medically incapacitated and students. Given the size of this group, it is perhaps surprising that Conservative efforts to reduce the overall burden of direct taxation achieved anything in the 1980s.41
The shift from taxation without representation to representation without direct taxation was by no means peculiar to Britain. Many nineteenth-century states defined eligibility to vote on the basis of direct taxation. In France between 1824 and 1830 suffrage was restricted by high direct tax minima and the highest taxpayers also elected 40 per cent of deputies. Just half of 1 per cent of men over 19 had the vote.42 The 1830 Revolution scarcely changed this. Under Louis-Philippe’s ‘bourgeois monarchy’ there continued to be a direct tax minimum which was only slightly lower (now something like 1 per cent of men over 19 could vote). When Guizot was challenged about the high level of the threshold for qualification, his response was simple: ‘Enrichissez-vous!’ – ‘So get rich!’ In Italy too the suffrage included a minimum tax requirement until 1913, though the threshold was lowered in 1882 and continued to apply to voters between the ages of 21 and 29 until 1919.43 In Prussia until as late as 1918 the ingenious three-class franchise for the lower house was based on direct tax payment: taxpayers were ranked according to the amount of tax they paid and divided into three groups each of which paid the same total amount of tax, the top third naturally having far fewer individuals than the others, but all three groups being given the same representation in the Landtag. Most of the member-states of the Reich restricted the vote in some such way; it was only at the federal level that there was universal adult male suffrage. Figure 6 shows how the exclusiveness of European franchises diminished from the mid-nineteenth century onwards. It is worth noting that Britain lagged behind both France and Germany in the race to democratize before 1914, while Italy lagged behind Britain. After the First World War, however, the link between taxation and representation was broken.
Figure 6. Electorate as a proportion of population aged above 20, 1815–1974
Source: Flora et al., State, Economy and Society, vol. i, pp. 113, 117, 127, 149.
In most modern democracies, there is now a considerable discrepancy between the number of people entitled to vote and the number who pay income tax. The British case is not so unusual. In the United States, the equivalent ratio since the war has been between 1.6 : 1 and 1.8 : 1. However, many voters (a high proportion of them non-taxpayers) do not exercise their right to determine who represents them. Only in the early 1960s did the number of active voters in elections to Congress exceed the number of income tax payers. In 1990 just over 61 million Americans voted; nearly 114 million (almost twice as many) paid income tax. Millions of Americans today are liable to taxation without representation; unlike their colonial forebears, however, their disenfranchisement is largely voluntary.
KAFKA’S CASTLE
Yet it would be a mistake to regard the relationship between taxation and representation as implying some kind of paradigm of fiscal democratization: the Whig theory of history translated into the realm of finance. Many modern authoritarian states have been able to extract high tax revenues without granting any representation to the populace. Tax can be collected without parliamentary consent, as it was (to name the obvious examples) in both fascist and Communist regimes after the First World War. But to do so effectively an army of tax collectors is needed: in short, a bureaucracy.
The origins of public employment lie in courts: institutions for dispensing justice and other forms of royal influence. The expenses of courts were in fact remarkably high in the early modern period, and not only in Europe. In the sixteenth century most of the expenditure of the Japanese shogunate went on the court.44 The costs of his court, harem and stables seem to have accounted for nearly all the Mughal Emperor Akbar’s expenditure.45 But these institutions were seldom concerned with such humdrum matters as tax collection.
The emergence of bureaucracy in the modern sense – an organization of salaried officials charged with executing the executive’s commands – was no more a linear development than the emergence of representative assemblies. In the medieval and early modern periods, the temporal power was hampered by the fact that the Church all but monopolized the training of clerks capable of drafting and executing written instructions. The partial secularization of education created a supply of laymen willing to hold offices; but this should not deceive us into antedating the emergence of the modern bureaucracy.46 The motivation of the ‘new men’ often lauded by historians was more often to secure a stream of income for themselves (whether in the form of a salary or the ‘perquisites’ of office) than to rationalize administration in the Weberian sense. Indeed, many monarchs were tempted to treat offices as state assets – which they were, in the sense that they generated revenue – and simply sell them to the highest bidder.
This could take one of two forms: the sale of specific taxes to so-called ‘tax farmers’ or the sale of specific offices to individuals. Tax farming was not unknown in England. From the reign of Elizabeth I until the Long Parliament, certain customs duties were farmed out.47 However, it was far more important in France. In the first half of the seventeenth century, the three main farms (of the gabelle, the aides and the so-called cinq grosses fermes which controlled customs duties after 1584) accounted for 80 per cent of the income from all indirect taxation. In 1681 Colbert merged all the various excises and customs with the new tobacco monopoly, leasing them in their entirety to a syndicate of forty tax farmers known as the Farmers-General.48 These leases were renegotiated every six years. The main disadvantage of tax farming is obvious: left to their own devices, the tax farmers creamed off a far larger share of the revenue passing through their hands than was in the interests of the executive. Half of total revenues simply never reached the French government.49 Although there were attempts during the eighteenth century to move to a system of régies (whereby the government paid the tax farmers salaries and bonuses), the resistance of vested interests to thoroughgoing reform proved insuperable.50 The Hôtel des Fermes came to be reviled as ‘an immense and infernal machine which seizes each citizen by the throat and pumps out his blood’.51
The other fiscal device on which the French ancien régime came to depend was the sale of offices. This has been called ‘a second system of public debt’, in the sense that office-holders invested some capital in an office, the income from which was equivalent to the interest on a government bond.52 By 1660 there were around 46,000 office-holders, whose offices had an approximate capital value of around 419 million livres. There may well have been political advantages to this system from the point of view of the French monarchy. Contemplating the overthrow of James II in 1688, Louis XIV’s advisers concluded that:
if England had as many officials supported by the king as France does, the revolution would never have occurred. For it is certain that so many officials means so many committed people attached to the maintenance of royal authority. Without that authority they would be naught. If it were destroyed they would instantly lose the large sums of money with which they bought their positions.53
The difficulty was that the fiscal costs of the system outweighed this apparent benefit. Although only a minority of offices were paid a salary, they represented a large liability for the crown, which could only partly be offset by taxes on office-holders such as the paulette. As early as 1639 annual payments to office-holders exceeded new income from sales of offices. By Colbert’s time the crown was receiving 2 million livres in taxes from office-holders, but paying out 8.3 million livres in salaries. Though Colbert was successful in abolishing around 20,000 offices, his work was partly undone by the high costs of the Dutch War of the 1670s.54 The attempt by Maupeou to reduce the number of offices in 1770 cut the total number by only 5 per cent.55
In place of tax farming and a venal officialdom, Britain developed, in the Department of Excise, the prototype of a modern bureaucracy, based on ‘recruitment by examination, training, promotion on merit, regular salaries an
d pensions, and standardized procedures’.56 The Excise still attracted rent-seekers like the poet Robert Burns; but he soon found he had to work for his salary. At the same time, there was a shift towards centralization of other revenue collection. By the end of the reign of Charles II, tax farming had been done away with and the Exchequer was in sole charge of accounting for the income and expenditure of all central government departments, a role ultimately taken over by the Treasury.57 These reforms were little short of ‘an administrative revolution’ with dramatic results:
In the 1670s, Charles II disposed of 2.7 times as much revenue as his benighted father had managed with such difficulty to collect just half a century earlier. Fifty years later, the revenues of the newly established Hanoverian regime were eight times, and in the 1770s eleven times, greater than those spent by Charles I. After the wars with Napoleon, the British state commanded thirty-six times as much revenue as that fiscally embarrassed and unfortunate Stuart monarch had garnered two centuries earlier.58
It was in this institutional regard, more than in their absolute economic resources, that the continental great powers lagged behind Britain. According to one rough calculation, there was one ‘fiscal bureaucrat’ for every 1,300 people in Britain. The comparable figure for France was one per 4,100, for the Netherlands one per 6,200 and for Prussia – often wrongly portrayed as a more bureaucratic state than Britain – one per 38,000.59 The fiscal bureaucracy more than trebled between 1690 and 1782: revealingly, the Excise became known as ‘the monster with 10,000 eyes’.60 The French Revolution – so Bosher has argued – was partly about achieving a similar transition to bureaucratic rather than ‘corrupt’ (or rather, entrepreneurial) finance – a transition which had in fact been set in motion by Necker and Brienne before 1789.61 Symbolically, 36 tax farmers were arrested during the Revolution, of whom 28 were guillotined on 8 May 1794.62 Among them was the great chemist Antoine Lavoisier, who had financed his researches out of his income as a tax farmer.63