Beard taxes and other lessons for Rachel Reeves

Stay informed with free updates

Simply register at UK tax myFT Digest – Delivered straight to your inbox.

When Ernest Borgnine auditioned for the lead role of MartyHe knew this could be his big opportunity. Typecast as part bully, Borgnine was almost 40 years old, losing his hair and gaining weight. Marty offered him the opportunity to play the protagonist of a film: the lovelorn butcher Marty Piletti.

While reading his audition lines, he protested to Piletti’s mother that “I’m just a little fat man. “A fat, ugly man!” he imagined speaking to his own Italian-American mother. He looked at the director and the screenwriter. They were both crying. Borgnine had landed the kind of role he had always dreamed of. It was his passport to stardom.

Just one problem: Marty It was never thought to be finished. Borgnine’s autobiography states that he realized that the entire project was designed to be filmed half-heartedly, without resources to subsidize other films, and then shelved, all as a ploy to reduce executive producer Burt Lancaster’s tax bills.

It’s hard to be sure whether Borgnine accurately described the nature of this, but what is clear is that the world of taxes is stranger than we imagine. Rebellion, rogues and income (a history of taxes by Michael Keen and Joel Slemrod) is full of wonders. Consider Peter the Great’s beard tax, imposed in 1698 with the strange but feasible goal not of increasing revenue but of getting Russian nobles to shave. (Those who paid the tax received a medallion with the image of a beard).

Or taxes on singles, popular in many places as a way of encouraging procreation and squeezing single men with, supposedly, money to spare. However, what if a man couldn’t find a wife? Surely the taxman wouldn’t add insult to injury by taxing your failure to find love? Exemptions were introduced for those who had attempted, but failed, to court a wife. As a result, around 1900 a new profession emerged in Argentina: the “rejecting lady” who, for a modest consideration, made a signed statement that a certain gentleman had proposed marriage to her and that she had rejected the offer. Taxes – and tax evasion – move in mysterious ways.

Rachel Reeves may want to keep these caveats in mind as she considers her options for having the UK’s first budget presented by a female chancellor. As is often the case when women take over a man’s job, the situation is not enviable. By British standards, the tax burden is high, but clearly inadequate to fund the public services and benefits the public expects.

There is scope to increase tax revenues (many successful countries have higher tax burdens) but sadly the Chancellor has ruled out most sensible ways of doing this. So what to do?

Reeves could find something new to tax: perhaps dogs (occasionally dangerous) or cats (dangerous to birds) or cows and sheep (methane emitters). She could act like Cleopatra and raise taxes on beer.

---

A more sensible rule of thumb is broaden the tax base, ideally reducing the tax rate at the same time. Unfortunately, the most economically efficient approaches are likely to be politically suicidal.

For example, Reeves could broaden the VAT base, charging value added tax on virtually everything, much like they do in Denmark. About half of what UK residents buy is not subject to VAT, with the weak justification that this is a pro-poor policy. Nonsense. A decent welfare state in a dynamic high-wage economy is a pro-poor policy, not a tax cut on half of national spending.

Despite high taxes overall, the income-based taxes paid by ordinary workers (national insurance and income tax) have been falling fairly steadily for four decades in the UK. The country’s tax base has become narrower and increasingly focused on squeezing the rich. There may be limits to how high spending can actually be without asking people with average incomes to pay a little more.

So for his next trick, Reeves could reduce – or at least freeze – the threshold for income tax relief. High tax-free allowances are expensive and much less progressive than they might seem: the poorer the household, the less they earn with a tax-free allowance.

To the extent that Labor wants to try to tax the rich, the policy (again) should be to keep things as simple as possible: reduce the threshold at which the top rate of income tax is paid and increase that rate .

None of this sounds like fun (I certainly don’t enjoy paying taxes) and Reeves has ruled out doing such a thing. But a government that is serious about raising revenues and growing growth at the same time would do well to avoid being too clever. Broad-based taxes at reasonable rates can generate a lot of revenue without distorting the economy too much. Punitive taxes, typically on narrow tax bases and riddled with loopholes, lead us into the world of professional woman rejecters, beard medallions, and approved movies as a way to avoid taxes.

According to Borgnine, US tax authorities clamped down on the half-finished film scam and insisted that Marty it could not be canceled until it was finished and projected. When Lancaster saw the finished film, he fell in love with it and promoted it vigorously. Borgnine won the Oscar for best actor.

However, if Reeves continues the British obsession with narrow and distorting taxes, he has no right to expect such a Hollywood ending.

Continue @FTMag to hear about our latest stories first and subscribe to our podcast Life and art wherever you listen