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After 1688, Britain underwent a revolution in public finance, and the cost of borrowing declined sharply. Leading scholars have argued that easier credit for the government, made possible by better property-rights protection, lead to a rapid expansion of private credit, and see the Industrial Revolution as a result of the preceding revolution in public finance. InPrometheus Shackled, prominent economic historians Peter Temin and Hans-Joachim Voth examine this hypothesis using new, detailed archival data from 18th century banks. They conclude the opposite: the financial revolution led to an explosion of public debt, but it stifled private credit. This resulted in markedly slower growth in the English economy. Temin and Voth collected detailed data from several goldsmith banks-Child's, Gosling's, Freame and Gould, Hoare's, and Duncome and Kent. The authors look closely at Hoare's, founded by Sir Richard Hoare in 1672, because of its excellent records. Numerous entrants tried their hand at the new business of deposit banking; few survived and fewer thrived. Hoare's and a small group of competitors did both. Temin and Voth chart their growth in the face frequent wars and heavy-handed regulations. This new data allows insights into the interaction between financial and economic development. Government regulations such as setting a maximum interest rate caused severe misallocation of credit; a misguided attempt to lighten the nation's debt burden led directly to the South Sea Bubble in 1720--analyzed in detail here--and frequent wars caused banks to call in loans, leading to sharply slower economic growth rate. Wartime borrowing crowded out investment. Far from fostering economic development, England's financial revolution after 1688 did much to slow it down-the Hanoverian "warfare state" was a key reason for slow growth during Britain's Industrial Revolution.Prometheus Shackledis a revealing new take on one of the most important eras of financial development.
PT: Gray Professor Emeritus of Economics, MIT, author of many books, including, Engines of Enterprise: An Economic History of New England Press, Lessons from the Great Depression, and Did Monetary Forces Cause the Great Depression? HV: ICREA Research Professor, Economics Department, Universitat Pompeu Fabra, Barcelona, author of Time and Work in England 1750-1830
Table of Contents
Foreword Who are we? Why did we team up to write this book? What's the book about? Who provided invaluable assistance on this project?
Chapter 1. HOW ARE WE TAXED? The View from 30,000 Feet Why is everyone always so worked up about taxation? What is a tax? What are the major kinds of taxes? How are taxes like ducks? Are there "hidden" taxes? Are there ways to raise revenue other than taxes? Why not just borrow the money instead of raising taxes? How can taxes be like regulations? How have taxes changed over time? How do state and local taxes vary? How does the composition of tax vary across among federal, state, and local governments? How do tax burdens vary around the world? Federal taxes in the United States have been at about 18 percent of GDP for 50 years. Does that mean that this is the natural rate of taxation? Why is the long-term fiscal outlook so dire? Can taxes be discussed without getting into government spending?
Chapter 2. PERSONAL INCOME TAXES What's the difference between personal taxes and business taxes? Taxing the "Rich" and Jobs Who really bears the burden of tax? Are there cases in practice where it does matter who writes the check? Can taxes affect asset prices? What is the personal income tax? Isn't the income tax a fraud? Box. How is federal income tax calculated in the US? What are exclusions, deductions, exemptions, and credits? Why are there itemized deductions? Isn't it unfair that most people don't benefit from them? At what income level do people start owing income tax? Is it true that half of households owe no income taxes? Is this bad for democracy? Do we tax capital income the same as labor income? What is economic income? Why do economists think my home earns me rent? Why don't we tax economic income? How do we tax capital gains and dividends? What are the arguments for and against lower capital gains tax rates? What is the "Angel of Death" loophole? If we want to favor capital gains and dividends, does it make sense to do it via lower rates? What is the AMT? Where the heck did this turkey come from and why is it so hard to get rid of? What is the AMT patch? What is the "Buffett Rule?" What are hidden tax brackets? Does Uncle Sam really want you to live in sin? How does inflation affect the income tax? What are payroll taxes and how are they different from income taxes? Aren't other taxes also dedicated to Medicare and Social Security? Is it true that most taxpayers owe more payroll than income tax? Notes to chapter 2
Chapter 3. BUSINESS INCOME TAXES How do we tax corporations' income? Why do economists say that we "double tax" corporation income? What are the others ways business income is taxed? Why tax corporations? Which people bear the burden of the corporate income tax? What are the impacts of double-taxing corporate income? What would happen if we just eliminated the corporate income tax? How can some companies get away with paying no income tax despite billions in profits? Why is it troublesome that some companies view their tax departments as profit centers? Income earned by corporations is double-taxed, and tax avoidance opportunities abound. Make up your mind-Is corporate income taxed too much, or too little? What is depreciation? What is "bonus depreciation?" Are there implicit spending programs run through the corporate income tax too? Are multinational corporations taxed differently than domestic companies? What is a foreign tax credit? Why do we try to tax corporations on their worldwide income? Why not follow the practice in most of Europe and simply exempt foreign income from tax? What is transfer pricing? Why is it important to multinational corporations (and taxpayers)? What is formulary apportionment? Would that be a better option than trying to enforce transfer pricing rules? What are tax havens? How does the U.S. corporate tax rate compare to the rate of other countries? Does our relatively high corporate tax rate hurt our companies' competitiveness, and the country's competitiveness? How do recent corporate tax reform proposals work? Notes to chapter 3
Chapter 4. TAXING SPENDING What is a consumption tax? Why tax consumption rather than income? A consumption tax sounds great. What's the catch? What is a retail sales tax? What is a use tax? What is a luxury tax? The First Excise Tax and the Whiskey Rebellion What is an excise tax? What is a sin tax? What is a Pigouvian tax? What is a VAT? The credit-invoice VAT sounds really complicated. Why do it that way? Are small businesses subject to the VAT? Why doesn't the US have a VAT? How much money would a VAT raise? What is the typical VAT rate in other countries? How would a federal VAT interact with state and local sales taxes? Streamlined Sales Tax Does a VAT promote exports? What is the flat tax? Wouldn't a flat tax be super simple and fair? There are flat taxes all over Eastern Europe. Are they the same as the flat tax advocated for the United States? What is the X Tax? What is a consumed income tax? Are tax breaks for saving and retirement indirect steps toward a consumption tax? Do these tax breaks actually encourage saving? If the economy runs on consumption, why would we want to encourage saving? What's the difference between Roth and traditional IRAs? Box. Stupid tax tricks: Roth IRA conversions Do consumption taxes disproportionately burden the old? Notes to chapter 4
Chapter 5. OTHER KINDS OF TAXES What is the estate tax? How is estate tax liability calculated? Why tax estates when the assets that went into them were already subject to plenty of tax? What are the estate tax's effects on work and saving? How does the estate tax affect small businesses and family farms? What is the difference between an estate tax and an inheritance tax? What is a financial transaction tax? What is the property tax? What is a lump-sum tax? Do economists have other goofy ideas about ideal tax systems? Do these ideas explain why people don't like economists? Notes to chapter 5
Chapter 6. TAXES AND THE ECONOMY How do taxes affect the economy? Why do economists think that raising funds costs much more than the tax sticker price? Do some taxes help the economy? What is the Laffer Curve? Which is a better economic stimulus, cutting taxes or spending more? What kinds of taxes provide the most stimulus? What are built-in stabilizers? Why do smart, serious people disagree about optimal tax policy? How do taxes affect prosperity and growth? How do taxes affect working and saving? How do taxes affect entrepreneurship? How do taxes affect research and innovation? What is "trickle-down" economics? Why not run deficits forever? If people care about their children, won't they just save more to make up for any deficits? I.e., do deficits matter at all? Notes to chapter 6
Chapter 7. THE HIDDEN WELFARE STATE Are a trillion dollars in middle class entitlement programs really hidden in the tax code? What exactly is a tax expenditure? Why do we call tax expenditures entitlement programs? They're tax cuts. Who benefits from tax expenditures? Why has the use of tax expenditures been growing in recent years? How should policymakers decide whether to run a subsidy through the tax system? How should tax expenditures be designed? Are all tax expenditures run through the income tax? A Tax Credit for People Who Don't Get Tax Credits? Is the whole concept of tax expenditures based on the fallacious assumption that government owns all your money? Notes to chapter 7
Chapter 8. THE BURDEN OF TAXATION What makes a tax system fair? What is the benefit principle? Do special fairness concerns come into play when tax laws change? How is the tax burden distributed? What is the burden of deficits? Is progressive taxation class warfare?
Chapter 9. TAX ADMINISTRATION AND ENFORCEMENT How much does it cost to run the U.S. tax system? How does tax remittance and collection work? Who gets audited, and why? What's the DIF? What is information reporting? What is tax withholding? Why do people cheat on their taxes? Why do they comply? How much cheating is there? How much more tax could the IRS collect with better enforcement? Why not audit everyone? Are refundable tax credits especially prone to tax evasion? Do most people get tax refunds? Should I? How many people use tax preparers? Do they help or hinder compliance? How should tax complexity be measured? Do fewer tax brackets promote simplicity? Why is there a trade-off between simplicity and other goals such as fairness? Should states be able to tax Internet and mail-order sales from other states? How fast are we moving toward e-filing? If almost everyone uses tax software or paid preparers, should we stop worrying about complexity? Should we start worrying about democracy? Could most taxpayers be spared any filing requirement (as in the UK)? Could the IRS fill out our tax returns for us? Would simplifying tax compliance be unfair to H&R Block and Intuit? What is a data retrieval platform?
Chapter 10. TAX POLITICS/PROCESS What does the public know about taxes? What does the public think about taxes? How are new taxes enacted? What are regulations and why are they important? How does the tax sausage get made? (House and Senate rules) Who estimates the revenue cost of tax changes? How do they do it? Do they ignore behavioral responses to taxation? What is dynamic scoring? Must taxes be raised? Can we solve the problem by raising tax rates only on those with high incomes? Notes to chapter 10
Chapter 11. SNAKE OIL The FairTax sounds, well, fair. Is it? Wouldn't a flat tax be super-simple and efficient? How about offering a new tax system on an elective basis? What is the "starve the beast" theory? The taxpayer protection pledge sounds great. Is it? What is the "two Santa Claus" theory? Notes to chapter 11
Chapter 12. TAX REFORM Tax reformers talk about a broad base and low rates. What does that mean? Is the broadest base always the best base? Does the framing of taxes matter? What is a revenue-neutral tax change? Should tax reform and deficit reduction be separated? Are there some sensible tax reform ideas? Notes to chapter 12