Dimensions of Tax Design: The Mirrlees Review

"Mick: This book is a series of background papers for a report that was prepared by the Institute for Fiscal Studies in the UK in 2011. There’s certainly a UK focus, but we picked this book because, although it’s a little out of date, it gives a great sense of where our discipline is. It brings together the theoretical apparatus that was developed over the last forty years or so with empirical techniques that have improved by leaps and bounds in this century. The various chapters are still the go-to places for a lot of the topics that arise not just in the UK, but in other countries too. Joel: One of the interesting aspects of this book is that for most—maybe even all—of the chapters, academic economists were paired with people from outside academia with a real interest in actual policy. It’s that aspect that comes to mind when you ask how good we are at taxing, because tax shouldn’t be left just to economists. In fact, there’s a quote in the final Mirrlees report to the effect that ‘economists cannot claim to have all the answers to good tax design.’ I think that’s true, not only about the practical aspects of administration and enforcement, but also about the ethical aspects. Mick and I, and others, will glibly use the word ‘fair’ and talk about ‘fairness in tax’ but deciding what’s fair is not an economics question. We have to look to the political system, or even to philosophers, for answers to that. But if you want to see where the state of the art is, even though it’s now 10 years old, these are some of the best economists in the world writing on 13 key topics. It is 1347 pages, so you do need to take a gulp before you recommend it to your readers. Mick: I confess that I realized after we picked it that each of us actually co-authored one of the chapters, but that’s amongst many authors. I hope we are still allowed to pick it? Mick: Picking up on Joel’s point about many of the authors not being academic economists, it occurs to me how many of the books we have chosen aren’t by economists. The author of The Sinews of Power is a historian. Taxing the Rich is by political scientists. Showdown at Gucci Gulch is by journalists. The prominence of non-economists in or choices is not just because economists don’t often write that well and we wanted books that people might enjoy reading. It’s also because economists have often not wanted to focus on, or felt comfortable with, taking a wider perspective on taxation. Joel: The Vestey family story is nice because it illustrates all the tricks that people still get up to on international taxation, but a century earlier. They ran a big multinational company and were very creative at playing all the tax avoidance games that multinationals and the rich still play today. It’s a lively story, with characters whose lives were, for better or worse, remarkable. So the Vesteys provide a way of telling the story of international taxation—even getting a little bit technical—and the tricks that taxpayers use, and how governments seek to counter them. Mick: That goes back to what we were talking about before. People have these ideas because they deal daily with these big-name companies and think, ‘They really ought to be paying tax to my government.’ But under the century-old norms, if a company is not actually physically present in your country, that’s simply the rule: they are not required to pay corporate tax there. Now we might begin to relax that rule, which would be a huge change. Mick: A few come to mind. One is an easy read. This is a wonderful short story by Mark Twain, called “A Mysterious Visit” . But it would spoil the joke if I were to describe it. Then there’s a book called The Pale King , by David Foster Wallace. This is very long, and to be honest neither of us got to the end of it, yet. It’s about his experience working in an IRS office in Peoria, Illinois. It has many great observations that we use in our book, for example about the great secret of tax policy being that it’s so boring that no one takes an interest in it, and therefore governments are able to get away with murder. The book also has many striking asides about the IRS, some of them true, some of them false. For instance, he writes about the US government having plans in place for tax filing in the event of a nuclear attack, which turns out to be true, right Joel? Joel: That one is true. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . Mick: There’s also a classic 19th century Russian novel that bears on oddities of tax systems: Dead Souls by Nikolai Gogol . It plays on a feature of the Russian tax system, which charged serf owners a tax related to the number of their serfs, but with that number based on an outdated register. If a serf was dead, you still had to pay the tax. The main character, Chichikov, travels the country trying to buy these dead serfs in order to later claim them as collateral for a large loan. The fun is in the characters he encounters, and their reactions to his odd proposal. And there are plenty of insightful episodes along the way. One is very relevant to tax administrations today. With most tax administrations—and as is often recommended by experts—a taxpayer who builds up a reputation for being honest gets better treatment. You may, for instance, get your VAT refunds faster if you have a good record. So, Chichikov builds up a reputation for being extremely trustworthy in relation to customs payments. And, of course, it’s all a prelude to a massive scam. This a nice reminder of possible pitfalls in standard ‘good practice’ in tax administration. Joel: Those are the ones I would have mentioned. There is a book by Dorothy Sayers , the British mystery writer, An Unnatural Death , which turns out to revolve around estate tax. There was apparently a tax motive for one character to die before the end of 1925 because, as of January 1, 1926, the inheritance tax was about to change and would have led to somebody losing a lot of money. Mick: We should also mention Robert Hart, a shy Northern Irish lad who went off to China in the mid-nineteenth century and became a wholly admirable and hugely respected head of China’s Imperial Customs Service. He kept diaries which include a lot about his very active and somewhat guilt-ridden amorous adventures. These have formed the basis for a novel, My Splendid Concubine , about his eventful career and ultimately quite sad love life. He fell in love with a Chinese woman and they had children but eventually parted. He is the only tax administrator we know of whose life inspired a work of fiction. Joel: And the only tax administrator we know of whose life inspired a statue. There was a statue of him on the Shanghai Bund. It’s not there anymore, but we have a picture of it in the book. Joel and Mick: Yes, Adam Smith , Chaucer , Voltaire, Cervantes, Herman Melville, Lavoisier, Tom Paine, Sam Adams all had tax-related jobs at some point. But they weren’t all very good at it."