Beard taxes and other lessons for Rachel Reeves

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When Ernest Borgnine auditioned for the title role of Marty, he knew this could be his big break. Typecast as a bit-part thug, Borgnine was nearly 40, losing his hair and putting on weight. Marty offered him the chance to play a movie lead: lovelorn butcher Marty Piletti.

As he read his audition lines, protesting to Piletti’s mother that “I’m just a fat, little man. A fat ugly man!”, he imagined he was speaking to his own Italian-American mother. He looked up at the director and scriptwriter. They were both crying. Borgnine had won the kind of role he’d always dreamt of. It was his passport to stardom.

Just one problem: Marty was never intended to be finished. Borgnine’s autobiography claims that he came to realise that the entire project was designed to be half-filmed, drained of resources to cross-subsidise other films, then shelved, all as a strategy 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 tax is stranger than we imagine. Rebellion, Rascals, and Revenue — a history of tax 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 aim not of raising revenue but of getting Russian nobles to shave. (Those who paid the tax were given a medallion with a picture of a beard on it.)

Or bachelor taxes, popular in many places both as a way of encouraging procreation and of squeezing single men with — one presumes — money to spare. Yet, what if a man could not find a wife? Surely the taxman would not add insult to injury by taxing his failure to find love? Exemptions were introduced for those who had tried but failed to woo a wife. As a result, a new profession arose in Argentina around 1900: the “lady rejecter” who would, for a modest consideration, make a signed declaration that a certain gentleman had proposed marriage to her and that she had declined the offer. Tax — and the avoidance thereof — moves in mysterious ways.

Rachel Reeves might want to bear such cautionary tales in mind as she ponders her options for the first UK Budget ever to be presented by a female chancellor of the exchequer. As so often seems to be the case when women take over a man’s job, the situation is unenviable. By British standards, the tax burden is high, but it is clearly inadequate to fund the public services and benefits that the public expect.

There is room to raise tax revenue — many successful countries have higher tax burdens — but unfortunately the chancellor has ruled out most of the sensible ways to do that. 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 make like Cleopatra and raise taxes on beer.

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

For example, Reeves might broaden the VAT base, charging value added tax on pretty much everything, much as they do in Denmark. Roughly half of what UK residents buy does not incur VAT, with the tenuous 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 break on half the nation’s 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, with ever more focus on squeezing the rich. There may be limits to how high spending can really go without asking average earners to pay a bit more.

So for her next trick, Reeves could lower — or at least freeze — the threshold for the income tax allowance. High tax-free allowances are expensive and far less progressive than they might appear: the poorer the household, the less they gain from a tax-free allowance.

To the extent that Labour will wish 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 nudge up that rate.

None of this sounds like fun — I certainly do not enjoy paying taxes — and Reeves has ruled out doing any such thing. But a government that is serious about raising revenue while also raising growth would be well advised to avoid trying to be too clever. Broad-based taxes at reasonable rates can raise a lot of revenue without distorting the economy too much. Punitive taxes — typically on narrow tax bases, and riddled with loopholes — bring us into the world of professional lady rejecters, beard medallions and movies greenlit as a tax-dodge.

According to Borgnine, the US tax authorities clamped down on the half-finished-movie scam, and insisted that Marty couldn’t be written off until it had been finished and screened. When Lancaster saw the completed movie, he fell in love with it and promoted it energetically. Borgnine scooped the Oscar for best actor.

If, however, Reeves continues the British obsession with narrow and distortionary taxes, she has no right to expect such a Hollywood ending.

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