Written By: Desmond Zihua Wang
Posted on September 3, 2019
In 2015 University of Toronto Law Journal article on tax administration in China, Professor Wei Cui highlighted the prevalence of “semi-compliant” behaviour among taxpayers in China, where tax is remitted and collected, but both the taxpayers and the collectors remain under-informed about the actual laws. This reliance on informal agreements between taxpayers and collectors undermines both the fairness of taxes and efficacy of tax policies. As China strives for rule-based administration, a study of tax administration in Victorian England may yield fresh insights into the Chinese system.
In the public imagination today, Victorian England mostly brings to mind the elegance and romanticism of a bygone era. But as the first nation to industrialize, England also experienced unprecedented economic growth and social changes. Observers of contemporary China could readily see parallels. England’s transformation profoundly challenged its prevailing legal system, including tax administration. The latter is the subject of a book by Professor Chantel Stebbings, a historian at the University of Exeter.
During the Victorian period, the machinery employed by the English state to collect direct taxes was the localist system, under which tax administration was overseen by the taxpayers’ peers rather than by the central government. Direct taxes were taxes on land, luxury goods, and income, among others. They were distinct from indirect taxes, such as customs, excise, and stamp duties, which were administered by officers appointed by the central government. The English government adopted localism for direct taxes because it was a long-established and tested system and satisfied the popular desire for local control.
Under localism, a typical local administrative body consisted of the commissioners, assessors, collectors, a clerk, and a surveyor. The commissioners were nominated by members of parliament from a pool of wealthy candidates. Their function was to “execute the legislation, to supervise and co-ordinate the assessment and collection of the tax”. To discharge these duties, they were granted the power to appoint subordinate officials, i.e. assessors, collectors, and clerk, who were mostly drawn from local farmers and tradesmen. Most subordinate officials worked part-time and were remunerated out of public funds. On the other hand, despite playing the central role in tax administration, the commissioners were unpaid for their work. This personal independence from the central government instilled confidence in the taxpayers that the commissioners would make fair assessments and decisions.
Surveyors, the full-time salaried officers appointed by the Treasury, were the only professional bureaucrats involved. Acting under the auspices of the Board of Inland Revenue, the surveyors brought potentially incorrect assessments to the attention of the commissioners, and inspected returns to establish their correctness. Nevertheless, in theory, they were subordinate to the commissioners, who retained the formal and final responsibility of administration.
In China, though tax administration functions are performed by full-time, salaried officers, they are concentrated at the lowest ranks of a geographically dispersed bureaucracy. This increases the difficulty of implementing laws and many Chinese tax administrators have given up trying to follow the legislation; instead, they attempt to approximate the end result by entering into informal agreements with their assigned taxpayers. This, in turn, diminishes the taxpayers’ incentive to learn about the laws. After all, why bother when your tax administrators are not even following them? In Victorian England, the legislature also did not require any particular legal expertise on the part of the commissioners, which seemed to make it a fertile ground for ignorance of the laws. Did informal agreements also prevail?
According to Professor Stebbings’ book, Victorian England actually saw much less semi-compliant behaviour from decentralization. In England, many commissioners maintained close relationship with the Board, with their clerks constantly writing to the latter for advice and guidance on matters of every kind. Importantly, the Board was happy to oblige. The central government long bemoaned the extent and leniency of local variations permitted under the localist system. The Board ceded control over to the commissioners only because the public’s suspicion of the Board’s neutrality and dislike for the taxes. With their hands tied, the Board lavished support for any commissioner who came to it for help in the hopes of nudging the latter toward stricter observance of the laws.
With no pecuniary interest at stake but a reputation to guard, the commissioners had no incentive to resort to informal agreements with taxpayers. The weak link was usually the assessors and collectors because they were exposed to financial temptations and were less sophisticated. Frauds, favouritism, and incompetency by assessors and collectors were constant thorns in the Board’s eyes, and likely accounted for most of the under-collection in taxes.
As the 19th century progressed, the localist system came under more and more strain in the face of increasing volume and complexity of work demanded by the new commercial age. The Times remarked in 1873 that the number of commissioners “dwindled through death or resignation, or they shirk the odium and responsibility of their task till the tax becomes a mere voluntary payment at the discretion of the taxpayer”. The central government seized opportunities to slowly but insidiously dismantle the localist system through formal and informal incursions into the commissioners’ territory.
The expertise of the surveyors proved particularly potent in overtaking the administrative and adjudicative functions of the commissioners, as commissioners, either willingly or reluctantly, conceded that only surveyors could rise up to the challenges presented by the modern state. By the start of the Great War, 36% of the income tax was assessed by Inland Revenue officials and 64% was collected by them, and by the middle of the 20th century the local tax officials had entirely dropped out of the picture. Unlike its counterpart in China, the Board actually had the capacity and expertise to administer taxes directly and was simply biding its time to replace the localist system.
The question remains as to how the English taxpayers obtained knowledge of tax laws. Only educated taxpayers with resources could realistically figure out the complexity of tax legislation. Many taxpayers turned to the clerks, assessors, surveyors, or the Board itself for advice on tax matters (commissioners, like judges, could not be easily approached). The surveyors and the Board were responsive to taxpayer queries and came to be recognized as the most authoritative voices. The clerks and assessors, though less knowledgeable, were also often consulted by taxpayers at the early stage of assessment process. The extensive support from the Board to educate these local officials may have prevented the emergence of large-scale informal agreements between taxpayers and assessors.
Taxpayers could also turn to their solicitors, and, later on, accountants for advices. Those two professions grew in response to the growing demand for expert knowledge. The fiercely guarded right to appeal tax assessments, along with the ease of initiating proceedings, its low costs, and geographical accessibility of tribunals, helped to create and maintain a robust tradition of tax litigation, further constraining the liberty of local tax officials in dealing with taxpayers (although it should be noted that Chinese courts are also low-cost and accessible).
In short, although tax administration in Victorian England faced similar challenges from decentralization as China does today, the presence of a central tax authority that was capable of and willing to administer taxes prevented local officials from taking significant liberty in their work and nipped the semi-compliant behaviour in its bud. If this theory is sound, then the Chinese tax agencies at higher level should invest heavily in improving their capability to administer taxes centrally to establish rule-based tax administration.