A cautionary tale: the Cobra Effect and other lesser known taxes

One fundamental problem with taxation is that it can promote behaviours that undermine the base which one is seeking to tax. Sometimes, those behaviours can even be counter-productive. This is known as the Cobra Effect. There is an anecdote based on a British Governor in Delhi, who wanted to reduce the number of cobras, so he introduced a bounty. Some enterprising locals decided to breed cobras, so they could collect the bounty. When the Governor realised this, he stopped it. But the locals released the cobras they had bred, and they ended up with more cobras than they started with. The anecdote was promoted by Horst Seibert, a German Economist, in a book called The Cobra Effect in 2001.

There are other examples of this in history. Indeed there is one in French Hanoi at the turn of the 20th Century with a bounty on rats. To collect the bounty you handed in the tail. Some cut off the tail and let the rat go so it would breed. Others bred rats, so they could maintain their source of income. The French stopped paying the bounty when they realised this was happening.

It is trite to say that taxation changes behaviour. In 1696, the UK & Wales introduced a Window Tax. It lead to architecture with blocked windows, long dark houses and a detrimental health environment. It was repealed only as late as 1851. The production of glass remained constant from about 1810 to 1851 notwithstanding the increase in population and the number of houses built. It also gave rise to a divide between the very rich and the merely wealthy. Indeed there is a “counter-tax” ostentatious architecture where architects were asked to build places with as many windows as possible to demonstrate the wealth of the inhabitants. So there are examples where windows are built over walls as well as where walls are built to fill in windows.

The Window Tax had the advantage that one could count the windows from the outside. Earlier there where Hearth Taxes. In fact the Byzantine Empire had hearth taxes from the 7th Century. France introduced them in the 1340s. From 1662 there was a British Hearth Tax. A tax officer would go into a home and count the fireplaces. Many were blocked to reduce the tax. There is one case in Oxfordshire in 1684 when a women dug a hole through to the neighbour’s chimney.  An ensuring fire destroyed 20 homes and killed 4 people. Repealed in 1689, it was viewed as oppressive because a petty official could inspect someone’s home to determine the amount of tax payable. This was the same year as the British Bill of Rights.

In 1712 the UK introduced a Wallpaper Tax. This changed wallpaper fashion. One moved to buying plain paper and stencilling on the wall, rather than purchasing the pre-printed taxable type. It was repealed in 1836. There was also a Brick Tax introduced in 1784 which was originally levied on the number of bricks. Some clever tax advisors at the time, said why don’t you make your bricks bigger, which brick makers did until the “loophole” was closed.

In 1785 in Britain a tax was introduced on perfumery in wigs, which lead to a significant decline in their popularity. Taxes on playing cards were around since 1588, but were dramatically increased in 1710. The law required that the printer place his stamp on the Ace of Spades so that the tax could be audited. Failure to do so was punishable by death. Hence that card came to be known as the death card. Alabama still has a tax on playing cards, whereas Nevada gives you a free pack when you lodge your tax return on time.

A more obscure tax was introduced by Roman Emperor Nero and reintroduced by Vespasian in 70AD. It was a tax on urine. The urine was collected in public toilets and sold to launders to give the togas an extra whiteness. There is an expression “Money does not smell” which comes from a conversation between Vespasian and his son to the effect that the source of the revenue does not taint it: Pecunia non olet. Not sure about the laundry, however.

It is rumoured that Henry VIII put a tax on beards, although there are no contemporary records supporting this. Peter the Great certainly did in his quest to make Russia more European with a clean-shaven look.

If you go to Wikipedia there is a special page on tax and resistance or revolt. They have 349 specific examples. Some of them significant. For example, a tax on salt played an important role in both the French Revolution and Indian Independence. A tax on tea was significant in the American War of Independence. Much of the 18th Century unrest in Japan was tax-based. Also featured is the Eureka Stockade, Australia’s only civil war, which happened over the weekend. It deals with a mining tax. It is interesting that an increase in the “scrutage tax”, where Knights paid not to fight, is considered to be a factor leading to the Magna Carta.

There are a couple of others I would like to mention because they concern a lack of human dignity.

In the UK Margaret Thatcher sought to introduce a Poll Tax in 1990. That is a tax which everyone paid no matter the level of wealth or income. But there was an earlier Poll Tax in 1377 introduced by John of Gaunt to finance the 100 years’ war with France. It was intended to be a one-off tax, but was repeated 4 times to 1380. Many peasants couldn’t pay the tax and were in hiding by the Peasant’s Revolt of 1381. They had little to lose.  It had an unusual feature, at least for tax administration: girls and boys under 14 were exempted. This lead to the “puberty test”, where young adolescents, and I suspect more commonly young women, were physically examined. This degradation was strongly hated by the peasants. John Legge, who devised the test, was executed after the revolt. Dare I say he would have been better off with self-assessment.

One of the most bizarre taxes ever levied was in Kerala in India. Traditionally it was seen as a sign of respect that lower caste men and women showed themselves naked from the waist up to those of the upper caste. The tradition was breaking down as many lower caste women wanted the dignity of being covered. So the Royal Court introduced a tax on being able to cover oneself. This lead to the Channar Revolt which was from 1813 to 1869 where women of the lower caste gained the right to wear upper body clothes without taxation.

Augustus in 9AD introduced a childless or celibacy tax. The Ottoman Empire had a similar tax in the 15th Century. In 1695 England introduced a tax on bachelors and childless widows. The USSR had an additional 6% tax from 1941 to 1992 for childless men. On the books at least, Missouri taxes single men between 21 and 50, $1 per year.

I will end on a contemporary note. Canada gives an exemption for the sale of cereal where the cereal box includes a free toy. Interestingly the legislation specifies, the free toy cannot be beer, liquor or wine for the lower tax rate to apply. Presumably for tax purposes Canada would have labelling which tells you whether you have a toyful cereal, a toyless cereal or a cereal with a beer, liquor or wine toy as the case may be. I am not sure whether there is a Cobra Effect here, but given the strength of the toy premium market in Canada, there is a move afoot to only allow free toys for healthy foods. That will undermine the toyful unhealthy cereals market and I am not sure that it would help the market for cereals with beer, liquor and wine toys either.

This article was first published to Tax Now

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