How Tax Holidays Contributed to the Fall of the Roman Empire « Global Financial Integrity

EJ Fagan

This article was originally published by The Huffington Post.

Corporate America, in part through the now-defunct WIN America campaign, has spent much of the past few years lobbying for a tax holiday. They asked Congress to allow them to repatriate the tax-deferred dollars that are offshore and pay a very low tax rate, instead of the 35% they owe. American companies are allowed to wait to pay taxes on “foreign” income until they bring the money back to the United States. I put the word foreign in quotes because we know that “foreign” income is often only the result of abusive transfer pricing, not actual income, as evidenced by an article in the New York Times this spring. Billions and billions of dollars of corporate profits sit in offshore bank accounts, often completely untaxed.

In an attempt to bring some back, the Bush administration and Congress passed a repatriation tax holiday in 2004, allowing tens of billions of people to return to the United States after paying a tax rate close to zero. As a result, business owners learned that if they waited long enough, they could avoid paying virtually all corporate tax on foreign income by simply parking the money in an offshore tax haven and until Congress relents and passes a tax holiday. The sum total of offshore deposits has exploded.

This outcome was absolutely predictable with basic logic. But on top of that, any student of classical history should also be able to cite a real-life example of the same pattern: the tax rebates of the Lower Roman Empire.

During the Lower Empire, much of the Roman economy was controlled by a small number of large landowners. A significant portion of the empire’s agricultural production came from these estates. Eventually this would begin to establish the European feudal system of serfs and landlords. However, most of the Roman population was still free, and a predominantly urban middle class existed. Rome had a well-developed tax system and sought to tax everyone from the rich, middle class, and poor. And, like a growing share of large multinational corporations in the United States and as is often the case throughout history, the wealthy class found a way to evade taxes.

Roman tax collectors traveled to these large estates in the Roman provincial countryside and assessed the taxes owed by the landowners. Debts to the Roman treasury were recorded and invoices were sent. Through a combination of powerless tax collectors and rampant corruption, owners of large estates were able to delay paying taxes. They would pressure the ruling imperial administration to periodically cancel their debts to the state. Large-scale forgiveness began with Emperor Hadrian and came only rarely at first. However, each successive rebate led to more deferral and tax evasion. Tax remissions became common for emperors or governors to issue a general tax remission for the senatorial class of entire provinces, especially when political unrest required the support of the upper class. Eventually, the imperial administration simply stopped trying to tax large estates. [1] [2]

Of course, Rome still needed tax revenue. They waged endless wars with powerful barbarians on all fronts, and the costs of running the Roman state did not diminish. When the imperial administration was increasingly unable to extract tax revenue from the larger estates, it raised taxes on the poor and middle class. [3]

Taxes became so heavy that the Roman middle class all but disappeared, and many indebted citizens who were not wealthy enough to bribe tax collectors were forced to flee. They fled to find refuge in the large, de facto tax-exempt estates run by the very people whose tax avoidance caused their taxes to be too high. This created a system of indentured servitude that lasted over a thousand years and contributed to the downfall of the Western Roman Empire. [4]

Sound familiar?

Repatriation leaves create vicious circles. The first repatriation opens the door to the possibility of avoiding taxes altogether, creating an expectation. This expectation creates pressure to follow through with another repatriation, which then creates an even greater expectation, and so on. This is as true today as it was in Roman times.

The result may not be the destruction of the middle class and the creation of a system of servitude, but it will have enormous negative consequences for the country. Small and medium-sized businesses pay a 35% tax rate while smart multinationals reduce their bill to zero or, in many cases, receive a net refund from the IRS each year. These types of inequities are having a profound impact on our market, just as they did on the economy of the Late Roman Empire.

We need to break the tax holiday feedback loop of rising expectations right now, never again allowing the wealthiest corporations to believe they are above paying taxes.

EJ Fagan is the New Media and Advocacy Coordinator for Global Financial Integrity and the Financial Integrity and Economic Development Task Force.


Footnotes :

  1. Neesen, Lutz, The Revenues of Rome. The Journal of Roman Studies, vol. 71 (1981), p. 170.
  2. Ralph W. Mathisen, “Julius Valerius Maiorianus (February 18/December 28, 457 – August 2/7, 461),” De Imperatoribus Romanis.
  3. Wickham, Chris. The other transition: from the ancient world to feudalism. Past and Present, no. 103 (May 1984), pp. 19.
  4. Same, pp 10, 21-24

David C. Barham