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How Tax Holidays Contributed to the Fall of the Roman Empire

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Corporate America, in part through the now-dissolved WIN America Campaign, has spent a good portion of the last few years lobbying for a tax holiday. They asked Congress to allow them to repatriate deferred tax dollars that are sitting offshore and pay a very low tax rate, instead of the 35 percent that they owe. U.S. companies are allowed to wait to pay taxes on "foreign" income until they bring the money back into the United States. I put the word foreign in quotes because we know that "foreign" income is often just the result of abusive transfer pricing, not real income, as evidenced by a story in the New York Times this spring. Billions and billions of dollars from corporate profits sit in offshore bank accounts, often completely untaxed.

In an attempt to bring some of it back, the Bush administration and Congress passed a repatriation tax holiday in 2004, allowing tens of billions to come back into the United States after paying a tax rate close to zero. As a result, business leaders learned that if they wait long enough, they can avoid paying virtually all corporate tax on foreign income by simply parking the money in an offshore tax haven and waiting for Congress to cave in and pass a tax holiday. The total sum of deposits sitting offshore skyrocketed.

This outcome was absolutely foreseeable with basic logic. But on top of that, any student of Classical history should also be able to point to a real example of the same pattern: the tax remissions of the Late Roman Empire.

In the Late Empire, much of the Roman economy was controlled by a small number of large estate owners. A significant portion of the agricultural output of the empire 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 mostly-urban middle class did exist. Rome had a well-developed tax system, and sought to tax each of the rich, middle class and poor. And, like an increasing share of the major multinational corporates in the United States and is often the case throughout history, the rich class found a way to escape taxation.

Roman tax collectors went out to these large estates in the Roman provincial countryside and assessed the taxes owed by landholders. Debts to the Roman treasury were recorded, and bills were sent out. Through a combination of impotent tax collectors and pervasive bribery, the owners of the large estates were able to delay paying taxes. They would lobby the ruling imperial administration to periodically cancel their debts to the state. Large-scale forgiveness began with Emperor Hadrian, and initially only came infrequently. However, each successive remission led to more tax deferral and 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 trouble required support from the upper class. Eventually, the imperial administration simply stopped trying to tax large estates. [1] [2]

Of course, Rome still needed tax revenue. They were fighting never-ending wars with powerful barbarians on all fronts, and the costs of running the Roman state were not shrinking. When the imperial administration was increasingly unable to extract tax revenue from the largest estates, they raised taxes on the poor and middle class. [3]

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

Sound familiar?

Repatriation holidays create vicious cycles. The first repatriation opens up the door to the possibility of avoiding taxes altogether, creating an expectation. That expectation creates pressure to follow through with another repatriation, which then creates an even stronger 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 serf system, but it will have tremendous negative consequences for the country. Small and medium-sized businesses pay a 35 percent tax rate while smart multinationals engineer their bill down to zero, or in many cases receive a net refund from the IRS every year. These kinds of inequities have profound impacts on our marketplace, just like they did on the economy of the Late Roman Empire.

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

[1] Neesen, Lutz, The Revenues of Rome. The Journal of Roman Studies, Vol. 71 (1981), pp. 170.
[2] Ralph W. Mathisen, "Julius Valerius Maiorianus (18 February/28 December 457 - 2/7 August 461)", De Imperatoribus Romanis.
[3] Wickam, Chris. The Other Transition: From the Ancient World to Feudalism. Past and Present
No. 103 (May, 1984), pp. 19.
[4] Ibid, pp 10, 21-24

E.J. Fagan is the New Media / Advocacy Coordinator for Global Financial Integrity and the Task Force on Financial Integrity and Economic Development.