Window tax and truffle pigs
Where tax lawyers sniff around
IN 1696, A KING introduced a tax on windows. The king was William the Third, of England. Google his portrait and you’ll see a pale, long-nosed man with a little rosebud mouth and curling brown hair parted precisely in the middle.
He needed a tax because the finances of the country were dire. The English Revolution had come and gone, expensively, a few decades before. There had been a recent and costly war with France. And the kingdom was in need of a round of re-coinage because of a common practice—an ancient scam actually, stretching as far back as the invention of coins—called “clipping” where small portions of the priceless metals would be shaved off the coin and kept, and then the lighter coin would be reintroduced into circulation.
So William the Third of England introduced a tax on windows.
It was a sort of precursor to a property tax or a wealth tax. It had a number of iterations, but its basic concept at the outset was to count the windows of each dwelling. If yours had less than ten, you were exempt; if more than ten, all your windows were taxable, including the first nine.
So, we can imagine, the builders went to their lawyers. “What are we to do?” they’d say. And, of course, if you study the records from the time, you’ll see a sudden proliferation of houses in 18th century England with only nine windows.
TAX LAWYERS are truffle pigs.
We turn our snouts to the dirt and sniff around for loopholes. There are some truffle pigs who are particularly clever. These truffle pigs find the best truffles, and then they sell the truffles to whomever can pay the highest rate for the truffles of highest quality.
In my early days as a lawyer at a big firm I worked with a minor-league baseball player-turned tax litigator. We’ll call him Gary. If there was anyone to lead the rich to the truffles, it was Gary. He was brilliant and he liked to cuss. Gary would swear, apropos of nothing, and then brusquely clear his throat of phlegm from decades-old minor league chewing tobacco.
Since Gary was brilliant he defended some brilliant tax schemes. One, which I worked on briefly, was a “Q-Yes Plan” or “Quebec Year-End Shuffle”. It was a sort of tax arbitrage. You’d move a company from one province to another in the middle of a transaction and largely avoid provincial tax in both.
Gary lost in the BC Supreme Court, but on appeal the result was overturned. The court said this: “It is not unreasonable to characterize the Plan as exploiting a ‘loophole’.” Quite. The judge said further that mere exploitation of a loophole doesn’t make a plan abusive. The taxpayer paid his advisors for a plan. It was a $23 million transaction. That kind of money can, and did, buy very good truffles. The plan worked. Provincial tax savings in this case was just under $1.2 million.
So the lesson, so far, is this. The more money you have, the more you can spend on truffle pigs. We’ll sell you loopholes and save you even more money. And we’ll defend you when the government drags you to court.
A YEAR OR TWO LATER, I left the firm where I’d begun and set out on my own. I rented a top floor office, a sublet from an M&A firm. When clients walked in and saw the Vancouver harbour and North Shore mountains they made a little “O” with their mouths and raised their eyebrows. “This guy sells good truffles,” they thought.
Not so—or not yet at least. I had very few clients at the beginning. I had to sell myself, I knew, but I no longer had access to the clever pigs at my old firm. I knew what everyone was doing, but not what the special few had access to, which was made clear by one client in particular.
“I’m looking for tax strategies,” he told me on the phone. He was tall and very broad, with fluffy hedgehog-like hair. He was newly rich, sales from his business having increased from mid-five figures in its first year to well over a million a few years later, and he wanted a tax plan. He sat with me at the end of the table in our big boardroom. I arranged his financials in front of me and nervously laid out what I could do. Section 85 rollover, I said. A holding company, a family trust, multiplication of the lifetime capital gains exemption among the members of his family.
He was disappointed. He’d read about tax havens, he said. He brought up Apple and their deal with Ireland where they paid a 2% tax rate. He didn’t want to pay tax at all or, if he had to pay tax, then as little as possible. He wanted the golden loophole. The nine-window exemption.
I hadn’t uncovered that truffle yet, and I lost the rich client with the fluffy hair. But I would have helped, I think, if I knew how: Incorporate in Barbados with an independent director, maybe. Transfer over your IP and charge a license fee back to Canada. Put sacks of grain in your living room. Or board up your windows.
THE WINDOW TAX was typically levied on occupants rather than owners, so renters would pay the tax. But there was an exception: large, multi-apartment tenement buildings. Slums, in other words. For these buildings, the tax was levied on the owner, justly perhaps. But then, let us imagine again, the slumlords went to their lawyers. “What are we to do?” they’d say. And, of course, if you study the records, you’ll see a proliferation of tenements in 18th century England with exactly zero windows.
Gangrene, dysentery and typhus proliferated in these houses. In 1781 there was a typhus epidemic in Carlyle. A doctor at the time traced the outbreak to one particular house which held six poor families:
In order to reduce the window tax [he said], every window that even poverty could dispense with was built up, and all source of ventilation were thus removed. The smell in this house was overpowering, and offensive to an unbearable extent.
There wasn’t much appetite for repeal. The homes of many wealthy landowners were exempted by friendly officials anyway. Others, knowing that commercial buildings were exempt, stacked up grain in their rooms and said they were storage facilities. Still others resorted to bribery, as tax officials of the time were notoriously corrupt.
It took a public groundswell in the 1850s, movingly led by Charles Dickens, to finally achieve repeal of the window tax. By then the damage was done. It was 155 years after King William the Third of England tossed back his curling brown hair parted precisely in the middle and signed the tax into law. And it was 155 years less a day from when one clever truffle pig put his nose to the dirt, sniffed around, and announced he found a loophole.
A note from the author:
Hi! If we haven’t met, I’m Jonathan Wright. I’m a writer and lawyer from Vancouver, in Canada. I’ve a small request for you: if you enjoyed this article, please share it! Thanks for stopping by.
Selected bibliography:
“The Window Tax: A Case Study in Excess Burden”, by Wallace E. Oates and Robert M. Schwab: https://www.aeaweb.org/articles?id=10.1257/jep.29.1.163