Taxes and tariffs are—unsurprisingly—a major topic for economists. On one hand, they generate huge inefficiencies, deadweight losses, and perverse incentives; on the other hand, they reveal the fascinating creativity with which entrepreneurs find ways to avoid these costs. Sometimes in a quite amusing way. Let’s look at a few examples from not-too-distant history.
Wall up the windows!
Let’s see for ourselves in Great Britain. The next time you find yourself wandering through historic British streets, lift your eyes a little higher. You might notice that a surprisingly large number of houses from the 18th and early 19th centuries feature strangely bricked-up windows. This architectural oddity was not caused by an excessive desire for privacy, but rather by the Window Tax, which remained in force in Britain from 1696 until 1851.
From a government’s perspective, taxing windows was a clever solution because in those times Britain lacked an income tax. The number of windows correlated with house size, serving as a reliable proxy for wealth. Adam Smith, the founder of economics, praised it as a progressive and easily administered tax. No forms were required; an official simply walked around the town and counted.
However, the specific rules between 1747 and 1757 explain the defensive architecture. Households with up to nine windows paid nothing. But with 10 to 14 windows, owners paid six pence for every window (even for the first nine). This rate rose to nine pence for 15 to 19 windows, and 12 pence for 20 or more. Naturally, citizens bricked up the tenth or fifteenth window to avoid the higher bracket.
Economists Wallace Oates and Robert Schwab (2015) confirmed this distortion in their research. See for yourself:
When the government later taxed homes with eight or nine windows, people adapted again, leaving us with a suspicious abundance of historical houses with exactly seven windows.
Sneaky tariffs
Tariff engineering, the art of legally circumventing customs duties, deserves a chapter of its own. Decades of fierce customs wars and legislative protectionism have left behind a massive chaos of thousands of exceptions and surcharges based on obscure definitions of various goods. To understand this absurdity, let’s observe three concrete examples.
When visiting USA, go to the nearest shoe store and look for Converse sneakers. These famous shoes, specifically the Chuck Taylor All-Stars, possess a strange feature: a fuzzy sole partially covered in very fine felt. This is not designed for better grip—the felt actually wears off after a short time—but for customs purposes. If a shoe’s sole is composed of at least 50% felt, it is technically classified as a “slipper” under US patent regulations. Imported slippers are subject to a mere 3% tariff, whereas standard footwear faces duties as high as 37.5%. This massive difference is a good reason for Converse to invest in fuzzy soles.
A similar strategy is found in Columbia women’s blouses. Many of these tops feature a very small pocket sewn near the waist. Like the Converse felt, this is no accident; it allows the blouses to be cleared at a 16% tariff rate rather than 26%. It is futile to ask why—likely, a local manufacturer once lobbied for an exception for their obscure clothing type. However, as confirmed by Columbia, manufacturers must now employ tariff experts alongside fashion designers and marketers. At least the ladies might appreciate the extra storage.
Yet, felt soles are trivial compared to the gymnastics performed by automakers. In 1964, President Lyndon B. Johnson imposed a 25% tariff on light trucks in retaliation for European taxes on American poultry—the so-called “Chicken Tax.” While original targets like brandy and starch were eventually exempted, the 25% light truck tax remained. To bypass this ordeal, Ford built Transit Connects in Turkey between 2009 and 2013 not as a truck but officially as a passenger vehicle with rear seats and seatbelts. Upon arrival in the U.S., the seats were immediately removed to convert them back. Mercedes took a different approach, disassembling vehicles in Europe and shipping them in pieces to be reassembled in South Carolina. Consequently, these companies pay only 2.5% duty instead of the crushing 25%.
Tomatoes, tomatoes
Lawyers and judges are famous for making a living out of petty semantics, but tax and tariff are the recipe for a true comedy.
When President Chester A. Arthur introduced a tax on imported vegetables in 1883, he infuriated a merchant named John Nix – a successful importer of tomatoes, which were suddenly subject to the new duty. If any botanists are reading this, they are likely to object: tomatoes are biologically fruits, as they possess a seed-bearing structure growing from the flowering part of the plant. Incredibly, this dispute reached the U.S. Supreme Court, which unanimously and permanently ruled that a tomato is a vegetable—at least for customs purposes. Justice Horace Gray famously argued that the colloquial, everyday definition of “vegetable” takes precedence over the botanical one.
A very similar case was heard by a British court. This time, the definition of Jaffa Cakes (soft sponge biscuits topped with orange jelly and chocolate) was on trial. When VAT was introduced in Britain in 1973, it applied to chocolate-covered biscuits, but not to cakes. Since a Jaffa Cake has “cake” in its name but resembles a biscuit, this mystery went before a tribunal in 1991. The judge considered the name, the ingredients, the texture, and the fact that when stale, Jaffa Cakes harden (like cakes) rather than go soft (like biscuits). He also noted they are eaten with fingers, not forks. The verdict? They are… cakes. Everyone sighed with relief, and Britain remained a slightly sweeter, less-taxed place.
The final bizarre decision involves Toy Biz, Inc. v. United States. Toy Biz—a subsidiary of Marvel Comics—went to court to determine if action figures of X-Men and the Fantastic Four were “toys” or “dolls.” Legal definitions stated that dolls represent human figures, while toys represent non-human creatures. Toy Biz argued that X-Men are mutants, not humans. While the company was motivated by tariffs (toys had a 6.8% tariff, dolls 12%), Judge Judith Barzilay’s ruling that they were indeed “non-human creatures” shocked fans – after all, the central theme of the X-Men saga is the heroes’ struggle to be accepted by society as human beings.
These examples prove that arbitrary taxation and tariffs inevitably force individuals and businesses to waste resources on navigating bureaucracy rather than creating real value. We probably can’t calculate how many man-hours were wasted trying to circumvent these taxes and duties, so we can at least have a good laugh about them.
Photo by Ox Street
