I suspect most of us long ago gave up on expecting any humility from our politicians – indeed, the less impressive they become and the more impotent it is clear that they actually are, the more their God complexes seem to flare up. It’s almost like they think humans are characters in a simulator game – like the popular Sims franchise – who can be clicked on and commanded at will rather than rational actors with their own agency. Nowhere is this truer than in economic policy, where the fatal dominance of wonks who think too highly of theory and politicians who think too highly of themselves has resulted in almost no one thinking about how humans actually behave. This helps explain why politicians are so often terrible at designing taxes and anticipating how people may seek to avoid them.
It has been a problem in tax policy for centuries. Between 1696 and the 1850s, many thousands of homeowners decided they’d rather go without sunlight than pay the hated window tax. During the reign of Queen Anne, an attempt to target the rich by taxing luxurious patterned wallpaper similarly backfired when crafty homeowners began buying plain wallpaper and paying artisans to stencil their patterns on directly.
Much forecasting might as well be done with bird entrails for all the bearing it has on reality
No one invented more taxes than William Pitt the Younger as he attempted to fund the costly war with Napoleonic France (though I’m sure if they had enough time, Rachel and Torsten could give him a run for his money). In 1795, scrabbling around for easy revenue-raisers, Pitt began taxing the perfumed powder used to colour Georgian wigs. Rather than pay up, many more people decided they could do without their elaborate hairstyles. The policy is credited with ushering in new trends for cropped hair and hastening the end of Britain’s booming wig industry – as you can see by comparing portraits from the 1780s and the 1800s.
Still, Pitt was a brilliant man and would sometimes rethink taxes when it became clear that they were creating perverse effects. In 1784, he reduced taxation on tea from a staggering 119 per cent to 12.5 per cent and effectively destroyed its vast black market at the stroke of a quill pen, raising revenues at the same time. I’m not convinced, however, that our current government possesses the humility to admit their errors and change course.
One change currently being considered by the Treasury is an NIC increase for landlords in an attempt to boost revenue in the upcoming Budget. You detect that telltale misunderstanding of human nature and disdain for unintended consequences. Though some landlords may absorb the cost, many more would surely pass on the costs to their tenants via rent hikes or exit the sector altogether, thereby pushing up rents. Reeves and her team must know this but, boxed in by the PM’s earlier promises not to touch VAT, income tax, etc., they may be willing to overlook it, should it raise money without breaching their ‘red lines’.
Of course, there are rogue landlords, from whom tenants deserve protection. But when the bad behaviour goes the other way, the law already protects wrong-doers to a shocking extent – a fact that is, in itself, contributing to the exodus of small private landlords. A relative of mine was recently forced to instruct lawyers at great expense and apply to the High Court to evict a tenant who owes tens of thousands of pounds in unpaid rent arrears. On average, it now takes a landlord almost eight months to regain possession of their property after issuing a claim to court. The mere threat of the renters’ rights Bill coming into force has already impacted the market, with vast numbers of landlords selling up. Targeting landlords may be easy but it feels like displacement activity for the fundamental issue of supply and demand, an area where the government is notably failing, especially in the capital.
It’s almost like government officials haven’t moved on from the days of the Roman augury; much forecasting might as well be done with bird entrails for all the bearing it has on reality. The government’s initial forecast massively overestimated the sums raised by the VAT raid on independent schools, since nearly four times the number of pupils have been displaced into the state sector than anticipated. Their pledge to hire 6,500 new teachers has quietly been shelved (although Labour MPs seem remarkably unbothered by this, perhaps because the policy was always motivated more by class resentment than raising revenue). HMRC recently awarded their ‘expert of the year’ prize to the wonk who performed the costings on the family farm tax – a year before the policy actually takes effect, which prompts the question of how on earth they feel they can judge its success or failure now.
Other follies spring to mind. The high rate of income tax incentivises sole practitioners to pay themselves through dividends instead of pay packets. Excessive tobacco duty has now reached such a high rate that further increases are merely spurring black market and criminal behaviour without actually reducing smoking rates. A recent KPMG report found that one in four cigarettes consumed in the UK now comes from the illegal market, amounting to billions in lost government revenue. Despite Labour MPs’ attempts to explain why increasing employer NICs is not in fact a tax on ‘working people’ or a ‘jobs tax’, predictably, it has resulted in 157,000 fewer people on payrolls, while the OBR estimates that in the medium term, employees will bear about three-quarters of the NIC increase.
This is perhaps the worst thing about ill-designed taxes that ignore human behaviour; not only do they target the wrong people and the wrong things, they all but guarantee that the government will go back for more.
Comments