“Nothing is certain in life except death and taxes”, as Benjamin Franklin’s old maxim goes. That’s especially true here in Britain, where everything from tampons to televisions is taxed, and even upon death there is one last impost, Inheritance Tax, to pay.
Inheritance Tax (IHT) was one of 20 taxes that the Institute of Economic Affairs recommended abolishing in a report last year, which made the case for a radical simplification of Britain’s complex and often counterintuitive tax system.
IHT, as unpopular as it is ineffective, represents a form of “double taxation”, because the inheritance is derived from income that has already been taxed – during the bequeather’s lifetime. The policy is riddled with loopholes and opportunities for avoidance, including nonsensical exemptions on everything from expensive artworks to agricultural land.
In many cases, IHT can be avoided altogether by gifting assets above the threshold to relatives well before death. This is, of course, easier for the rich to achieve than the moderately well-off, whose main bequeathable asset remains their home.
A glance at the history of taxation in Britain reveals that myopic policy-making is nothing new.
We also singled out Stamp Duty Land Tax (SDLT), another poorly considered levy with destructive side effects. It might raise revenue for the Exchequer, but it causes enormous distortions in the process, which is why Stuart Adam of the IFS termed Stamp Duty “a strong contender for the UK’s worst-designed tax”.
By penalising any move from one property to another, stamp duty creates harmful bottlenecks in the housing market by, for instance, discouraging older couples from selling family homes and downsizing. The knock-on effect of this is to reduce the availability of appropriate housing for younger people, such as couples hoping to start or expand their families. Consequently, two groups of people are left worse off.
This is a “stupid” tax. A non-stupid tax would be one that transfers a certain amount of money to the government in a straightforward, predictable and relatively painless way. A stupid tax is one that makes you behave in ways which you would otherwise have considered absurd – like staying in a house that is clearly too big for you. A tax is stupid if it makes you do stupid things, to reduce your tax burden.
But a badly designed tax system is not confined to contemporary politics. A glance at the history of taxation in Britain reveals that myopic policy-making is nothing new. Here’s my pick of the most misguided of them.
The Wallpaper Tax
This tax was introduced in 1712, during the reign of Queen Anne, to capitalise on the growing popularity of wallpaper as an alternative to tapestry or panelling. In an attempt to target wealthier citizens, the levy was directed at “painted, printed or stained” wallpaper favoured by the middle and upper classes, rather than cheaper plain paper, which remained untaxed.
It was initially priced at the rate of a penny per square yard of wallpaper, which had risen to one shilling by the time the tax was abolished in the 19th century.
Unfortunately for the government, the tax was widely and easily bypassed. Canny decorators avoided paying the charge by simply buying untaxed plain paper and painting or stencilling patterns on by hand. But the tax still came at a cost: it hampered the division of labour. It meant that people had to waste their time stencilling patterns into paper when they might otherwise have simply bought ready-made wallpaper.
The Window Tax
The infamous window tax, supposedly the origin of the term “daylight robbery”, was introduced by William III in 1696, and lasted for over 150 years. And much like Stamp Duty, Window Tax was structured in a perverse and illogical way.
Until last year, Stamp Duty featured what economists call “cliff-edges”, that is, a point at which the tax rate suddenly shoots up. For example the rate of stamp duty, until recently, would jump from 1 per cent to 3 per cent of the entire transaction price at the £250,000 cut-off point – thereby creating an increase in tax liability of £5,000 as the house price crossed this threshold.
Unsurprisingly, these notches created strong incentives for reducing house prices to a point just below the cut-off; whether by vendors underinvesting in interior decoration, or simply selling their property at a reduced price.
Having a 10th window meant that you then had to pay tax on all of the other nine windows as well.
The same was true of the Window Tax.
Houses with fewer than 10 windows were, at first, exempt from the fees altogether – the tax was an attempt to target the wealthiest, after all.
But, as Adam Smith observed at the time, windows were an inaccurate proxy for wealth.
“A house of ten pounds rent in the country may have more windows than a house of five hundred pounds rent in London. Though the inhabitant of the former is likely to be a much poorer man than that of the latter, yet so far as his contribution is regulated by the window-tax, he must contribute more to the support of the state”, Smith noted in the Wealth of Nations (1776).
Homeowners with 10 or more windows, however, were liable to pay – and at a hefty rate of sixpence per window per year. In other words, having a 10th window meant that you then had to pay tax on all of the other nine windows as well. The rate of tax was banded – rising to ninepence at 15 windows, one shilling at 20 windows, and so on.
It was a powerful incentive for people to alter their behaviour.
Many of the period’s surviving buildings (including the IEA’s own HQ in Westminster) still bear the legacy of this policy; bricked up windows were a common practice used by middle-income families to alleviate their tax burden. When, in 1797, PM William Pitt the Younger tripled the rates to help cover the spiralling costs of the Napoleonic Wars, thousands of windows were boarded or bricked up by thrifty homeowners.
Tenants lived in increasingly dark and cramped conditions as a result.
The policy affected much of the architecture from this period, as new builds began to feature fewer windows, or “blind” windows that were actually painted facades. Between 1810 and 1851, UK glass production remained static, despite significant increases in population and buildings – a testament to the far-reaching impact of the impost.
The poor suffered especially. Landlords, responsible for paying the fees on owned properties, now had a vested interest in reducing the number of windows, while builders were incentivised to build smaller dwellings, or homes with fewer windows. Tenants lived in increasingly dark and cramped conditions as a result.
This example provides yet another lesson for modern policy makers. As previous IEA research has outlined, there is a strong correlation between the introduction of rent controls into the property market and a corresponding underinvestment in housing stock and property maintenance.
The reason? Squeezing the profit margins of landlords – whether through capping rents, or taxing windows – obliges them to recoup their profits elsewhere. Ultimately, these costs are likely to be passed onto tenants, in the form of worsened living conditions.
The Hat Tax
Astonishingly, hats were subject to a special sales tax between 1784 and 1811, first introduced by Pitt the Younger. Pitt, who also served as Chancellor of the Exchequer for much of his tenure as Prime Minister, was responsible for implementing 17 new taxes, more than any other Chancellor, before or since.
Like the Window Tax, it was designed to be a progressive form of taxation – hats were viewed as a neat proxy for wealth, something richer citizens were likely to own more of, and poorer people unlikely to own at all.
Sellers attempted to dodge the tax by rebranding their creations as “headgear”.
In London, milliners were required to buy a retail licence for two pounds. Elsewhere in the country, shops were charged 5 shillings. An additional levy was then applied, in proportion to the hat’s price tag. The government was able to trace the number of hats on the market, by issuing revenue stamps to milliners, which they were required to paste on the linings of their goods.
Hefty fines were imposed on anyone (milliner or hat-wearer) who failed to pay the tax, and the government went even further by imposing the death penalty on those caught forging revenue stamps.
It led to constant disputes as to what actually lay within the charge, with sellers attempting to dodge the tax by rebranding their creations as “headgear”. As a result, the government was forced to officially amend the legal definition of a hat in 1804. If legal experts have to waste their time quibbling over the precise definition of what constitutes a “hat” – you’re probably dealing with a stupid tax.
The Wig Tax
The Hat Tax was soon followed in 1795 by the Hair Powder Tax, another attempt by the Pitt administration to squeeze the rich to fund Britain’s costly war with Napoleonic France. New legislation required all users of hair powder, essential for wearing the fashionable wigs of the period, to purchase an annual certificate for one guinea (equivalent to about £120 in today’s money).
There were exemptions for clergymen, barristers, army and naval officers, and other workers whose professions required them to wear wigs in day-to-day life. The Royal Family and their servants were also exempt from the charge, for less progressive reasons.
By the time of its repeal in 1869, the tax yielded an annual revenue of just £1,000.
While some wig-wearers did pay the annual fine, many more decided they could do without their elaborate coiffures and the policy is credited with ushering in new trends for cropped hair, and swiftly putting an end to Britain’s flourishing wig industry. In 1812, 46,684 people were still paying the tax – by 1855, this number had dropped to 997. By the time of its repeal in 1869, the tax yielded an annual revenue of just £1,000.
Restrictions on Gin
Last year, for the first time ever, gin sales exceeded £1 billion. Yet our love affair with gin really began in earnest in the late 17th century, after William of Orange’s Court popularised it – then the favoured drink of the Dutch – among the British. English troops, fighting alongside soldiers from the Low Countries during the Thirty Years’ War, had already noted the bravery-inducing effects of the drink on their foreign counterparts – nicknaming it “Dutch Courage”.
Thanks to lower import duties on gin, and deliberate hikes to beer duty, gin quickly supplanted ale as the favoured drink of the poor. Sales skyrocketed from 572,000 gallons in 1684, to eight million gallons by 1742.
At the height of the gin craze, an estimated 20 million gallons were being consumed each year in London alone. One estimate puts gin consumption during the 1740s at an average of two pints a week for every man, woman and child! Crime rates and prostitution soared. Between 1720 and 1750, the city’s birth rate fell, while the mortality rate rose, as people literally drank themselves to death as can be seen in contemporary artworks like William Hogarth’s Gin Lane etching of 1751.
Onerous gin levies helped stimulate the black market and encouraged illegal distilling en masse.
The government understandably sought to combat the social problems caused by this brush with binge-drinking, but their approach, to attempt to put gin beyond the reach of the masses through hefty taxes and stricter licensing laws, backfired horribly.
In 1729, an excise licence of £20 was introduced, along with duties of two shillings for every gallon of gin. A further Act in 1733 banned street vendors from selling the drink. When these regulations failed to have the desired effect, the Government passed a far-reaching Gin Act in 1736, which aimed to make (legal) gin prohibitively expensive for all but the wealthiest.
The Act required all sellers to purchase a retail licence for £50. This was a huge sum at the time, more than the entire annual earnings of the average labourer, and well beyond the means of the majority of traders. New laws also barred distillers from selling less than two gallons wholesale, meaning that the poor were prevented from purchasing gin in affordable quantities.
As with many modern-day “sin taxes”, however, onerous gin levies helped stimulate the black market and encouraged illegal distilling en masse.
Within six years of the introduction of the Gin Act, only two distilleries had actually bought licences, yet over the same period of time, production had risen by almost 50 percent as bootlegging soared (common additions to contraband gin included turpentine spirit and sulphuric acid). And blindness was a common side-effect of consuming these mixtures.
This era is even thought to have originated the world’s first vending machine, as a front for selling bootleg gin on the streets.
The Act suppressed the legal end of the gin trade, but the quantity of “bad spirits” consumed by the English public continued to rise, with gin sellers deploying increasingly creative means to dodge the legislation. This era is even thought to have originated the world’s first vending machine, as a front for selling bootleg gin on the streets.
Britain’s notorious gin craze may have happened almost three centuries ago, but today, as in the 18th century, affordability continues to determine the size of the illicit alcohol market. We ignore this fact at our peril.
As my colleague Chris Snowdon has outlined, it’s no coincidence that the two areas of Europe which consume the most contraband booze are Eastern Europe, where incomes are generally low, and Scandinavia, which imposes exceptionally high alcohol duties.
With both the Welsh and Scottish governments soon to implement minimum alcohol pricing as a quick fix for problem drinking, it seems policy makers might not have learnt all they might from all our past mistakes.
Reprinted from CapX.