- Tax laws can go terribly wrong: The Boston Tea Party started with the British government declaring tax on tea and led to the American Revolution.
- Corruption and weak governance makes people feel that their taxes are not being used effectively—and so they will be reluctant to pay.
- Even when citizens trust the government, the levies need to be fair; arbitrary taxes and high rates increase the number of people avoiding them.
Having just filed US tax returns for the first time, I officially have experience with both the UK and US tax systems; not just with how they work, but more importantly, with how they feel.
Everything about money is personal, and small things can make a big difference. Even the name of the tax office matters when it comes to our feelings about parting with a large sum.
Who do you think will best handle your money: the Internal Revenue Service, or His Majesty’s Revenue and Customs?
Those writing tax law usually wear their economist hat rather than their psychologist one, but in reality, it’s impossible to separate the two—especially considering how bad things can get when the wrong duty is imposed at the wrong time. The Boston Tea Party, for example, started when the British government declared a new tax on tea, which then led to the American Revolution.
In 18th-century England, the Parliament of Great Britain imposed a tax on the number of windows a house had. On paper, this is about as fair as it gets: The more windows a building has, the wealthier its owner must be. But the tax came with the easiest avoidance scheme in the world: Homeowners would brick up their windows in an attempt to be tax-exempt, making homes dark and unhealthy—and making their tenants miserable.
The Parliament of Great Britain has an excellent track record of taxing anything and everything, from windows to hats, or even things as obscure as hair powder. By now, the UK’s HMRC is probably the world’s most experienced tax office when it comes to coming up with creative levies and handling them when they backfire.
Today’s “tampon tax” could very well become one of those duties that people laugh at a hundred years from now. Tampons and other menstrual products are a necessity for the people who use them, yet in many countries (and US states) they are all subject to sales tax.
When in Rome
Any Swedish citizen can access the tax records of their compatriots, including information on income, wealth, and taxes paid. The principle of public access, or Offentlighetsprincipen, has existed since 1766 and is one of Sweden’s fundamental laws.
Public tax records make it difficult to commit tax evasion and fraud, but that’s the kind of thing that Scandinavian people don’t want to do anyway. Citizens of these Nordic countries generally see taxes as a way to give back to society—by funding healthcare, education, or other high-quality public services. Despite having some of the highest tax rates in the world, Sweden, Finland, and Norway consistently rank lowest in tax avoidance.
Transparency is certainly not for everyone. For instance, it’s all too easy to find countries where tax avoidance is not seen as a serious offense, but as perhaps more of a national sport.
In areas with low-quality public services, for example, people find it hard to see where their tax money is going. Those in developing countries where corruption is high, governance is weak, and transparency is low often share the perception that their taxes are not being used effectively—and are reluctant to pay them altogether.
Even when a government has the trust of its citizens, the taxes levied still have to be deemed fair. If people perceive the duties as arbitrary or that their rate is too high, they will try to find a way around them.
The response to unfair taxes can cause a big upheaval. In the late 18th century, the French government faced severe financial problems and decided to raise taxes. Since the nobility and the clergy were largely exempt, the new levies hit poor people the hardest. The unjust tax system is considered a major cause of the French Revolution.
In an effort to modernize his country, Peter the Great in 17th-century Russia imposed a tax on beards. People in Western Europe at the time were mostly clean-shaven, so enforcing a no-beard rule may have sounded like a surefire way of bringing Russian society in line with Western European models. Unfortunately for Peter the Great, resistance was widespread, and the Russian Orthodox Church declared being clean-shaven as blasphemous—a view that many have held ever since.
The Office of Tax Simplification
Many factors influence tax compliance. We’ve looked at social norms, perceived fairness, and trust in government so far, but here’s another important aspect as to why people don’t pay their taxes: because they don’t know how.
In the US, it’s easy to slip up right out of the gate: Where do we actually need to file? Besides federal returns, there may be state taxes, local taxes, and even quarterly estimates to pay, depending on a complex set of rules. Filing UK returns, in comparison, is a magical experience. It’s done through a modern government portal, with a tool that helps account for all income and expenses, and the return is then filed all in one sitting.
It’s not a coincidence that the HM Revenue and Customs experience is so simple. Since 2010, the UK has had an independent body working closely with HMRC to find ways to simplify the tax system. The Office of Tax Simplification gathered data and feedback from taxpayers, businesses, and professional advisors, and was responsible for providing independent advice and recommendations.
When dangling carrots in front of taxpayers isn’t enough of an incentive, the ultimate solution to making people pay is to bring out the stick. In the IRS’s Comprehensive Taxpayer Attitude Survey, almost all of the respondents agreed with this statement: “It is every American’s civic duty to pay their fair share of taxes.” Yet, when asked why they actually pay, almost two-thirds of respondents said: “Fear of an audit.”
Comprehensive Taxpayer Attitude Survey (CTAS) 2021 - Publication 5296 (Rev. 4–2022) Catalog Number 71353Y Department of the Treasury Internal Revenue Service https://www.irs.gov/pub/irs-pdf/p5296.pdf
The Office of Tax Simplification (OTS) on www.gov.uk https://www.gov.uk/government/organisations/office-of-tax-simplificatio…
Principle of public access to official records on Wikipedia https://en.wikipedia.org/wiki/Principle_of_public_access_to_official_re…
Duty on Hair Powder Act 1795 on Wikipedia https://en.wikipedia.org/wiki/Duty_on_Hair_Powder_Act_1795