Category: Tax

The hearth tax was a revolutionary policy in the 1600s and set the trend for tax collection and proper recording. While at the institutional level it simplified and made transparent the entire process, the public reception was not very favorable. Read more about the introduction at www.hearthtax.org.uk/about/history.html

At the broader level, the tax system is adept at measuring wealth inequality and taking measures to bring down the levels. The system was fair in its design, as wealthier property owners paid twice as much as the average property owner. Property owners who owned properties worth more than 20 shillings paid 2 shillings in annual tax (10%) whereas the rest paid 1 shilling.

Let us begin by neglecting the most widespread cause of unpopularity, which is that tax evasion was no longer possible. This is not a reason that should at all be factored, as it is every citizen’s duty to pay tax. With transparency and proper recording of tax records, tax evasion could easily be monitored and eradicated.

It was not so much the design and the intent of the tax system, rather the execution and administrative complexities that made it unpopular at the time. The structure allowed the role of private tax collectors, who could enter homes and collect taxes, which were then passed to the crown. However, due to a lack of proper execution, there were cases where tax information was incorrectly passed on.

This happened when tax collected visited homes when people were away. In some cases, they tried to count the number of chimneys in a house from outside in order to determine the number of hearths. This resulted naturally in incorrect counting and wrong tax calculations. This created dissatisfaction and outrage among some sections of the community.

In some other cases, people would deliberately not answer the doors when the tax collectors came, to avoid paying taxes. The same outcomes resulted from such situations, although in this case it is hard to blame execution. You cannot forced someone to enjoy paying taxes!

There were also loopholes that were fully exploited by citizens. For example, in those times it was possible to evade tax by declaring yourself to be poverty-stricken. Such declarations were easily possible by downgrading to a home worth very less, which would indicate that you are poor. These was no comprehensive check on all means of finances at the time.

The situation could have been tackled in various ways, mainly by proper communication. When the tax was introduced, the full disclosure of what the tax revenue will be used for, and what kind of future benefits it could produce to the very same citizens that pay up initially, would have resulted in relatively more willingness to pay taxes. These are lessons for the future.

Let us begin with macroeconomics. All of us have studied this at some point or the other. Macroeconomics presents the concepts of tax, public spending, deficit, trade imbalances and recession. These concepts are crucial to understanding the current economic context.

Every institution, individual, company or government has sources of revenue and sources of expenses. When it comes to government, the key revenue source is taxation. Taxation can come in many forms – income, capital gains, property, wealth, inheritance, pensioners and corporate. With each of these tax types, there are usually different slabs catering to different categories of taxpayers.

Why is tax important? Let us begin with the annual budget. At the beginning of every fiscal year, the government releases an annual budget for its expenditures. Expenditures range from key categories such as trade, education, social service and infrastructure, to minor categories such as foreign aid and presidential /royalty expenditures. All these expenses are meant to serve the citizens of a nation, ergo are funded by the citizens’ income.

When there arises a situation wherein tax revenue exceeds expenditures, you have a fiscal surplus. And vice versa, when revenues fall short of expenditures, you are faced with a fiscal deficit. While both situation are not ideal, fiscal deficits can potentially lead to more disastrous consequences. When governments try to win the popular vote by reducing tax when they are not supposed to, their fiscal situation becomes unstable and they can fall into serious debt issues.

It is obviously important to keep a balance between fiscal stability and the overall public health. This is the reason why tax has not just one lever, but several. When there are looming threats of wage disparity or unemployment, you move the levers of taxation such that the policies don’t negatively affect the middle-class or lower income earners. When you are faced with the threat of domestic investors finding the local situation a tad too unfair and moving their investments abroad, you adjust (to an extent) levers that affect the wealthy such as wealth, property and capital gains taxes.

If the government would like to keep tax rates intact and still is in dire need to raise revenue, there are always other sources. However these need to be planned in advance and cannot be exploited as easily as tax levers. Two additional revenue generating means for the government are trade and external loans. In times of surplus, governments can consider issues loans to foreign institutions or governments to rely on a predictable interest stream for the future.

There is also trade. Countries like Germany enjoy the flexibility of tax adjustment decisions due to the immense trade surpluses that they enjoy, Naturally trade surpluses have their own pitfalls, but when it comes to revenue sources they are as good as any. So citizens, take note! When you are doubting the effectiveness of a policy designed to increase revenues, it is good to have the full situation known.