Hi Tim,
With regards to your recent FT column (“A pre-Budget day guide to Britain’s bad taxes” [*]) you said out loud something I think gets far too little coverage in the UKs conversation about taxation.
You said “Taxes do not just transfer money from citizens to the government; they also shape our behaviour.”
I believe the degree to which the latter impacts their ability to do the former is under-appreciated by most, probably including the bureaucrats responsible for tax policy.
Four decades as table top role player and game master – a hobby I know we share [*] – a decade spent at a video game company known for its digital distribution platform, award winning games and, shall we say, unorthodox organizational structure, and a variety of organizational roles across the technology sector have all led me to the same conclusion:
Everything is game design.
And to badly paraphrase Philip K. Dick – “ignoring that reality doesn’t make it go away.”
Examples abound. Eliminating the remittance taxation basis anecdotally caused wealthy mobile people to respond by using their mobility to preserve their wealth – reacting particularly to arguably rapacious death taxes [1, 2, 3, 4]. It was commonly predicted that aligning capital gains tax rates with income tax rates would discourage asset sales, potentially making the change revenue net-negative [1, 2].
Taxes are a sort of game – seen by many as at least slightly adversarial. And with regards to any game, what the game designer wanted or expected players to do when they designed the rules is largely irrelevant – what matters is how the players play the game.
Players have incentives to find, and take advantage of, places where complex rules combine in ways that are surprising to the rules designer, and they’re often remarkably effective at doing so. This is often lumped into discussions of “game balance” and can be something of a black art. Game rules get refined by play testing and iteration – something public finance has precious little opportunity to do. So – as you point out when talking about the NZ VAT vs UK VAT treatments [note: he points out that NZ charges a lower VAT rate than the UK, but applies it more consistently, resulting in much higher per-capita tax revenue with few opportunities for evasion or “optimization”] – simpler is nearly always better.
I’m sure I’m preaching to the choir.
The last thing I wanted to say – and something I hope gets more attention from yourself and other commentators in positions to nudge the public discourse – is that when thinking about taxes: continuous functions are necessary and smooth continuous functions should be strongly preferred.” [note: in mathematics continuous function is what I mean by smooth here, that is has no jumps or discontinuities – but I use continuous here in the colloquially understood sense – that the function has a value for all inputs.]
Whenever there are thresholds in fiscal policy – jumps between (for example) the tax on £X and £X+1 – people will look hard for ways to stay on the “right” side of the threshold – and zooming in on the data reveals points piled up against those fence posts.
I don’t at all mean to imply that setting tax policy is easy – or that there’s a “right answer” – but the behavior of the exchequer over the years I’ve been in the UK belies a lack of understanding of the game being played. And succeeding at a game without understanding it is nigh on impossible.
Cheers.
[Note, started life as an email sent to Tim in response to his column. This version has been lightly edited for clarity and had context added.]