Taxation and the Boiling Frog Theory

I suppose there are people, somewhere in Government, whose job it is to see how much more revenue can be squeezed from the public. They must sit around wondering how much they can get away with, though I doubt if they consider public disorder on a mass scale being a result of the kind of rises they envisage.  This is the story of how one bit of tax came to be.

Taxation is a stealth activity. You start cold and slow, and then build up the heat. First, you introduce a new Tax; let's say the Air Passenger Duty and you make it sound fairly innocuous. Ken Clarke introduced this for the Tories in their 1993 budget and it came into force the following year. The cost then was £5 on domestic and European destinations and £10 on the rest. I suppose we all thought, "Oh, what's a fiver anyway", sighed and paid up. The rationale behind this is interesting because it reveals the way Chancellors and their advisors make decisions about taxation. Clarke believed that Air Travel was "under taxed". It appears, then, to have been a given that, if it moves, tax it. An assumption is made that everything is a target for taxation. An assumption is made that you constantly tax upward as a percentage. So, why not put VAT on Air Travel? It is currently VAT free and so is aviation fuel. EU rules prevent extending the scope of VAT unilaterally, so Chancellor Clarke had to invent a new one. What Clarke did not do was to pretend that this tax was anything other than a means of raising revenue - an estimated £330 million every year. A slight drop in passenger volume was anticipated as a result of the rise in ticket price, but never occurred. The Travel trade was on the whole inclined to be thankful it did not pay VAT, the APD being a small price to pay. Of course, before too long, temptation got the better of Ken Clarke and in 1996, the Tories proposed to double the tax.

When Labour got into power, they did double it. Just like that, and of course they could blame the Tories. 

This tax was altered slightly - Gordon Brown using his favourite word, "fairer" claiming, in his Pre-Budget statement  of November 1999 that at a cost to the Treasury of £80 million, the price of European flights would be halved, and in the case of the Highlands and Islands, abolished altogether. A briefing from the Treasury at the time said it would be revenue neutral

Gordon Brown's Pre-budget statement of November 1999 was at variance with official HM Treasury briefing of the same month.

The tax was frozen for five years until 2006 when Gordon Brown doubled it again from 2007. Further increases were introduced in 2009, only this time the reason given was to "help the Government achieve its environmental goals." Quite how this tax rise was going to do this was never explained, and unless anyone has information to the contrary, there is no evidence that the additional revenue was being spent on environmental issues. It is interesting to me that at the outset, no pretense was made about the introduction of APD, it was purely done to raise revenue. We are now in an age of lies and spin and it seems we have to be fed garbage about the environment in order to accept more taxation. Even Alistair Darling was touting the "environmental" ticket, when signaling further increases, without any indication about what the extra revenue was to be spent on.

So already you see the kind of escalation that occurs when a new tax is introduced. The first bite is merely an inoculation. That is the trick of taxation. Make it seem really tiny, and once everyone accepts it, you can double it, and double it again. Well, you can if you are Gordon Brown. If you are Gordon Brown, you can claim you are giving tax breaks away, even if the Treasury says you are not.

The moral of the story is, you increase taxes in the same way you boil a frog - or so they say: Start cold, and turn up the heat slowly and the frog will not jump out of the pan for it will not react strongly to a gradual change.

Sources: 

http://docs.google.com/viewer?a=v&q=cache:Duuci7AmWGYJ:www.parliament.uk/commons/lib/research/briefings/snbt-00413.pdf+%22Air+passenger+duty%22&hl=en&gl=uk&pid=bl&srcid=ADGEESj0VTUqZnPmaFlxdc8cKf32x4pVXUFwXDZVwJUBKoOCA7sjXEQaddsuqx2Bvc5ieBa6n3kucC59YO8LQFMiAIIDRGd-ZG2QjPXDJty5a7riLY-azlyKT_TtSIyoo0CxLjt2LBp2&sig=AHIEtbTVDBHe4XE5d7YvwapSKOQOh5QTEA


NB
According to the Daily Telegraph, the tax burden has doubled under Labour:

These show that HMRC took £69bn out of salaries and pay packets in 1997, but expects to raise £134bn in 2010. National Insurance contributions (NICs) – a tax on income by another name – took less than £47bn out of pay 13 years ago, but will exceed £98bn in 2010, according to calculations by accountants Grant Thornton. Other taxes – such as stamp duty, council tax and capital gains tax (CGT) – have risen by even more.

And on Wine:
Research carried out for The Sunday Telegraph shows that while the price of a bottle of wine has increased by 25pc since Labour came to power in 1997, the duty on it has increased by 53.3pc.

And on Fuel:

In December, 2008, a permanent increase in fuel tax was introduced to offset the temporary reduction in VAT. This increase remains in place, despite the increase in VAT. In effect, it was a stealth tax, designed to be hidden and forgotten.

5 comments:

denverthen said...

Brilliant post. Dazzlingly so. (Gush? Me? Never!)

boil Geoff Hoon said...

I never cease to be amazed at the number of people calling for a minimum price for alcohol. Like all taxes it will slowly creep up every year. Don't give them an inch. Not that it would have any effect on drinking levels anyway but that's another argument.
Look at VAT. Initially introduced for 'luxury' items and now covers most stuff apart from burials. They just get their money from your inheritance tax or the new £20K death tax instead.

Wrinkled Weasel said...

DV. Don't get carried away!

I will happily boil Geoff Hoon, but it appears he has boiled himself by offering his services like a common prozzie.

http://www.telegraph.co.uk/news/newstopics/politics/labour/7490787/Four-Labour-MPs-implicated-in-cash-for-influence-scandal.html

Jim Baxter said...

The Boiling Frog theory is more formally known as The Weber-Fechner Law (WFL) of the 'smallest noticeable difference'. WFL describes the relationship between stimulus and perception such that dp is the differential change in perception, dS is the differential increase in the stimulus and S is the stimulus at any subfraction of a temproal index. A constant factor k is to be determined by guesswork, much like Hubble's Constant.

The relationship is assumed to be logarithmic, in a similar manner to the Richter scale.

The WFL has been applied to the phenomenology of human ageing.

A miserable childhood appears to endure for eternity as the subject has few previous years against which to gauge the subjective passage of time. By contrast, as adulthood is prgressively consumed, a year represents an ever diminishing fraction of total experienced time, which explains why adulthood is experienced as a logarthmic decrease in time remaining and so is over quickly. This leads to the 'Methuselah Paradox' - to wit - the longer you live, the more quickly life comes to an end, whether you're enjoying it or not.

wv: rested

Jen said...

I already have over a third of my pay taken in taxes, I fully expect at least half to be gone with the inception of national healthcare, stimulus and any other fun stuff that comes out of the remainder of this president's term. It will begin slowly, but over the next ten years, it'll grow into a monster. We saw this after Clinton, but this one will be truly spectacular.