Thinking Fast, and Slow……About Tax.

So very refreshing to read some genuine tangential thinking about the realities behind a taxable (or not) transaction.

Setu Kamal LLM Tax

Thinking Fast, and Slow….About Tax.

“You know, ‘Why? Why?’ and that was a very (again, in my way of seeing America) a very American finger-snapping question. I did something magnificent and mysterious and I got a practical ‘Why?’ And the beauty of it is that I didn’t have any ‘why’.”

– Philippe Petit, Man on Wire (2008)

There is a scene in the film A Bronx Tale (1993) – which Roger Ebert rightly awarded 4 stars to – where the frustrated young protagonist Calogero is chasing an elusive acquaintance who owes him twenty dollars. He is spotted by his mentor, Sonny, who waves him over. When explained the situation, Sonny laughs and advises Calogero to forget about the loan. The way Sonny sees things is that Calogero has paid a mere twenty dollars for the privilege of not ever having to see that person again – a bargain. It is…

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The Origins of the UK Tax Year

One of the things with which many people struggle when thinking about tax, is why on Earth the tax year begins on 6th April of each year. The date just seems so very arbitrary.

The date of the first day of the tax year is not in fact so random but to understand why it is so, requires a look back in time. A long, long way back in time.

In the medieval era the calendar was marked by four key days in the religious calendar:

1.       Lady Day, March 25th, commemorated the day on which the archangel Gabriel announced to the Virgin Mary that she would bear a son, Jesus Christ;

2.       Midsummer, June 24th;

3.       Michaelmas, September 29th, and

4.       Christmas Day, December 25th.

By custom, accounts had to be settled by each of these “quarter days” as they became known and so each marked the end of a natural accounting period.

Lady Day was the first such “quarter day” and over time (for reasons that are now obscured by time) it came to be regarded as the beginning of the financial year.

Throughout this period, the “Julian calendar” was in use in England. That calendar had been established by none other than Julius Caesar himself. The Julian calendar had a leap year every four years to account for the fact that it takes a little longer than 365 days for the Earth to orbit the Sun.

Unfortunately, the Earth takes a little less than 365.25 days to orbit its star. In fact, it takes more like 365 days, 5 hours, 48 minutes and 30 seconds… And so it came to pass that in October 1582 Pope Gregory XIII introduced the “Gregorian calendar” to address the issue. In a document entitled the Inter Gravissimas, a papal bull, it was decreed that every 400 years three leap days would be omitted.

Inter-grav

England has always been a little old-fashioned and change can come slowly. It was not until 1752 that England decided to adopt the Gregorian calendar. By then, England was 11 days discrepant with the rest of Europe and so it was decreed that September 2nd would be immediately followed by September 14th for that year only.

The Treasury was concerned that the shortened year would result in lower revenues and so decreed that the beginning of the tax year would change to April 5th and there it might have remained but for yet another development. In the history of the tax year, this was to be the first arbitrary change.

In 1800 under the Julian calendar it would have been a leap year but it was not in the Gregorian calendar. The Treasury, in a move that HMRC would be proud of today, decided to treat the year as a leap year anyway and thereby generate an extra day’s worth of revenue. So the beginning of the fiscal year was moved to April 6th. There it has remained since.

How is it determined when a leap year will be skipped?

The Gregorian calendar established that a leap year would occur in any year that was divisible by 4 but not if it was also divisible by 100 unless it was also divisible by 400. Make sense? Take a closer look and you will see that under this system, 3 leap days are skipped every 400 years.

Under the formula the year 1900 was not a leap year but the year 2000 was (and thank goodness, the millennial celebrations just would not have been the same). The year 2100 too will not be a leap year.

In 1900 the Treasury missed out on the opportunity to adopt a precedent and squeeze out an extra day’s worth of revenue. Will HMRC make the same mistake in 2100?

The Fairness of Tax

There is a social contract I’m told and paying my taxes is my duty and my responsibility.

I don’t remember agreeing to that contract or negotiating the terms. Doesn’t there have to be an agreement for a contract?

It is difficult to envisage a World without tax. It is an obvious point to make; how else would our schools, our hospitals and our museums be funded?

Mark Skousen had something to say about that:

Taxation is the price we pay for failing to build a civilized society. The higher the tax level, the greater the failure. A centrally planned totalitarian state represents a complete defeat for the civilized world, while a totally voluntary society represents its ultimate success.

A tax-free State is perhaps not such a far-fetched idea and that is perhaps a subject for another day.

Let us for the moment accept that tax is a necessary evil. If taxation relies on a social contract, surely the contract can only be upheld if it is fair. Is our tax system fair?

If taxation relies on a social contract, surely the contract can only be upheld if it is fair.

Think about the service you receive for the tax you pay. Are you satisfied that your money is well-spent? The press report daily on the woeful inefficiency of State institutions. The NHS is a vast money-sink and while it is an incredible and wonderful institution I doubt anyone would argue that it is well-managed. Vast amounts of tax revenue is wasted every day.

We don’t really have a choice about the NHS. It’s the only public health service we have. Of course, you could choose to have private health care and very many do but you still have to pay for the service whether you want it or not. Is that actually fair?

Is it fair that our money is spent by inept public servants and huge amounts of it wasted?

Sadly, it is also true that the burden of tax does not fall fairly. The great cry that goes out every time a tax avoidance scheme hits the headlines is that the rules should be the same for everyone. The rules are not same for everyone, though.

How is success rewarded in our country? With ever greater rates of tax.

What is the incentive for the talented of this country to strive for success when success means that almost half of what you earn is taken by the State?

If the rules were the same for everyone, everyone would pay the same rate of tax.

Jean-Baptiste Colbert was the treasurer to Louis XIV:

An artful taxman so plucks the goose as to obtain the most feathers for the least hissing.

The point seems lost on our taxman. One might suggest that higher rates of taxes for the rich are good politics and make for votes. As more and more countries move to the advantages of flat-rate taxation and see their revenues surge, the argument that they are good for revenue is doubtful.

Princess Leia Organa bravely said to Darth Vader:

The more you tighten your grip, the more star systems will slip through your fingers.

Might that wisdom not apply to high-rate tax payers, too? If you were faced with a lawful tax bill for almost half of your wealth and you could just as legally decline, wouldn’t you choose to slip through the taxman’s fingers?