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Iron taxation: Thatcher’s lump-sum experiment

April 1989. Margaret Thatcher, the Iron Lady, has been Prime Minister of the United Kingdom for 10 years. Her latest, and arguably boldest policy – to replace former property taxation schemes in the UK with a new lump-sum tax – the Community Charge.

Taxes differ depending on how average taxation varies with income: regressive if it decreases when income increases, proportional if it does not change and progressive if it increases with income. Regressive taxes are generally regarded as quite unfair – any real debate happens between proportionality and progressivity. While the first may be the most equalitarian, arguments for progressive taxes stem from fairness, as the wealthier can generally part with a larger share of their income with a smaller utility loss than the poorer segments of society.

While generally the most conservative opinions are for proportionality, since they are the most neutral of the three, the Thatcher administration took market neutrality to its extreme by attempting to replace the existing property-based (progressive) taxes with lump-sum taxes – meaning every adult, no matter their income (with some exceptions), should pay the same tax, as determined by their municipality. The aim was to make the local public provision of goods into a more market-like scheme: each local government would decide how much they wanted to provide, and tax citizens accordingly. People who preferred a higher level would stop free-riding (consuming more than they paid for) and possibly even move to communities where it was higher. On the other hand, those who valued local provision lowly would move to communities with lower taxes and as such stop overpaying. In practice, however, I would assume most people would not change their residence only due to their preferences for local public provision. Obviously, this market approximation was not perfect.

Another argument for this kind of taxation was the effect on public decision-making. Since an increased provision would naturally mean higher taxes, which voters are not fond of, administrators would seek to provide the most possible at the lowest possible cost – an effective measure against the adverse selection problem that perpetually hounds public administration.

The result, however, was catastrophic – enormous riots broke out and there were mass campaigns for tax rejection (basically, non-payment). With the Community Charge, Thatcher saw her popularity plummet, and her continued defence of it was likely the final nail in her political coffin. Faced with the resignation of her cabinet and challenge of her party, she had no choice but to resign herself in 1990.

While the idea might sound good on paper, and lump-sum taxes are generally regarded as non-distortionary, in practice its implementation in the UK meant that low-income tax payers saw a much higher share of their income taken, as part of the tax-burden shifted from high to low-class citizens. The British people killed the tax, in a clear statement of their fairness standards – the perceived increased efficiency was clearly not enough to offset the unfairness brought about. One might argue that great part of the benefits created would be long-term and were as such not observed. This, however, is well likely to remain unproven, as in the wake of such a disastrous example, it is expectable that no politician will risk the same fate.

Henrique Alpalhão (827)

Based on

Economic Perspectives: Margaret Thatcher and the lump-sum Head or Poll Tax

Further reading

Mises Institute: Mrs. Thatcher’s Poll Tax

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Author: studentnovasbe

Master student in Nova Sbe

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