The Importance of Fairness in Tax Policy

Abstract

One of the key areas where behavioral economics offers major insights into developing successful policy involves issues of fairness. Taxation offers many examples, ranging from the Boston Tea Party of 1773 to the UK's unsuccessful community charge, often called the ‘poll tax', of the early 1990s, where a failure to appreciate fully taxpayers' perceptions of fairness led to unexpected outcomes. The use of behavioral economics to supplement mainstream economic analysis might not only reduce the risks of such tax disasters but also improve the development of tax reform more generally. This paper shows how such additional explanatory power contributes to our understanding of the success or failure of UK tax policy arising from the ‘natural experiments' of the successful introduction of value added tax in 1973 and the contrasting difficulties associated with the community charge in 1990 and, more recently, the abolition of the 10% rate of income tax in 2008.