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March 03, 2006

Rationality at Work?

Who knows? Perhaps this is taxpayers simply being rational?

Four out of five families are paying too much tax, footing an extra bill of £7.6 billion, according to new research.

These households are overpaying an average of £155 each by failing to claim tax credits and to manage their finances properly.

The news will provoke criticism of Gordon Brown's tax system, which many analysts have derided as over-complicated and cumbersome. Britain's "tax bible", Tolley's, has doubled in size since 1997, a sign of the increased complexity of taxation structure.

155 quid a year? What’s the cost to you of actually reading through the reams of forms and claims and exemptions to get your tax bill right? What’s your hourly pay rate? A tenner? Think it will take 15 hours to wade through all the bumph and see if you are overpaying or underclaiming? 15 an hour or so (roughly men’s average wages)? Take 10 hours to try to understand El Gordo’s forms?

Leave aside the ulcers and migranes brought on by the actual prose, the mind numbing effect of reading hundreds of pages of civil service pamphleteering. Think just of the time spent, or the opportunity cost of having to do so.

I agree, everyone will have different utility functions here, some who will cackle with glee at being able to grab something back from the Treasury, others who would rather have those few precious hours to do something interesting, like grouting the bathroom.

March 3, 2006 in Taxes | Permalink


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I think your analysis is flawed here Tim: the level of available tax credit decreases the more you earn (c.f. your hourly rate), so not only does the number of hours beyond which it becomes unproductive to claim reduce with an increase in hourly rates, but the reward drops also: there is an exponential decay in the utility function with rising hourly rates.

At the other end of the scale (low hourly rate), the number of hours available is higher - doubly so because the rewards will be "above average". The lower your hourly rate the more sense it makes to wade through the stuff to claim.

I suspect that Gordo had exactly this in mind: that he stops actual payments of actual cash (net gain for Treasury) and replaces it with a tax credit system that he knows a good proportion of people at the top will not claim (because it is not worth their while to go through the form filling), and a good proportion of the bottom will not claim (because they can't fathom the bureaucracy).

He gets left with the net gain...

Posted by: The Pedant-General | Mar 3, 2006 12:00:28 PM