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Taxpayer behavioural factors can mean that even small changes are sometimes hard to implement. The model of prospect theory (Kahneman & Tversky, 1976) suggests that people feel a loss much more acutely than a gain of equivalent size but curiously that additional pain caused by larger losses gets less and less over time. Conversely lots of small tax increases are perceived by taxpayers to be more costly than a single large increase to the extent that incremental rate escalators, as in the vehicle fuel tax eventually had to be discontinued. Similarly the so-called ‘pastie tax’ on takeaway snacks and the ‘holiday park tax’ on caravans were cancelled as tax actions but contrarily the £12billion increase in general VAT duty in 2011 went ahead with barely a whimper from the general population.
Assessment criteria (weightings indicated for each criterion)
A high score will be gained by evaluating this conundrum in the following steps:
1) Thoughtfully explain how taxpayer behaviour should be brought into policy discussions at an early stage by referring to numerous tax changes that have been implemented or discontinued over the past 15-years. [50% of marks]
2) Use your research discoveries explained above to show how the prospect theory model introduced in the discussion might assist or disentangle future taxation issues designed to achieve government public policy. [50% of marks]
Direction for your research and critique
Your assignment task will be aided by reference to the recommended textbooks of Melville, Lymer & Oats, James & Nobes and chapters within The Mirrlees Review – “Dimensions of Tax Design”, as well as the innumerable textbooks in the Mountbatten Library on taxation and public policy. There are several websites of interest notably: Institute for Fiscal Studies (IFS), HMRC, HM Treasury, Institute of Economic Affairs (IEA) and the website of the publisher, Fiscal Publications Ltd.
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