Tax proxies: roughly right instead of precisely wrong
[Another entry in our occasional series on local property taxation: previous posts 1, 2, 3.]
Since at least the 1086 Domesday Book and its Roman predecessors, local property taxation has been reverse-engineered, based on how much revenue the sovereign (king, emperor, duke, or city council) has needed to raise. Meanwhile, every sovereign’s instinctive political calculator has an intrinsic Benthamite political utilitarianism, seeking to raise the money in the least objectionable manner, discovers that:
In politics, ‘least objectionable’ = ‘perceived fairest.’
“The greatest tax from the greatest number.”
Since time immemorial, ‘perceived fairest’ has also meant that those who have more, should pay more.
“From each according to his assessment valuation …”
“Oh, shut up, Karl.”
Aside from administrative practicality, those who have more are also the biggest beneficiaries of a successful polis: society, civility, security, and peace all protect property and business.
For two thousand years, sovereigns have been grappling with the challenge of apportioning the tax burden among their citizens. Land and real property have been natural targets of taxation, because not only are they valuable, they are fixed and externally observable. I can hide my jewelry but I cannot hide my pasture land.
However, I can hide my property’s interior, because ‘a man’s home is his castle,’ and entering a home for the purpose of assessing it has long been seen as an impermissible intrusion.
Enter the proxy.
A proxy is a single indicator that stands for a complex whole, such as subprime lending as a leading indicator of market condition, or in a local taxation context, hearths as a proxy for property value.
See anything to tax here?
As the BBC reports:
Else Churchill of the Society of Genealogists explained that with a need to raise revenue after the Civil War and the Interregnum, it was decided in 1662 to levy hearth money.
“‘It was decided’? I never did anything in the passive voice!”
This was a property tax on buildings worth more than 20 shillings a year in rent. The number of hearths there were in a building calculated the tax. However there were some exemptions. For instance, people who received poor relief did not have to pay hearth tax. Some industrial buildings were exempt but not forges, locksmiths or bakers’ ovens.
Even in this earliest phase, government realized the value of differentiating among property uses. Our ancestors may have had less technology, less education, but they were no less shrewd than we.
The tax, which was collected twice yearly - on Lady Day (25-Mar) and Michaelmas Day (29-Sep) - was 2 shillings per hearth. It was a very unpopular tax because the tax commissioners had the right to come into the home to count the hearths. It was the first time tax inspectors could visit a property.
Creating a tax requires a careful census, and then as now, property can neither move nor hide.
“It says here your home is located at
Attempts to avoid paying by blocking up a chimney could, if discovered, be rewarded with a doubling of the tax.
It was also a very inefficient tax. During the lifetime of the tax some of the collecting was farmed out to private individuals who all took their cut and it therefore simply did not raise enough money.
To tax, one must improve the information technology and its infrastructure:
The records of the hearth tax are a valued source for historians. Lists of returns are held in the Public Record Office. They carry considerable information about house sizes and the people who lived in them.
Gradually, the tax became associated with the Restoration Stuarts (merrie Charlie and dour James). With a regime change, came a taxation change:
It was not until William and Mary came on to the throne that one of the first acts they passed was the abolition of the hearth tax in 1689.
How to win friends and influence subjects … abolish your deposee’s most visible tax.
As Mencken observed, few taxes ever fully vanish, they cleverly metastasize into new forms, and so it was with property taxation: it was too good to forego:
In the 1690s, during the reign of William III and Mary II, there was another national financial crisis. There was growing inflation due to the various conflicts in
“Once this is over, I have to tax windows.”
So in 1696 a new property tax, the window tax, was introduced.
Windows (apertures, not lights) stood in for property values.
This was less intrusive than the hearth tax because the windows could be counted from the outside.
Nonetheless, it was unpopular because of what it seemed to tax. Its opponents called it a tax on fresh air, light and health.
The tax was at first a flat rate of 2 shillings, or 8 shillings on houses with more than ten windows.
The danger is that in proxying one thing (in this case, wealth) you often proxy others (in this case, health and safety). For those with money to flaunt, the measure of wealth became wealth’s symbol (Wikipedia disclaimer applies):
The richest families in the kingdom used this tax to set themselves apart from the merely rich. They would commission a country home or a manor house whose architecture would make the maximum possible use of windows. In extreme cases they would have windows built over structural walls. It was an exercise in ostentation, spurred by the window tax.
Here we have taxation driving a status innovation. Conversely, taxation can drive not just innovation but also avoidance: markets, which have a much faster OODA loop, change their behavior to avoid the tax:
In fact people managed to dodge payment by bricking in windows, camouflaging them or even building dummy windows so that inspectors were completely confused. Some blocked in windows and then unblocked them as soon as the collector had gone.
“I’ve covered up the windows and you can’t see me!”
The result, as supply-siders up through Arthur Laffer have hypothesized, is that an increasing assessment yields diminishing returns:
It’s all in where the curve crests.
Over the years people became so clever at avoiding the tax that revenue from it fell and the law had to be tightened in 1747. It was then that the Government of the day began juggling with bands of payments according to how many windows a house had.
This cycle of move and counter-move illuminates that the imperfection of proxies becomes more visible with time.
This raised more revenue; however there was more avoidance and so the rates were doubled in 1784.
We’ll catch up with that pesky market!
Eventually the regulator’s efforts to chase the proxy become self-defeating, and the whole regime has to be junked in favor of a less arbitrary proxy:
The tax continued until 1851.
In case you’re wondering, the window tax’s abolition represented not a tax break but a shift to a more sophisticated method:
In 1825 the number of widows taxable went from six to eight windows. The Window Tax would be replaced in 1851 with a tax called House Duty.
Over time, the cut-and-thrust of taxation and avoidance wore out the rough proxy, which gave way to a more precise estimation made possible only because of improvements in financial and information infrastructure.
That House Duty is the ancestor of our modern form of property tax assessment.
Tune in tomorrow for what this historical interlude means for modern real estate taxation.
