Knishes and Taxes
A cautionary tale.
Jun 18, 2012, Vol. 17, No. 38 • By IRWIN M. STELZER
This is a tale of knishes, taxes, and conservatives’ hopes to replace income and capital gains taxes with a national sales tax on consumption. Like all those who preside over national treasuries, Britain’s chancellor of the exchequer, George Osborne, has a deficit that needs closing. Unlike other financial-men-in-charge, he would wisely rather not tax work and risk-taking, and so in his latest budget he cut the highest marginal tax rate from 50 percent to 45 percent.
To fill part of the revenue hole, he decided to extend the VAT, or Value Added Tax, essentially a national sales tax beloved of Europe’s politicians, to a favorite of Britain’s moderate-income consumers, the hot pasty (pronounced pass-tea). Think knish—some sort of stuffing wrapped in dough. The chancellor reckoned that the tax, at a rate of 20 percent, would produce about $160 million. Unfortunately, the leadership of the coalition government, dominated by the Tory party, includes many with inherited wealth, educated in private schools and not among leading consumers of pasties. Their political vulnerability to a Labour party round of class warfare somehow escaped the proponents of this new levy.
In response to the uproar, a new set of regulations was crafted. In effect, the government changed the definition of “hot.” Pasties in warming units in supermarkets will still be taxed at a 20 percent rate, but hot pasties left out to cool—“to return to ambient temperatures,” as revenue-gatherers put it—will remain exempt from the tax. Note that the pasty need not be at any specified ambient temperature, merely in the process of approaching an unspecified ambient temperature. Sheryll Murray, Conservative MP for South East Cornwall, told the government, “I didn’t want to see an army of thermometer-wielding tax inspectors poking our pasties.”
If you think this idea emerged from the brain of some bureaucrat, no K Street-style lobbying needed, think again. Greggs, the U.K.’s largest bakery chain, gathered more than 300,000 signatures on a petition to change the definition of “hot,” and enlisted the National Association of Master Bakers and Cornish Pasty Association in its lobbying effort. Greggs’s CEO, Ken McMeikan, met with Treasury officials to suggest “a very sensible way forward for the government.” The Treasury’s adoption of the “sensible way forward” produced a 9 percent jump in Greggs’s shares.
This is only one example of many that attest to the complexity of consumption taxes and the lobbying efforts such taxes attract. Conservatives might have many good reasons for favoring such taxes—taxing spending, not earnings from work, being the most cited—but simplicity and the creation of a glut of abandoned offices on K Street should not be among them. Because consumption taxes are regressive—they claim a larger portion of the incomes of lower- than of higher-income consumers—all sorts of exemptions get built in to exempt some purchases from tax.
Food should be the most obvious candidate for exemption. But what is food? The British taxmen have a detailed answer, the result of which is that crackers made from tapioca starch carry no tax; prawn crackers made from cereals do. Frozen yogurt that needs to be thawed before eating is not taxed, while frozen yogurt ready to eat is. Dog food creates more complications: Food intended for working sheep dogs or racing greyhounds is not taxed, but food for “sheepdog breeds” and greyhounds not used for racing is taxed.
Clothing is also a source of such complexities as to bring a gleam to the eye of special pleaders. Children’s clothing is exempt, which the book of regulations defines as bras up to and including size 34B, body stockings that measure no more than 27-and-a-half inches shoulder to crotch, and babies’ shawls but not “mother-and-baby shawls intended to wrap around both mother and child.” One can imagine an interested company pointing out to the grey men of Her Majesty’s Treasury that today’s children mature earlier than those when the reg was written, and that therefore the size warranting exemption should be increased.
This would be good fun were it not a warning to conservatives. At some point in the near future there will have to be a serious negotiation to address our nation’s headlong dash to insolvency. In a laudable effort to keep marginal income tax rates as low as possible, many conservatives are thinking about consumption taxes. In the end, that might prove to be a necessary part of any effort to bring our deficit down to manageable levels. But it would have a cost, a cost not very different in type and amount from that now produced by the complexities of the income tax code. Law and accounting firms with offices in Britain, already experts at the game of exemption-writing, will be among the winners.
Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of -economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).