The unexpected virtue of a flawed tax system

Sometimes a flawed tax system teaches us more about human behaviour than an effective one. That thought occurred to me after reading the interview of a general practitioner in Knack magazine. He has observed a profound shift in the mindset surrounding illness and incapacity for work. That week alone, he issued 35 certificates. Nowadays, some employees have sufficient job flexibility to strategically time a period of illness to coincide with a long weekend. In itself, this is not a particularly groundbreaking observation. What struck me was his statement. In the 1980s and 1990s, he stated, many employees still earned part of their income under the table. Those who stayed home sick lost that income immediately. Today, a short absence is usually fully compensated. The financial cost of staying at home due to illness has disappeared for many.

This is not a case for undeclared income. My point is that taxes influence behaviour. Yet, this insight is at odds with one of the great ideals of modern taxation: neutrality. The previous government’s blueprint for tax reform is based on that very principle. A tax system should be as neutral as possible. Comparable situations must be taxed similarly. Citizens should not allow their economic choices to be determined by fiscal loopholes, exceptions, or artificial structures. However, neutrality should not be confused with the absence of behavioural control. Anyone who thinks that the sole purpose of taxes is to raise revenue underestimates their societal impact. Every tax creates incentives and influences choices.

Behavioural economists speak of a nudge: a subtle adjustment of the environment that pushes people in a certain direction without taking away their freedom of choice. People, for example, take the stairs more often, not because they are forced to do so, but because the environment has been set up differently. Taxes are also a form of architecture. The evidence of such a statement can be found in our political history. Until 1893, Belgium had a property-based suffrage. The right to vote was reserved to citizens who paid sufficient taxes. The system was undemocratic and favoured a small elite. It had a fascinating side effect, however. Since political influence was linked to the payment of taxes, some citizens became very keen to present their income or wealth as higher than it actually was. They wanted to reach the required tax threshold to become eligible to vote.

Today, the government allocates huge resources to audits, sanctions, and procedures to convince taxpayers to declare their income correctly. In the nineteenth century, there were citizens who wanted to pay more taxes, because the fiscal incentive was linked to something they considered valuable. That is exactly what the GP unknowingly described in the Knack article. We shouldn’t just ask how much tax someone pays. The question is which behaviours does a system reward, discourage, or enable.

The tax debate usually revolves around rates, bases, exemptions, and budgetary revenues. But people respond to incentives, expectations and social norms. Therefore, I suspect that there is still much to be gained in tax enforcement using insights from behavioural economics. Not through harsher sanctions or more controls, but by better understanding how people really make decisions. How do you create spontaneous compliance? How do you reinforce the perception that taxes are fair? How do you make correct behaviour the easiest choice?

These are not philosophical questions. They determine how much taxes are paid and how much the government must invest in enforcement. Once again: I am not advocating for undeclared work. Nor for a return to property-based suffrage. But sometimes flawed tax systems teach us something that effective ones tend to forget. That taxes don’t just raise money. They also shape behaviour.

The author is a lawyer and founder of Tuerlinckx Tax Lawyers

Quote:

“Anyone who thinks that the sole purpose of taxes is to raise revenue underestimates their societal impact.”