Since You Asked

Taxing my music can’t be good, can it?

“Exploitation of a controversial value-added tax relief on low-value goods such as CDs, DVDs, memory cards and contact lenses shipped from the Channel Islands will be blocked next April, the Treasury announced on Wednesday.”

Financial Times, Nov 9

No more cheap CDs from Amazon?

Strictly speaking the cheap CDs come from a company called Indigo Starfish, Amazon’s “preferred vendor”, which is based in Jersey and not subject to the UK rate of 20 per cent value-added tax. UK customers should be paying that VAT when they import CDs, but for decades cheaper items have been exempt from this requirement with the idea of keeping administrative costs down. No longer.

So this means I’ll have to pay an extra 20 per cent for my CDs?

Possibly, although the pre-tax price might come down a little now that companies don’t have to fulfil your order out of a warehouse somewhere off the coast of France in order to save on tax.

Won’t this cost lots of jobs in Guernsey and Jersey?

Quite possibly.

Doesn’t this just prove that raising taxes costs jobs? Shouldn’t the government be scrapping VAT completely rather than finding new ways to charge it?

That doesn’t follow at all. It depends on the price-elasticity of demand and that in turn depends on the availability of substitutes.

In English?

Ordering an offshore DVD feels very much like ordering an onshore DVD, so customers will plump for the cheapest price. The onshore DVD mail-order industry can be wiped out by a very small tax disadvantage. That doesn’t mean that a tax on all DVDs would destroy the DVD industry. Closing this loophole probably won’t cost many jobs, it will just relocate them from somewhere near Cherbourg to somewhere near Coventry.

Are there any other industries that exist only because of tax breaks?

Probably, although perhaps the international financiers favour the Cayman Islands chiefly because of the weather.

It’s amazing that taxation can have such a profound effect on our behaviour.

There have been stranger examples. Consider the window tax introduced in the late 17th century in England and Wales. It was an easily administered, non-intrusive way of taxing people with grander homes. However, it led to windows being blocked up for tax reasons.

Reminds me of the Douglas Adams character Hotblack Desiato.

Ah yes, Mr Desiato was spending a year dead for tax reasons. Life imitates art: the economists Andrew Leigh and Joshua Gans found that in response to a change in Australian inheritance tax rules in the late 1970s, one in 20 deaths were successfully delayed for a few days with the effect of exempting the estates from inheritance tax.

Didn’t Benjamin Franklin say that nothing in life was certain except death and taxes?

Something like that. And in Gone with the Wind, Margaret Mitchell wrote: “Death, taxes and childbirth! There’s never any convenient time for any of them.” Franklin and Mitchell were both wrong: Mr Gans and Mr Leigh also discovered that many Australian mothers successfully postponed the births of their children in late June 2003. This was because the Australian government unwittingly gave them a financial incentive to do so. July 1 2003 broke records for the number of babies born. Whether you’re entering the world or leaving it, tax breaks matter.

So these tax breaks are like a superpower? You can get people to do anything you want?

Like all superpowers it can be used for good and for evil. I think of these taxes as being a bit like a selective breeding programme. Breeders can develop tastier, more disease-resistant crops, or strong, loyal dogs. Or they can breed malformed show dogs that can’t mate or go through labour without assistance. It all depends on how the selective breeders go about their task. Similarly, through appropriate tax incentives governments can summon up logistics hubs on remote islands, or create dingy town houses in London and Edinburgh.

Any thoughts of these taxes being used for good?

Taxes on cigarettes and alcohol are the obvious example. The gaping omissions are carbon taxes and congestion taxes. If tax incentives can create a “fulfilment industry” in Jersey and Guernsey, miracles can happen.

Also published at ft.com.