The contribution of behavioral economics to tax reform in the United Kingdom

This paper examines the contribution of behavioral economics to tax reform by examining two major reforms in the United Kingdom which may be seen as natural experiments – the reform of local taxation and the introduction of value added tax. The case for both was based strongly on mainstream economic analysis but one was a failure and the other a success. The introduction of the local community charge, or ‘poll tax’ as it became known, was such a failure that not only did it have to be repealed but it was also a factor in the downfall of Mrs. Margaret Thatcher as Prime Minister. The introduction of value added tax took more account of behavioral factors and was successful. The paper concludes that a wider approach based on behavioral as well as mainstream economics may have considerable advantages in developing tax policy.

► The relationship between mainstream economics and behavioral economics is examined. ► Behavioral factors are linked to the process of tax reform. ► Two major reforms which may be seen as natural experiments are analyzed. ► It is concluded that behavioral economics has an important role to play in developing successful tax reform.