The 'Tax Simplifier' series aims to make the case for a much simpler tax code with practical recommendations for policy change on a regular basis. Blogs are published twice per week, on Monday and Thursday. Read David's previous blog on small businesses. You can follow David on Twitter @TaxSimplifier.
There was a critical problem when the introduction of an income tax was first being considered. This was the reluctance of wealthier people to disclose to any official what their income actually was.
So in 1696 a window tax was introduced instead. Initially it was charged on houses having more than 10 windows. No-one could complain that this meant disclosing something confidential!
But as we find with tax today, exemptions and reliefs complicated things.
Poor people were exempted, and certain rooms such as dairy rooms did not count. There was also avoidance - although the standard method of blocking in windows (a feature that can still be seen across the country today) seems comparatively unsophisticated compared with tax avoidance in today’s world!
As we also find with tax today, the rates of window tax and the numbers of windows charged changed over time.
The tax became more and more unpopular, but was not repealed until 1851.
When income tax was finally introduced taxpayers reported the results under different schedules to different tax inspectors, so that no one official knew all the income “of a gentleman”. This was perhaps the main reason why income was divided into separate compartments under the schedular system.
Although we have become more accepting of one inspector of taxes knowing all our income, we are still suffering from the unnecessary complications today of computing income separately for separate sources. Separate rules for aggregating income from the different sources and for providing relief for losses from the different sources are then also required.
From the historic perspective much of this has long ceased to be justified.