English windows and tax distortions – 08/15/2023 – Bernardo Guimarães

The strange case of the missing windows.

England, 1750. It is estimated that almost 20% of houses had nine windows. Less than 10% of homes had seven windows or less.

Fifteen years later, in 1765, 27% of houses would have only seven windows.

This curious disappearance of windows is well known and the numbers are in the work of Wallace Oates and Robert Schwab. In microeconomics textbooks, it’s a concrete example of the effect of taxes on people’s decisions.

In 1696, a tax was imposed in England on the number of windows a house had. In 1750, houses with up to nine windows were exempt from this tax. However, in 1761, houses with eight or more windows were taxed.

So, in order not to pay the tax, the owners would brick up the bedroom window to stay within the exemption limit. This was one of the ways used to reduce the number of windows in English houses in the 18th century.

In Brazil today, windows are not taxed, but eligibility rules for special tax regimes distort people’s decisions.

Companies that fall into the individual micro-entrepreneur category pay much less tax. There is, however, a cap on the company’s revenue. Many are right at that limit. Using data from small companies in Sergipe, Enlinson Mattos and Marcos Nascimento show that there are three times as many companies just below the threshold than you would find if there were no such change in taxation.

These simple examples illustrate the distortions caused by taxation rules.

To cover its expenses, the government needs to tax. One discussion is about how much the State should spend and, consequently, collect. Another is about how taxation should be.

The discussion, in general, revolves around the distributional effects of changes in taxation rules. In fact, subsidies, special tax regimes and changes in tax rates affect our pockets directly.

But tax rules don’t just determine who pays the bill.

Taxes and special taxation regimes mean that windows no longer exist, companies produce less, motorcycles are assembled in Manaus and transported to São Paulo.

Taxes mean that perfumes and books with similar costs are sold to consumers at very different prices because of the high IPI on cosmetics. As prices affect our purchasing decisions, taxes change what we consume and produce.

Because of taxation rules, people create companies to replace their work papers with invoices. Employees receive meal vouchers. So many people work at companies that issue vouchers or do accounting for companies that don’t need to exist.

These people could be employed in the production of other things. If that were the case, we would have more to consume and invest. GDP would be higher.

Taxes determine whether hybrid cars and solar panels are worth buying. So, even without touching our windows, tax rules affect the quality of the air we breathe.

Because of all this, tax issues have dominated the economic news since the beginning of the year. The distributive aspects are important. We want fair rules. But we need to remember that taxes affect how, what and how much we produce — and sometimes drive us to spend to close our windows.

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