Tax loopholes and Policy design - 2026-01-24

When I saw the news about people in the UK fighting in court and roping in scientists to prove whether a chocolate-covered item was a biscuit or a cake (since cakes are GST-exempt), I learned something interesting: biscuits absorb moisture and go soft when left out, while cakes lose moisture and go hard. While this is a fun scientific fact, it’s a nightmare for a country trying to exempt "essential" items. These exemptions invite complexity; companies must label products with different tax rates in their software, leading to higher administrative costs and frequent mistakes.

Businesses will always try to "game the system" to lower costs. We see this with the redesign of Kei cars in Japan or US importers modifying products to avoid specific tariffs (like the "Chicken Tax" on light trucks). Or worse, we end up with expensive court cases just to classify a snack.

Another example is Singapore’s Certificate of Entitlement (COE) system. Because it is split into Category A and B based on engine power, manufacturers frequently cap an EV’s output at 110kW just to qualify for Category A. This makes the car significantly cheaper than the high-performance Category B version, even if it is the same model. However, this system is still not too complex as cars are in limited supply.

Singapore’s GST system treats everyone the same at the point of sale. This system is easier to implement as there are no special exemptions for certain items, unlike in the UK.

As a future policy maker, one must consider the long-term total cost of implementation. You don't want an entire society hiring people just to find loopholes or manage complex compliance. History proves this: in early Imperial China, the poll tax (tax per head) led to families underreporting births or committing infanticide to avoid the burden.

This changed during the Qing Dynasty with the 'Tan Ding Ru Mu' reform, which shifted the tax burden from individuals to land ownership. Once the "penalty" for having children was removed—and high-yield crops like sweet potatoes were introduced—China’s population surged. Historically, governments favored the poll tax because counting heads was easier than surveying irregular land without modern tools. As surveying technology and bureaucracy matured, governments could finally move away from regressive poll taxes to more stable, land-based systems.

We see this 'headcount' system in the Bible, where Joseph and Mary traveled to Bethlehem for a census. During the time of Jesus, the Roman Empire enforced a poll tax (Tributum Capitis) on its subjects.