How can taxes build a better society?

As we await Rachel Reeve's budget announcement, Laurence Fletcher wonders what positive tweaks can be made to our economic system.

Laurence Fletcher

Laurence is a journalist at the Financial Times.

Few doubt that Chancellor, Rachel Reeves, will be putting up taxes when she presents her first Budget on October 30. The political narrative of recent months has very much been of an alleged fiscal “black hole” of £22bn - or is it £40bn? - that somehow needs to be filled.

While the size of the shortfall and the identity of those responsible are both hotly disputed, and despite a lack of detail from the Treasury about what it actually consists of, the questions now being asked are not whether taxes will rise but which ones and by how much.

Months of speculation have focused on employer National Insurance, capital gains tax and freezing income tax thresholds as areas that Reeves could look to for the additional revenue. But beyond the immediate issue of raising enough revenue to make good any shortfall, lies a deeper, trickier question about the way in which taxes should be levied for the good of society. If a government is to force people and companies to hand over their money, then what is the most ethical way to do this? Who should pay and who shouldn’t? How can tax be used to reduce inequality and build a better society?

Answering such questions is, of course, far from straightforward, because there are plenty of other factors in play.

For instance, some taxes are surely levied because they are simpler to collect. Take income tax - an unpopular measure introduced in 1799, then abolished before being reintroduced as a supposed temporary measure. It could certainly be argued that taxing people’s income - their attempt to get on in life and improve their lot in life - is less “fair” than taxing wealth that has been accumulated by someone’s ancestors years ago. Working hard and earning income is often surely a way of breaking down class divisions. But income tax - contributing 28 per cent of UK government tax take in 2023-24, according to The Institute for Fiscal Studies - has the advantage that it is relatively difficult for the average worker at a UK company to avoid it. Ease of levying it is surely a driver.

Equally, some taxes that might seem “fairer” have deliberately not been levied because of the difficulty in collecting them, and/or because to try to do so could be counterproductive. A wealth tax, for instance, would be “economically damaging”, according to one of the UK’s highest profile tax experts, Dan Neidle. Or take the politically contentious issue of non-doms, a colonial era tax break allowing rich foreigners to avoid UK tax on overseas income. It would be fairer, the argument goes, to tax them on the whole of their income. If they are going to be resident in the UK, then surely they should be taxed like a UK resident whose home is here?

Former Chancellor Jeremy Hunt abolished this regime earlier this year but left a number of concessions that the incoming Labour government pledged to abolish. But non-doms are tax-sensitive and highly mobile, and a number of jurisdictions compete to attract them. Many are entrepreneurs and wealth creators that many countries need. Reports have suggested a clampdown could raise no money or even cost money and could drive people away.

So what can be done to use tax in an ethical way? Paul Williams, research professor of marketplace theology and leadership at Regent College, Vancouver and chief executive of the Bible Society, takes a perspective that he believes offers some solutions.

He takes as his starting point a story in the gospels, where Jesus is asked whether people should pay taxes to Caesar. The question is a trap - either Jesus gives his backing to taxation that is highly unpopular with the Jewish people, or he rejects the tax in an act of rebellion against the Romans.

Jesus replies that they should “pay to the Emperor what belongs to the Emperor, and pay to God what belongs to God.” We are to pay our taxes to those in authority, but we are also to honour God.

While Williams believes that too much emphasis is placed on the Budget and political parties’ promises to be able to fix everything, and that a more radical rethink of our economy is required, he also sees room for positive tweaks to the current system.

One key area is the property market, the manifestation of so much inequality in society, with some people owning multiple houses while others cannot afford to buy one. Williams argues that the ready availability of debt finance has allowed those who already hold assets to easily acquire properties, turning real estate into an investable asset class to the detriment of many of the poorer in society.

“The reason there’s so many homeless people and empty houses is due to debt finance. It makes it easy for a relatively small proportion of the population to acquire a large percentage of the assets.

“The system has allowed a structure in which a small advantage in the beginning can lead to big, big differences over time.”

Williams highlights parts of Devon and Cornwall that have been “completely ruined” by wealthy people from elsewhere buying second homes that used to belong to locals, leaving property out of reach of anyone who lives and works there.

Nevertheless, he believes taxation can be used in this area to help level the playing field.

He proposes a “pretty punitive” marginal rate of tax on ownership of more than one home. (Stamp duty only partly does the job and is a blunt instrument also affecting people moving homes, thereby makes mobility expensive).

“You want to disincentivise the way the housing market is used for speculation,” he says.

“Housing is being treated as a commodity. The problem is, it’s not; it’s not just an asset. It has utility value and a communal and quasi-spiritual value, enabling people to feel rooted.”

Buy-to-lets, meanwhile, are better than having empty second or third homes, but “wouldn’t it be better if occupiers could buy that house?” he adds.

Meanwhile, research by the Financial Times recently found a huge wealth gap between the average millennial and the top 10 per cent of millennials, who are benefiting from family wealth to accumulate substantial housing assets.

So would increasing the rate of inheritance tax - one of the most hated of taxes - and/or lowering the threshold also help reduce some of this inequality? After all, how is it fair that one child in the UK is born to inherit large property wealth while another is born to inherit little or nothing? Or, even worse, that second child will only ever be able to afford to be the tenant of the first, paying them rent for the rest of their lives? Williams is not a fan of inheritance tax per se, arguing that it is “not part of the package” in a Biblical image of a flourishing economy. But he adds an important caveat: “the playing field is not level".

“There might be circumstances to impose a one-off tax on the very wealthy… if you want a transition to a more equitable society.”

Such steps are not easy to take. It is, he admits, probably “career suicide” for a politician to adopt such views. But if we are to take steps towards a fairer way of life, and avoid a two-tier society in decades to come, then maybe the conversation needs to shift this way. Perhaps the Budget could be the time to start.

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11 December 2024

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All this can be yours: the momentum that drives mafia states

Once abhorred opinions gain traction among the distracted nursing grievances.

Simon Burton-Jones

Simon is Bishop of Tonbridge in the Diocese of Rochester. He writes regularly round social, cultural and political issues.

Preisdent Putin stands behind a lectern with a gold door and Russian flag behind him.

What is Putin thinking?

Is there a new Cold War today? This assumption, spurred by the war in Ukraine, is challenged by Anne Applebaum in Autocracy, Inc. (Penguin Random House, 2024). Instead, she argues, there is a growing group of autocratic nations where ruling elites exercise staggering levels of corruption, accumulating wealth, eviscerating the common good and suppressing any meaningful dissent. There is rule by law rather than rule of law, where the courts become the means by which brutal, cynical state power is employed to destroy and imprison opponents.

The Cold War was underpinned by ideology, but autocratic states today support one another through logistics, resources and propaganda despite big differences in outlook. Iran, North Korea, Venezuela, China, Russia and Zimbabwe, to name a handful of autocratic nations, share little by way of common ideology, except the desire of their dictators to stay in power, both to ensure their wealth and to protect themselves from legal action. The fig leaves of religious beliefs and nationalism are often used in different combinations but fool few.

If there is a common denominator for these autocracies, it is the wish to scrap the post-war settlements – the institutions and laws that have marked global affairs since. The body of existing international law is a particular target, as its dismantling immunises dictators against judgment.

Framing the present global picture in clear, criminal terms like this is helpful. Mafia states exist, and they are growing in influence. But it is too easy for others to place themselves on the side of the angels. These kleptocracies have been enabled by corporate bodies elsewhere. In the UK, London is host to lawyers, accountants, bankers and PR experts who have helped to launder money for corrupt elites. They argue their support is legal, but it is also amoral; such is the professional framework of some of the biggest names in law and finance. London’s property market, like several other global capitals, has been grossly distorted by the laundering of foreign money, to the detriment of working people trying to afford their own homes.

At the end of the Cold War, there was a widespread sense that liberal, democratic values had prevailed and it only remained for this dye to leak into the fabric of remaining nations. Not only is this not true today, if anything the momentum is with autocratic values infecting democracies with their ways. The global technology revolution has assisted this, as once abhorred opinions and positions gain traction in the minds of distracted people with grievances, real or imagined.

There is a special hypocrisy when criminals who have stolen billions and murdered thousands claim to speak for God.

The late Chief Rabbi, Jonathan Sacks, said the key question for the new century was: who speaks for God? If the suggestion was that this is a question different religious traditions need to answer in ways that support our common humanity, we now have no shortage of dictators who say they speak for God. Their claims that other regions of the world are godless and degenerate are made time and again. Like Goebbels, they know that the endless repetition eventually wears people down until phrases become believable. No-one who cares about God’s character would claim their society reflects his character well; there is injustice, hatred and violence everywhere. But there is a special hypocrisy when criminals who have stolen billions and murdered thousands claim to speak for God.

When Jesus faced his life-defining temptation in the wilderness, the devil showed him the kingdoms of the world and promised they would be his if he ‘turned’. He also tempted Jesus to turn stones into bread. Power and wealth, the very trappings coveted by the world’s dictators. And his final temptation: to throw himself from the roof of the Temple, only to be saved by the angels. To surround himself with a loyal cadre of officers sure to protect his interests at all times.

Instead of the highway to autocracy, Jesus took the uneven and winding path of service to others. One of self-denial, deprived of the material wealth made available by his elevated position. This is the human standard we have been set and it compels self-reflection, not boasting and threats.