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Economics

Politics

24 October 2024

1 min read

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 Fletcher 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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Politics

28 November 2024

4 min read

Here's why we need to keep democracy holy

It's much more than a utilitarian deal that benefits the most.

George Pitcher

George is a visiting fellow at the London School of Economics and an Anglican priest.

A sign reading 'polling station' stands by the entrance to a church.

Red Dot on Unsplash.

One of the more ludicrous constitutional contributions of late has been the parliamentary petition, with well past two million signatures when I last looked, demanding another general election be called, because the Labour government, elected in July, has “gone back on the promises they laid out in the lead-up to the last election.”

Prime minister Sir Keir Starmer has surprised precisely no one by saying that he won’t be calling one. And so we’ll move on. But, in passing, what is truly breathtaking is how little our democracy is understood and, apparently, how unseriously democracy in the west is now taken. If that sounds unduly censorious, I have a two-word response: Two million!

Little time need be spent on demolishing the premise of this spurious petition, other than to wonder how many of those signatories would have appeared on one calling for, say, a fresh mandate after the coalition government of David Cameron and Nick Clegg (where is he now? Ah yes) performed a massive reverse-ferret on a manifesto pledge not to raise university tuition fees.

Or how many of these same fearless electors believe the result of the Brexit referendum should be voided because of the lies of the Leave campaign, most notable the one painted on the side of Boris Johnson’s battle bus. But no – two million residual, self-righteous righties can only be mobilised against a Labour government.

This event none the less raises valid questions about what our democracy is (and is not) and why we should want to protect or even cherish it. These questions become the more critical because there’s a tangible feeling of slippage in western democracy, as if we’re growing a bit tired and even contemptuous of it.

There’s the ominous re-growth of nationalism across Europe. And not a few bien pensants – me included, to my shame – might admit to a feeling after Donald Trump’s re-election as US president that democracy is too important to be left to the people.

Slightly more seriously, we need to ask ourselves what the qualities of democracy are that we should seek to defend. The first of these is, quite obviously, the rule of law. Should a political actor seek to overthrow a democratically established electoral process, then that is a crime within the rule of law. Witness the horrors on Capitol Hill in Washington DC on January 6 2021.

That’s the Feast of the Epiphany as it happens, but nothing to do with the coming of wise men. With Trump at the centre of it. Draw your own democratic conclusions – and weep for the rule of law.

Natural justice is to ensure that vexatious petitions don’t overthrow legally elected governments, either by lobby or violence.

Again, why does this matter and what is it about democracy that we hold sacred, even holy? It can’t simply be that we hold dear a kind of hard utilitarian ideal that what we elect to do is for the benefit of most of the people, for most of the time, as decided by popular mandate among the demos.

If we believe in democracy, as I believe most of us do, we’re presented with a choice: We can look to secularism as a solution, universal Enlightenment principles built on citizenship and equality before the law. Or we can look to a multiculturist model, keeping the peace between essentially separate communities and the state.

Or we can shape something on Augustinian Christianity, that recognises the limits of political democracy, which would eschew undemocratic theocracy, but which would hold that no political order other than the Body of Christ (the Church) can claim divine authority.

We’re in classic Rowan Williams theological territory here: “[T]he Body of Christ is not a political order on the same level as others, competing for control, but a community that signifies, that points to a possible healed human world.”

Unsurprisingly, I buy that. Williams goes further to state this spiritual effect on the political environments in which we find ourselves is likely to be “sceptical and demystifying.” Which seems to be a reasonable manifesto in a democracy.

The principle of election can be a worrying one in theological terms. We don’t “elect” God, though some secularists would claim that the Godhead is our invention. Rather, it has sometimes been perceived to be the other way around historically.

Reformational Calvinism would hold, among many other things, the rather terrifying view that we’re elected by God. “The Elect” are those who will be saved, while the rest of us (I presume) can rot in hell. Little democracy there.

Less deterministically, a more modernist worldview would argue that the Christian faith, on which foundation western civilisation is built, offers a viable moral definition of the lawful state, with which politicians of all (democratic) persuasions can tackle issues of global justice.

One such issue of natural justice is to ensure that vexatious petitions don’t overthrow legally elected governments, either by lobby or violence. That’s an important aspect of Christian witness and will require true grit in in its application during the years ahead. That’s, if you will, our grit in the democratic oyster.