Article

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.

Article

Character

Culture

Leading

Virtues

19 September 2024

6 min read

What is Putin thinking? And how would you know?

The self-centeredness of modern culture is antithetical to strategic thinking.

Emerson Csorba

Emerson writes on geopolitics. He is also a business executive and holds a doctorate in theology.

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

What is Putin thinking?

In a world of Google Maps when walking on city streets, or of Waze when driving, it is difficult to ever become lost.

The AI algorithm provides us with the shortest route to our destination, adjusting whenever we make the wrong turn. We do not need to think for ourselves, technology instead showing the way forward.

But there are times where it is possible to get lost. This happens less in a city with its clearly set-out streets, and more so when taking the wrong turn in open expanses: hiking in the mountains, traversing farmers’ fields or while navigating at sea. In each of these situations, a miscalculation may lead to peril.

It is in these situations that we must carefully think through our steps, determining how to proceed, or whether to turn back. Often, these situations are ambiguous, the right way forward unclear.

Much of life – perhaps more than we wish to acknowledge – is like this, more akin to a walk across an open field with multiple possible routes forward, than a technology-enabled walk through a city.

When making important decisions, our grasp of a given situation, of others’ intentions and motives, and the networks facilitating and constraining action, are less evident than we may initially think.

This acknowledgement of uncertainty is no reason for delay, but rather a basis for careful deliberation in determining what to do, and how to proceed. It is necessary if we are to pursue what we believe is right, in a manner that may produce positive results.

In a recent interview with the BBC Newscast podcast, University of Durham Chancellor Dr Fiona Hill – who previously served as White House National Security Council Senior Director for European and Russian Affairs, and currently as Co-Lead of the UK’s Strategic Defence Review – provides listeners with a powerful reminder on how to proceed within ambiguous situations, especially in navigating the choppy seas, or rocky terrains, of human relationships.

Strategic empathy requires self-restraint when natural impulses urge a person to make rapid conclusions about the reality of a given situation – the default human tendency.

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Dr Hill uses the term “strategic empathy” to consider how the political West might proceed in its relationship with Russia, and specifically with Vladimir Putin.

Strategic empathy is a serious commitment to understanding how another person thinks, considering their worldview, their key sources of information (in other words, their main three or four advisors, who have a person’s ear), and other emotional considerations that underpin decision-making.

It is much more than just putting oneself in other’s shoes, as is often said about empathy. The approach is one of realism, suspending judgment based on self-protective or self-aggrandising illusions, in favour of what is actually the case.

In the case of Putin, Dr Hill helpfully reminds listeners that his worldview is drastically different than that of Westerners, and that significant intellectual effort (and specifically, intellectual humility in setting aside one’s own default frames of reference) is necessary to consider decisions from Putin’s perspective, and so make the right decisions from ours.

Technology is here an assistant but not a cure-all. Whereas AI might – based on a gathering of all possible publicly available information written by and about a particular person – help to predict a person’s next move, this prediction is imperfect at best.

There are underlying factors – perhaps a deeply engrained sense of historical grievance and resentment in the case of Putin – that shapes another’s action and that can scarcely be picked up through initial conversation. These factors may not make sense from our perspectives, or be logical, but they exist and must be treated seriously.

This empathy is strategic, because effective strategy is the “How?” of any mission. Whereas a person’s or organisation’s mission, vocation or purpose (all words that can be used relatively interchangeably) is the “Why?” of a pursuit, strategy is the “How?” which itself consists of the questions “Who?” “What?” “When?” and “Where?”

To understand how to act strategically requires a prior effective assessment of reality. This requires going beyond what others say, our initial perception of a situation, any haughty beliefs that we simply know what is happening, or even the assessments of supposedly well-connected and expert contacts.

Dr Hill’s strategic empathy is an appeal to listeners to ask questions – digging as much as possible – to arrive at an assessment that approximates reality to the greatest degree possible. This exercise might be aided by AI, but it is at its heart a human endeavour.

Strategic empathy requires self-restraint when natural impulses urge a person to make rapid conclusions about the reality of a given situation – the default human tendency. The persistent asking of questions is difficult – requiring mental, emotional and intellectual endurance.

There is considerable wisdom in Dr Hill’s reflections on strategic empathy, which extend well beyond the fields of intelligence, geopolitics or defence. The idea of strategic empathy helps show us that in much of modern culture – which glorifies the self, individuals putting their wants, needs and desires before those of others – developing strategy is very difficult.

The key then, when deliberating on potential right courses of action in ambiguous situations, is to not begin believing that the right way is clear. It rarely is.

Why is this the case? When popular culture favours phrases such as “You do you,” the you becomes a barrier to asking questions, with some aloofness to the situation, necessary for understanding how another thinks. People are encouraged to focus on themselves at the expense of others, and so fail to understand others’ worldviews and ways of operating.

Simply put, the self-centeredness of modern culture is antithetical to strategy. It impedes deliberation, which involves patience in the gradual formation of purpose for action. It wages war against the considered politics or statesmanship that many want to see return. In place of this is crisis or catastrophe, in which self-focus leads to clashes with others that could otherwise be avoided or worked through carefully.

The Biblical story of the serpent in the garden is another vantage point for the idea of strategic empathy. Soon after Adam and Eve eat the apple in the garden and become “like gods, knowing good and evil,” God searches for them and asks “Where are you?”

It is right after individuals try to become the judges of good and evil – “like gods,” that Adam and Eve find themselves lost: God’s “Where are you?”

Put differently, when a person is convinced they are right, but without asking questions, they make mistakes, they likely suffer unnecessarily because of this, and then become anchorless – the “Where are you?”

This applies to countries as much as it does to people: the more they moralize, seeking to become the judges of good and evil in a complex geopolitical landscape, the more they drift from their sense of purpose.

The key then, when deliberating on potential right courses of action in ambiguous situations, is to not begin believing that the right way is clear. It rarely is. A belief in evident rightness often leads to error, whereas the ability to suspend such judgment helps reveal – often gradually – the right path forward.

The strategic empathy approach requires both assertiveness – in asking good questions and maintaining persistence in doing so – and self-restraint in the face of believing that the right answer is clear.

The glue between assertiveness on the one hand and restraint on the other is faith, which helps a person to move forward in a trusting manner, but without exerting oneself so much so that they become the centre of the situation.

So, while Google Maps, Waze or other technologies might be at our disposal in our travels, both real and metaphorical, these technologies only get us so far.

The right way forward is seldom initially clear when navigating ambiguous situations, the frequency and stakes of which increase as we embark boldly – with faith – on the adventure of life.

Dr Hill’s strategic empathy – asking questions, listening carefully, suspending a self of sense, seriously considering diverging worldviews, and adjusting as necessary – helps us to achieve the understanding and direction we need.

Indeed, this approach is fundamental to a more effective and resilient political West. It is necessary for sounder deliberation, better strategy and statesmanship, in an increasingly ambiguous world.