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

Attention

Comment

Economics

23 October 2024

1 min read

Budgeting for discontent

The Chancellor can't please everyone, but is contentment possible?

Paul Valler

Paul Valler is an executive coach and mentor. He is a former chair of the London Institute for Contemporary Christianity.

A woman stands behind a lectern against a blue and red backdrop.

Chancellor Rachel Reeves speaks at a recent event.

HM Treasury.

As the Chancellor Rachel Reeves seeks to raise billions in this Autumn budget, the news media are all over the downsides. Poor pensioners freezing during winter and businesses complaining of the tax burden are political headlines. Tough choices must be made, but we are rarely happy when it comes to money.

Economic discontent is ironically a cultural norm in first world countries. In the west we have become used to what psychologists call the hedonic treadmill – adjusting our expectations to any new benefits and finding ourselves wanting even more, to try to maintain the same level of happiness. It’s a mentality that dooms us to discontent. Socrates said, ‘He who is not contented with what he has, would not be contented with what he would like to have.’

Contentment seems to be a forgotten virtue today, and increasingly elusive in a society striving for happiness through wealth. Yet being content in life is a more valuable form of wealth than money. There is something enormously attractive about a tranquil state of mind and heart. Contentment does not mean passive acquiescence; there is a noble side to being passionately discontented about something that is unjust – especially when we are fighting for others. William Wilberforce demonstrated that with his campaign for the repeal of laws allowing slavery.

Our personal challenge is to be content in ourselves, whatever the circumstances. Oscar Wilde said, ‘True contentment is not having everything, but being satisfied with everything you have.’ Practising paying attention to what we do have and being thankful for it. That attitude of gratitude is a recognised way to lift our mood and strengthen our resilience. But thankfulness doesn’t solve every problem. Warm words may help warm hearts, but they don’t heat cold homes. Although gratitude is proven to improve our wellbeing, it’s not enough to compensate for all the problems of life. Because here’s the deal; life is tough and then you die, and there are many worse things than economic woes.

Pain, grief and loss are all too common, and they can test our resilience beyond what feels like our ability to endure. Chronic physical or mental illness for example; or being permanently disabled. Or the life-sapping effort to parent children with special needs; or caring for a parent/partner with dementia - especially when it goes on and on. Sometimes horrible events happen like violent abuse, or the deep grief of relationship breakdown or bereavement. This level of suffering pushes us to the end of ourselves, to the place where something more than psychological self-help is needed. What is the secret of contentment then?

I don’t envy the Chancellor, and I do not trivialise the very real challenges raised by having to make tough economic choices.

This is where the secular and the Christian worldview are radically different. Secular philosophers call people to show their own self-sufficiency and superior reason when enduring suffering. This can feel principled and stoic, but it lacks empathy and hope. Christianity accepts the reality of our own weakness and insufficiency, recognising that we can’t fix everything ourselves. Instead of trusting in humanity, we choose to trust God both for this life and the life to come. And this trust and hope is linked to a deeper form of contentment, which transcends pure rationality.

Of course, sceptics say this is just psychological comfort from an imaginary friend, and it doesn’t make sense, because surely any good God would not allow us to suffer in the first place. But any realist must acknowledge that a lot of human suffering comes from the damaging exercise of our own free will. Wars and slavery are examples. If God were to override our free will, we would be robbed of the authentic capacity to love, which makes us fully human. The coexistence of free will, suffering and God is a complex issue.

The experience of millions of Christ followers is that trusting God is much more than imaginary comfort. God is real and prayer changes things; the most ordinary, natural and chance experiences can be affected by it. And prayer changes us. In our vulnerability, if we choose to trust God something changes, we begin to relax, things become a bit easier to bear. In fact, the apostle Paul claimed that Christ’s power was perfected in his own weakness.

Contentment is a strange peace that comes from trusting God in the middle of difficult circumstances. One of the great old hymns was written by a man who lost his four daughters in an accident at sea, and also lost all his money in a fire. The refrain says, ‘It is well, it is well with my soul.’ This isn’t denial or delusion, it is the inner sense of quietness that God can give. Only an eternal perspective allows for that kind of contentment.

I don’t envy the Chancellor, and I do not trivialise the very real challenges raised by having to make tough economic choices. Britain is clearly in a place where some stringent fiscal discipline is needed, and that will inevitably cause some hardship and difficulties. But in the face of all the discontent that is so freely shared in the news, there is another way to respond. Instead of complaining about our flawed Government or moaning about our circumstances, we can change our perspective to put our trust in the ultimate Authority. And in doing so can find a peace that the world cannot give. Contentment is a treasure beyond the wealth of nations.