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Economics

29 October 2024

6 min read

How to tax ethically to avoid a two-tier society

From income tax to property and inheritance taxes, which is fairer?

Laurence Fletcher

Laurence Fletcher is a journalist at the Financial Times.

Sarah Agnew on Unsplash.

Few doubt that Chancellor Rachel Reeves will be putting up taxes when she presents her first Budget on October 30th.

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.

“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.”

Paul Williams

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 Biblical perspective that he believes offers some solutions.

He takes as his starting point a story from the gospel of Matthew, 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, he says, “completely ruined” by wealthy people from elsewhere buying second homes, 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 said.

“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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Conspiracy theory

Death & life

29 August 2024

4 min read

A Bayesian theory of death

The sinking of the superyacht displays the probability, and banality, of death.

George Pitcher

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

Rescue workers look at the plan of a yacht.

The search for the Bayesian.

Vigili del Fuoco.

On any statistical calculation, the probability of dying by drowning when your luxury yacht suddenly and inexplicably sinks at anchor in the Mediterranean has to be extremely low.

So it’s the cruellest of ironies that tech tycoon Mike Lynch should so die, along with his daughter and five others, having devoted his commercial life to the application of such statistical probabilities. He had named his yacht Bayesian after the 18th-century theorem that introduced the idea that probability expresses a degree of belief in an event.

That doesn’t expressly mean religious belief. But, intriguingly, it doesn’t exclude it either. According to Thomas Bayes, who published his theorem in 1763, the calculable degree of belief may be based on prior knowledge about an event, such as the results of previous experiments, or on personal beliefs about it.

In essence, you don’t believe your yacht will capsize in the night and sink in seconds, because your experience tells you so. That belief can mathematically be included in the probability of it happening.

We can transfer the method into religious praxis. Christian belief in the event of resurrection, for instance, can be calculated in the probability that the deaths of the Lynches and others aboard the Bayesian are not the end of their existence.

It’s an intriguing legacy of Lynch’s work for theologians. But it’s the sheer lack of probability of the lethal event occurring at all that lends it its random banality. It’s that death visited those asleep on a yacht in the small hours that lends this news story such tireless legs, not just that these were super-rich masters and mistresses of the universe.

There have been bitter observations on social media that the Bayesian’s victims have commanded limitlessly greater attention than the many thousands of refugees who die in small-boat crossings of the Mediterranean every year.

This is a category mistake. And again, Bayesian theory can be deployed. Experience supports our belief that crossing the sea in overcrowded and unseaworthy vessels can all too often lead to tragically terminal events. The probability of death is plain. Again, it’s the sheer randomness of the Bayesian yacht event that sets it apart.

If death can visit at any time, there can be no difference in the valuation of long or short lives.

That randomness brings us back to the banality of sudden death among us, almost its ordinariness, something that just happens, often entirely out of the blue. The prayer book has the funeral words “in the midst of life we are in death”, meaning that death is our constant living companion. But that doesn’t quite cut it for me, because it tells us it’s there, but nothing of its true significance.

The tenets of Christian faith are regularly said to be those of a death cult; that it’s a deep-seated fear of death that leads us to avoid it with assurances of eternal life. But it’s the sheer banality of death, as displayed in the randomness of the Bayesian event, that seems to knock down that idea. In its randomness, death looks ridiculous rather than evil.

Conspiracy theories around the sinking of the Bayesian are a kind of denial of the reality of death too. We want there to be more to it than the utterly banal.

Author Hannah Arendt coined the phrase “the banality of evil” when covering the trial of Nazi holocaust architect Adolf Eichmann in Jerusalem. I’d want to suggest that it’s that same banality, that basic human ordinariness, that is the real nature of the supposed grim reaper, rather than his evil.

None of this can comfort the Lynch family, who mourn the loss of a much-loved father and his young daughter, or the families of the others who lost their lives on the Bayesian. But it is meant to go some way towards an explanation of what we mean in Christian theology when we bandy about phrases such as “the defeat of death”. Because it’s not a wicked serpent that’s been defeated, more of a pointless clown.

There is something especially painful about the death of the young, such as that of 18-year-old Hannah Lynch on the Bayesian that night, a young woman on the threshold of life. And – God knows – the even younger lives we’ve read about being taken lately.

But the concept of banality may lead us to another tenet of faith: The completeness of every life. If death can visit at any time, there can be no difference in the valuation of long or short lives.

A poem, often ascribed to a former dean of St Paul’s cathedral, begins with the line: “Death is nothing at all.” That’s wrong, as an idea. Death is as significant an event as birth. But its defeat is in keeping it in its place.

The dignity in simplicity with which football manager Sven-Göran Eriksson greeted his final illness is a masterclass in this tactic for life. Death isn’t to be negotiated, it’s just there.

In the end, death isn’t a Bayesian probability, it’s a certainty, for all of us. The difference, in Bayesian theory, must be the belief we bring to our personal calculations of the probability of the event.