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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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General Election 24

Politics

20 June 2024

4 min read

What small boats tell us about belonging

Do I belong to these politics? And do these politics belong to me?

George Pitcher

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

A grainy surveillance picture of an rusty boat overloaded with people

A small boat overloaded with migrants.

BBC.

Our son used to say that “home is where the dogs are”, as he was greeted by them. It’s a variation on “home is where the heart is”. Either way, it means that a sense of home isn’t just about place or geography, so much as family and, relatedly, the familiar.

If home were simply an address, candidates in an election campaign wouldn’t bother knocking on doors to meet people. To be familiar is to meet people where they are, circumstantially as well as literally on their doorstep.

To date, the solution to the refugee crisis has been to “stop the boats”, as if our principal concern is with rubber dinghies. We’ve still not addressed the people in those boats; we’re not familiar with them, their circumstances and motivations.

I’d hazard a guess that a common desire among those who flee persecution and mortal danger is something else associated with familiarity – a sense of belonging.

The refugee belongs nowhere, until she or he reaches a new and safe home. Indeed, all of us know we’re home only when we’re somewhere we belong.

Somewheres are rooted in place and community; Anywheres are footloose and and educationally privileged. To which I would add the global category of migrants, who are Nowheres.

This is Refugee Week (17-23 June) and Thursday 20 June is World Refugee Day. It’s theme this year is “Our Home”, which is why I started this column on the nature of familiarity and belonging.

Out of which arise two questions: Do I belong to this country? And does this country belong to me? The first is fairly straightforward in a practical sense – I have a British passport and pay my taxes here, so yes I do. The second question is more complex, more of which in a moment.

When it comes to sovereign governments, the questions move from first to third person. Do you belong to (or in) this country and does this country belong to you? Again, the first question is about paperwork. The second, however, becomes crucially about exclusivity.

Exclusive ownership reaches its abhorrent nadir in a BBC2 documentary this week titled Dead Calm: Killing in the Med?, which provides evidence that the Greek coastguard has been employing masked vigilantes to cast adrift landed refugees, including women and children, in international waters and, in some cases, to throw migrants overboard to their deaths. A story told alongside the capsizing, through incompetence or otherwise, of the rust-tub Adriana, in which more than 600 migrants drowned a year ago.

These are matters for international law. But it shows where treating migrants like cargo, rather than people, takes us. It’s a mindset that could start with repellent (in both senses) wave machines, as considered by a former UK home secretary.

None of which arises if the criteria of belonging are applied. Former Prospect editor David Goodhart famously wrote that a key electoral demographic could be defined in Somewheres and Anywheres. Somewheres are rooted in place and community; Anywheres are footloose and and educationally privileged. To which I would add the global category of migrants, who are Nowheres (see above).

The key here is having nowhere to belong. Former PM Theresa May talked of “citizens of nowhere” in 2016, but she meant globe-trotting tax-exiles and the like. I mean Nowhere people, with nowhere to go – and it’s toxic for all of us that there are so many of them.

This is where the question “does this country belong to me?” carries so much human freight (like a small boat, as it happens).

To belong is an atavistic human need. American psychologist Abraham Maslow’s hierarchy of needs places belonging and love as principal needs in his pyramid between basic physicalities (such as safety) and self-fulfilment at the apex. “Belongingness”, a sense of home, is vital for human stability.

This is where the question “does this country belong to me?” carries so much human freight (like a small boat, as it happens). Simply to repel refugees like they’re someone else’s problem is massively to miss a point, because they’re going to carry on looking for somewhere to belong. So they’re going to keep coming.

Maslow identified religious groups as one of those offering a sense of belonging. I would guess as much as two-thirds of the congregation I’ve looked after over the past decade came to church for that sense of belonging, which we’re called to offer to the despised and marginalised as well as the Somewheres and Anywheres.

Miroslav Volf has written here that “God created the world to live in it” and therefore, I contend, belongs to it. So we’re called to “live in more homelike ways”, which I define as a sense of familiarity and belonging. That’s the theology of it.

We are now facing the politics of it. Nationalism is not enough. We need leaders who can solve this at a global level, which is both a political and a theological imperative.

Perhaps a way of reframing my questions, in this Refugee Week as we ponder how to vote, is: “Do I belong to these politics? And do these politics belong to me?”