George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Tax and fairness: the debate has changed

The public debate about taxation and fairness has changed. For much of 2020 and the preceding years, the debate about who should pay how much tax and on what quickly morphed into the widespread proposition that taxes should rise, but only for other people. National inequality, intergenerational disparities and the ‘postcode lottery’ for services were all invoked as proxies to justify the introduction of a wealth tax, higher capital gains taxes, council tax increases, a higher top rate of income tax and perhaps even a higher rate of VAT on luxury goods.

With the prospect that the Chancellor of the Exchequer would raise taxes in his 3 March 2021 Budget to help pay for the cost of the pandemic, calls for higher taxes seemed to be a self-fulfilling prophecy. However, over the last three weeks, all this has changed. Among the discernible reasons, four stand out.

First, younger adults have started speaking out against higher taxes on their parents because this will reduce the ability of the Bank of Mum and Dad to help fund mortgage deposits now and will in due course also reduce inheritances. Charity begins at home, so to speak. Critics, of course, argue that while this reduces inequality within families, it perpetuates inequality between families.

Second, while one of the key justifications for taxation is the redistribution of wealth, there is a growing concern that this has been over-emphasised. Nevertheless, the use of the tax system for its other primary purpose, namely, to enable a government to meet its objectives, still remains a primary preoccupation. In a civilised society, everyone should have enough to eat, a decent home, an education system to help them realise their potential and a health system to look after them.

Third, a government’s right to increase taxes must be matched by an equal responsibility to spend those taxes wisely. While the last nine months have presented governments worldwide with challenges the likes of which we have not seen for 70 years, regular revelations regarding the mishandling of very large amounts of public money have emphasised that governments cannot increase taxes without improved accountability and transparency. Wasting taxes which have been collected is as bad as tax-dodging, the argument goes.

Fourth, the dreadful surge in the new variant of Covid-19 threatens to simultaneously increase the pressure on the public finances while reducing the Chancellor’s scope to raise taxes. A tax-raising Budget on 3 March is the last thing most people want. However, following the traditional mantra, if inflation does not come to the Chancellor’s rescue to erode the cost of repaying the huge sums of money which have been borrowed, then higher taxes will be inevitable at some point.

Politicians are often accused of failing to learn the lessons of history. In 1944, while the Second World War was still raging, delegates from the 44 Allied nations met in Bretton Woods, USA to agree a new system of rules, institutions and procedures to regulate the international monetary system. By and large, the new system served its initial purpose for a quarter-century and has continued with varying degrees of effectiveness to the present day.

As so many countries have incurred huge debts in the course of responding to the current pandemic, surely now is the time to rethink the global financial system from scratch in a way that allows countries to address their debt responsibilities without imposing crippling austerity on their populations. The opportunity could be taken to focus on job creation, rebuilding the global economy in a way that simultaneously meets climate change objectives. Tax increases alone cannot do this.

 
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