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The Common Wealth

The Fiscal Philosophers

Limehouse in the old London docks is one of the crucibles of British political life. It was there that, on 30 July 1909, David Lloyd George, Liberal Chancellor of the Exchequer, addressed 4,000 people at the Edinburgh Castle, the former music hall and gin palace that Thomas Barnardo had turned into a coffee house and People’s Mission. Lloyd George electrified the crowd with a furious defence of his ‘People’s Budget’, which had introduced taxation on wealth on the grounds that income earned was superior to income unearned. Earned income included wages, salaries and tips. Unearned income in this context referred to capital gains, interest income, passive income generated from rental real estate, stock dividends, and bond interest.

The 1909 budget increased income tax from 1 shilling to 2 shillings in the pound and introduced a ‘super-tax’ by which anyone who earned over £5,000 a year paid 6d for every pound that their income exceeded £3,000. It also proposed unprecedented taxes on the lands and the unearned incomes of the wealthy. Lloyd George’s express intention was to wage a war on squalor and wretched poverty to make it ‘as remote to the people of this country as the wolves which once infested its forests’. The most controversial measure in the budget was the proposal for a valuation of all land to be conducted and for a 20 per cent tax to be levied on the increased value of the land when it changed hands.

The protectionist Conservative party, just as it had in the case of Peel and the Corn Laws, sided with the merchant class, preferring instead to place tariffs on imports. The House of Lords also performed its class duty. On 30 November 1909 it rejected the Finance Bill by 350 votes to 75. Asquith, the Prime Minister, dissolved Parliament and the subsequent general election of January 1910 was fought on the issue of the peers versus the people. It was during this campaign that Lloyd George gave his notorious Limehouse speech, which provoked a letter of complaint from the King. The Liberals lost seats in the election but returned to government and the main argument was deemed to have been won. On 28 April 1910 the House of Lords was forced to accept the budget. The turmoil led to the removal of the Lords’ power of veto over money bills under the Parliament Act of 1911.

In Limehouse, the Chancellor raised himself to such a pitch of elevation that fiery rhetoric became known thereafter as ‘Limehousing’. Lloyd George’s act was so popular that he was approached by American theatre producers to perform it on the music hall stage. But the principles he espoused were more than great theatre. Thirteen years later, on 23 November 1922, the MP for Limehouse, who was known for his work with the poor of the area, made his maiden speech in the House of Commons. Clement Attlee spoke passionately about work being a source of dignity superior to welfare and why family was the basic unit of society. Attlee’s 1922 Limehouse declaration combined patriotism with passion for the common wealth of the citizens.

In recent times these principles have not been respected. Millions of households have instead faced the prospect of stagnating living standards. On current trends, the average British family will have 15 per cent less cash coming in by 2020 than it had in 2008. At the same time a greater share of GDP is being taken by shareholders as profit. In 1989, for every £1 that GDP grew, the median income grew by 95 pence. By 2007 the family on the median income only got 50 pence from that £1. Until 1990 if you worked harder, you got paid more; now, after you have bought the essentials, you don’t.

The introduction of a minimum wage cost no jobs, which shows that companies were paying their staff less than they could afford. In retail and distribution, in which non-unionised workers have no effective power at all, some employers are offering zero-hours contracts, under which they summon labour as and when they need it. How anyone is meant to live like this, let alone thrive, is unfathomable. Britain is creating jobs of a lower status, with lower skills, at lower rates of pay, than any of its competitor nations. It’s not an inevitable result of the market economy, because different capitalist nations have different patterns of work. It’s a choice and it is one that we could and should avoid. When the top 10 per cent of the population own almost 70 per cent of the wealth, British capitalism has a problem and we need to think again about the principles that we bring to bear on this question. We need to revive the spirit of the common wealth in Britain and, in particular, the three principles on which it should be founded: merit, enterprise and work.

Taxing Questions and Home Truths

These principles need to inform decisions about what to tax. Albert Einstein put the conundrum nicely when he was filling in his tax return: ‘This is too difficult for a mathematician. It takes a philosopher’. Choices about what to tax, and at what rate, are leading indicators of a political philosophy. The social democrat tends to see taxation as a way to restore the fairness that goes missing in a market distribution of earnings. It is more than coincidence that the left’s favourite self-description, ‘progressive’, is also the term applied to the regime by which the rich pay a greater proportion in tax than the poor. The conservative is more likely to see tax as a necessary evil.

At current prices and patterns of expenditure, the British state requires £700 billion a year. It has to be raised somehow but taxation in Britain observes no discernible principles at all. This is extraordinary. Taxation is coerced payment; it should be levied according to principles we have chosen to voice and defend. In the common wealth, merit, work and enterprise should be taxed as lightly as possible. Far too much unearned wealth falls, as John Stuart Mill said of the undeserving rich, ‘into their mouths as they sleep’. At present in this country, those who have over £1 million of income a year receive a fifth in the form of dividends, interest and property. People with an income between £20,000 and £30,000 receive less than 5 per cent in the same way, and those from the poorest households virtually nothing at all.

We should follow the fiscal principles of the People’s Budget: avoid imposts on effort and work; seek, instead, to locate idle wealth and try to place a fiscal deterrent on activity that is evidently harmful to others. The path of least resistance, the easiest way to raise cash, is to tax earnings. But income tax was never meant to be the staple source of revenue. It was introduced in 1798 to raise funds to beat Napoleon and was meant to be temporary. The mandate to levy tax still expires every 5 April, when the government has to reapply for permission with another Finance Act. Yet there is not much chance of the mandate lapsing. Of all the public revenue raised, 44 per cent comes from income tax, a levy on labour which the party of that name is always, strangely, seeking to increase. A further 20 per cent of the tax required comes from business. Consumption taxes account for a further 30 per cent.

The tax base is also heavily reliant – too reliant – on London and on financial services. London is one of only two regions in Britain, the other being the south-east of England, that generates a surplus. During the boom before the financial crash, the rest of the country was subsidised by London and the south-east. London accounts for a quarter of all the income tax paid in the country, which is three times as much as Scotland and more than the north-east, the north-west, Yorkshire and Humberside combined. The capital contributes a quarter of all corporation tax and business rates, and a third of all stamp duty. London and the south-east are bringing in 40 per cent of the total tax take.

Taxation is therefore largely levied on activities that we ought instead to be encouraging – work, creativity and enterprise. We are taxing what is easy to tax rather than what it is right to tax. A meagre 5 per cent of revenue is raised on land and buildings which are static creators of unearned income. The case for taxing land and property, though hardly popular, is clear. Property, unlike income, is hard to hide and taxes on it hard to evade. When domestic residences attract no capital gains tax, property becomes an investment as much as a home. This is a public incentive for the creation of an asset bubble. I am lucky enough to have bought a house yet I cannot meaningfully be credited with earning its rise in value. Supply in London, where I live, is constrained and, in an open economy, money floods into property in the capital. The lucky ones, like me, enjoy the bonanza while the unlucky, born too late, cannot afford to buy. This makes no sense.

The place to start is the council tax which in England, incredibly, is still based on 1991 house prices. Every house valued at more than £320,000 pays the same amount. Since 1991 the average price of a London house has risen by 399 per cent. In the east Midlands, the region with the lowest house-price inflation in the country, prices have still risen by 219 per cent. At the moment, the owners of a home in the highest band pay three times as much in council tax as the owners of a home in the lowest band even though their home is twenty times the value. Inflate that 1991 figure by the average rise in house prices over the past twenty years, and you get to almost £1 million. The obvious reform is to revalue properties now, and to do so regularly, and to introduce a graded property tax, proportionate to the value of the house. The addition of three new council tax bands could raise £4.7 billion a year. Somebody will always object that they know a little old lady who cannot find a single penny in any one of her twenty-seven rooms, but that’s easily dealt with. The debt can be deferred and paid out of the estate.

Higher property taxes would generate revenue from foreign owners who otherwise swerve with ease past the UK tax authorities. If property prices rise the tax take will rise with it. Thus a tax could help to flatten the volatile housing cycle. It would certainly help to redress the gap between the north and the south because 60 per cent of the total revenue on houses worth more than £1 million would be paid by four London boroughs. The whole of England north of, and including, Birmingham would pay only 2 per cent of the total.

If we do not confront the need to tax fairly then there is no hope of solving Britain’s housing crisis, which is where the breach of the political covenant is most flagrant. Home ownership, the promise of which has been central to the bargain of British politics, has now fallen to its lowest level since 1987. As land values rise, house building is at its lowest level since 1923. Money is flowing into the existing stock of property from overseas and the planning regime makes new building harder than it should be. A higher divorce rate, later marriage and greater longevity means there are more single-person households than there have ever been. In 1911 only 5 per cent of households contained one person. Now, one in every four houses is occupied by a single person. Since 2008 access to easy mortgage finance has been curtailed. Housing costs for the average family have tripled since 1961, from 6 per cent of income to 18 per cent.