Taxation: What it says about us
By Tim Thorlby
12 min read
The Chancellor’s Autumn Statement has put the question of tax centre-stage again – how much should we paying? Who should pay? What do other countries do? In this blog, Tim offers a bird’s eye view of taxation in the UK, together with ideas for reform inspired by biblical insights.
In this blog series, I am touring the UK economy and looking at its different features in turn, seeking to offer a fresh perspective on what ‘good business’ and a ‘good economy’ look like. This month, I am looking at the topical issue of taxation – its purpose, how it works and what it says about us – together with a biblical view that points us forward.
There are many myths and misconceptions about tax, so let’s take a look at what’s going on in the UK, before exploring if there are better ways to use this powerful tool.
1 – Why taxation matters
“Read my lips: no new taxes”
President George H. W. Bush
“I like to pay taxes. With them, I buy civilization.”
Oliver Wendell Holmes Jr
"I told the Inland Revenue I didn't owe them a penny because I lived near the seaside."
Ken Dodd, Comedian & ‘failed accountant’
Some people like to drop their shoes in a heap by the front door. Some people prefer to line them up neatly on the shoe rack. This can cause arguments in a family. Many arguments, especially the most heated ones, often start over something like shoes, but may end up expanding because, well, we’re not really arguing about shoes are we, we’re nearly always arguing about something else, something more important (like, ‘you never really listen to me’).
And so it is with taxation. As a nation, we argue about taxes – higher, lower, who pays them – but really we are arguing about something much deeper. Our policies on taxation matter because of what they say about us as a society. Our beliefs about the respective roles of the state, the market and civil society, together with our priorities in life (family? wealth? liberty? planet?) will play a big role in determining our views on what kind of taxes should be levied, and how much, and on whom.
So, in this blog I want to focus on what our current approach to taxation says about us as a society, offer a biblical reflection on this and suggest some ideas on what we might want to change.
2 - UK Taxation: A bird’s eye view
Here I want to provide a brief overview of the shape and scale of taxation and explore what it says about us.
Taxation is the sole prerogative of government. It is the main way in which governments (national and local) raise revenue in order to pay for important collective goods and services – national infrastructure like road networks and power stations, public services like health and education, the welfare system and other activities in the national interest, like national defence. Taxes can also be added or removed from goods and services to influence their price and nudge behaviour in one way or another (e.g. taxes on alcohol or sugar to reduce consumption). In the UK, taxation is ultimately authorised by Parliament, so is (in theory!) by popular consent.
There are many different types of taxes applied to various kinds of transactions, income or profits. They mainly fall mainly on individuals (e.g. income tax) or businesses (e.g. VAT or Corporation Tax).
To provide a sense of scale, in 2021-22, the last full financial year:
the UK government raised £915 billion in total revenue…
…of which the vast majority, £825 billion (90%), was through taxation,
…and the government also borrowed £133 billion to make up the shortfall with its spending, which was over £1 trillion[1]
Note that the privatisation of many government assets in the 1980s and 1990s (e.g. British Rail) deprived the government of ongoing income worth c3% of GDP which is one of the reasons why taxation now accounts for such a high proportion of the government’s revenue.
This is a complex and dynamic area of national life and volumes have been written about it. To convey something of the nature of how we do tax in the UK, here are five things to know about how it currently works. Some of these may surprise you.
Feature 1 – The UK is not a ‘high tax’ country
Feature 2 – Three taxes account for the majority of all tax revenue
Feature 3 – Corporation Tax delivers little revenue to government
Feature 4 – There are very few ‘green’ taxes
Feature 5 – UK tax is highly centralised, with little local revenue-raising
Feature 1 – The UK is not a ‘high tax’ country
Since 1945, total government revenue has fluctuated regularly, within the range of 31% - 44% of GDP. In 2021-22, it was at 39% GDP, which is not historically high for the UK and is fairly average in comparison to other developed economies.
Within the same time period, the level of taxation has also varied. It’s level in 2021-22 was also not historically high for the UK nor in comparison with other countries. In recent years, the UK’s tax level has been below average for the 38 OECD countries[2]. It is much lower than our Scandinavian neighbours.
In his recent Autumn Statement in November, the Chancellor set out plans to increase levels of taxation to counter higher borrowing costs (thanks to Truss/Kwarteng) and lower revenue arising from the current recession. The forecast puts total taxation up to 37% of GDP in 2027-28. If this actually happens, it would be the highest level of taxation in the UK since 1945 – although still well below many of our international partners.
Feature 2 – Three taxes account for the majority of all tax revenue
There are three taxes which account for two thirds of all government tax revenue (in 2021-22 it was 67%) - Income Tax, National Insurance (NI) and VAT. In recent years, income tax has contributed less as personal tax thresholds have been increased and revenue from both NI and VAT has increased quite significantly to make up for this.
The balance between taxes matters because different taxes affect different groups of people. For example, a rise in NI increases tax for employees, employers and the self-employed, but not for those earning income from assets (like rental income for landlords). We will return to this later.
Feature 3 – Corporation Tax delivers little revenue to government
It may surprise some that Corporation Tax (the tax that every business pays on its profits) has not provided more than 10% of the government’s tax take for over 20 years. It obviously fluctuates from year to year, but in 2021-22 it accounted for just 5.5% of government tax revenue. (Nb - Businesses do pay other taxes as well, just to be clear - e.g. Employer NI and sometimes Business Rates - but this total tax take from business is also low by international comparisons, so its not that businesses just pay it some other way).
Currently, our Corporation Tax rate is 19%, one of the lowest in the OECD and well below average globally. The Chancellor’s Autumn Statement confirmed that a higher rate of 25% would apply from April 2023 to companies making larger profits (over £250k) but this still leaves the UK with the lowest such tax rates in the G7.
NB: A short but arresting note on tax avoidance
One of the reasons that Corporation Tax contributes so little to public coffers is that some businesses pursue aggressive tax avoidance measures and take pride in paying as little as possible. (NB: ‘tax avoidance’ is using methods which are technically legal, whereas ‘tax evasion’ employs illegal methods. According to former Chancellor Denis Healey, the rather subtle difference between the two is ‘”the thickness of a prison wall.”)
International researchers have estimated that multinational businesses shift a whopping $120 billion of profits out of UK tax jurisdiction every year to avoid tax[3]. The tax that is lost equates to nearly one third of our current Corporation Tax revenue – some £17 billion. That’s enough to build over 30 brand new fully equipped hospitals, every year.
The sorts of businesses that are only too happy to make aggressive use of our rather loose system include major brands like Amazon, Apple, Google and Nestle.
The UK has one of the highest rates of such tax avoidance in the OECD. It is no accident; it is how we choose to do business. In fact, the UK leads the world on tax avoidance[4], together with numerous tax havens elsewhere which are also British Overseas Territories (e.g. the British Virgin Islands, the Cayman Islands) and of course, dear old Jersey.
When you add in the amount of tax also being lost through tax avoidance by wealthy individuals (as well as businesses), research has suggested that the UK government may be losing out over £44 billion per year; that’s more than half of our total national education budget.
Feature 4 – There are very few ‘green’ taxes
Amidst all the concern about tackling climate change and protecting our environment you may be surprised to learn that there are only four taxes in the UK that have explicit environmental objectives and that these account for just 0.5% of all tax revenue. This includes the Climate Change Levy and the Landfill Tax. The slightly longer list of all taxes which have a significant impact on the environment still only accounts for 6.3% of all UK taxation[5].
We also have quite a number of taxes which actively incentivise people to choose environmentally damaging options. For example, the tax reliefs for investing in new oil and gas drilling, the zero rating of VAT for all domestic air travel, etc. So, we have a long way to go.
If anyone doubts the impact that taxes can have on behaviour, the NAO helpfully studied the impact of the Landfill Tax. It was introduced in 1996 as a deterrence, to reduce the dumping of waste and incentivise recycling. From 1997 to 2014, the amount of waste dumped duly fell by 65%[6]. Not too shabby.
Feature 5 – UK tax is highly centralised, with little local revenue-raising
The UK has one of the most centralised taxation systems in the western world. A recent study showed that local government was responsible for only 12% of all government taxation in the UK (and even lower in England). This is the lowest of all G7 nations and compares to 17% in Italy, 30% in Germany and almost 50% in Canada[7]. It is one of the reasons why local government in the UK has little autonomy.
3 – A biblical view
That’s a whistlestop tour of our tax system. So what might a biblically-inspired view of our tax system look like? I think there are four key strands of thought within the Bible that relate to this:
Solidarity
Subsidiarity
Fairness
Integrity
Thought One: Solidarity - Taxation enables collective provision for the common good
A common concern throughout the Bible is the welfare of those in society who are vulnerable or who need support. It often comes through in both the Old and New Testaments as an abiding concern for ‘foreigners, widows and orphans’.
Those with wealth and resources are encouraged to be generous and share these in different ways - informally as neighbours (“love your neighbour”), through socially-minded business practices (e.g. allowing others to ‘glean’ leftovers from your fields), through volunteering (e.g. the Old Testament calling up of the militia in time of war) and also through institutional taxation (the ‘tithe’ to support the temple, the priests and the poor).
Through the collective pooling of resources, the nation could look after its families and communities and defend the nation. This is solidarity in action, reinforcing our relationships with each other. More than this, such actions are described as a form of ‘worship’, as we live faithful and obedient lives (Romans 12:1-2), and even if we don’t like the Government (Romans 13:1).
Jesus himself paid taxes, even to authorities who were not popular. When questioned directly about paying taxes to the Romans, he replied “Give back to Ceasar what is Ceasar’s…” (Mark 12:17). He also paid his Temple Tax (Matthew 17:27).
It is not too difficult, nor controversial I think, to see a clear mandate here for the levying and payment of taxes for the common good - and for this to be seen not as a burden but as a positive way of serving others; it is one practical way that we collectively love our neighbour.
Thought Two: Subsidiarity – Tax raising power should decentralised as far as possible to prevent its abuse
The second thought provides a more cautionary principle. The Bible is not positive about the concentration of power of any kind due to the ease with which it is abused and the resulting injustices. So there are frequent injunctions on those with power to exercise restraint and also to act fairly. The Bible also presents a strong concern for healthy family and community life and local civic activity; it is clearly not the Government’s role to do everything, there are many things we should be free to organise, pay for and do as citizens and members of our community. Exercising our own freedoms to build healthy social relationships with each other is a huge part of what makes for a happy and healthy nation.
So, whilst we should be positive about the role of taxation, government should also be cautious a) not to tax people more than is necessary, and b) to devolve powers where possible so that decisions are taken as close to those affected as possible.
Thought Three: Fairness – Tax should be levied in accordance with the ability to pay
The Bible supports the idea of ‘private property’ but also notes that all material wealth and property should ultimately be understood as a gift from God, to be used wisely, rather than just as ‘possessions’ for our own use. We therefore have a responsibility to acquire and use our wealth in ways which respect our mutual social obligations to each other.
There is a strong concern within the Bible about the need for justice and for the wealthy to recognise and act upon their social obligations to others. Thus, we can see how those with more resources might be asked – fairly – to pay more tax than those with less.
Currently, the way that our tax system works, wealthier households often pay lower effective rates of tax than poorer households because income from assets has lower tax rates than income from work.
Thought Four: Integrity – We should follow the spirit of the law, not just the technical wording
The Bible clearly supports honesty and following the law (see for example Amos 8: 4-6). But it also asks for more.
Some argue that things like aggressive tax avoidance are fine because - if you have good legal advice and a clever accountant – it can be done legally. The suggestion is that it is somehow ‘smart business’. But the Bible has much to say about the importance of ‘heart’ as well as ‘mind’. Jesus taught that obeying the Law in a technical sense was not good enough, we needed to follow its direction with all of our hearts – grasping the spirit of its intention (to “love our neighbours”) not just ticking the legal box.
So, I think we can say three things in response to those who like to engage in aggressive tax avoidance in their business:
It’s depressing – This kind of position is rather depressing as it takes the lowest possible benchmark as our guide for behaviour. You may indeed be able to avoid a lawsuit, but that is hardly a high standard, or a responsible approach. Don’t we aspire to more than just: “I think I can get away with it”? The law literally sets the lowest acceptable standard, not good practice nor the ideal. Is the bottom of the barrel really where we set our sights?
It’s anti-competitive - In fact, aggressive tax avoidance by profitable businesses undermines responsible businesses and results in unfair competition if one group of businesses are paying taxes and others are not. For example, the hollowing out of our High Streets as more retail businesses fail or move online has been turbo-charged by Amazon being able to undercut the prices of its business rivals through tax avoidance (estimated to be up to a staggering £0.5 billion in the UK in 2021 alone[8]). It also deprives government of important revenue for funding public services and infrastructure.
It’s free-riding – Public investment is essential for every business and a functioning marketplace to do business in. Those taxes pay for essential infrastructure like roads and public transport, they pay for an educated and skilled workforce, they support health services which employees rely upon and they ensure law and order so everyone can safely go about their business. If your business benefits from it, it’s not unreasonable to chip in and pay for it.
A fuller and far more eloquent theological critique of tax avoidance has been published by Christian Aid[9].
Overview
The challenge of course is to hold these thoughts together, but they provide a helpful framework:
Taxation is a positive thing for the common good, worth celebrating
There are limits as to how much tax we should allow government to take
Taxation should be decentralised where possible
Aggressive tax avoidance undermines the common good
More tax should be paid by those with the greater ability to pay it
There are legitimate political discussions to have about the precise nature and extent of taxation, but there can be little doubt about its overall importance to a healthy society.
5 – A practical agenda: six ideas
There are many ideas circulating about how to reform tax. I’d like to finish this blog by drawing out six practical ideas which take us forward in trying to apply a biblical perspective. These are for discussion!
IDEA 1 - CULTURE: We need a more positive conversation about tax
Given that tax funds wonderful things like schools, hospitals and libraries, maybe we can be more positive in our language about taxation? Even those who advocate a low tax society accept that there is still an essential role for tax, so let’s be positive about it.
From a business perspective, our enterprises perform best when the marketplace benefits from a healthy level of investment in infrastructure, skills, R&D, environmental protection, etc. Public investment underpins wealth creation, it is not ‘anti-growth’.
From a social perspective, our taxes provide essential public services for everyone and protect the elderly and vulnerable in our society.
Maybe churches should celebrate a ‘Common Good Sunday’ every year which includes acknowledgement of the role of taxation?
Businesses can also apply for the Fair Tax Mark, an accreditation showing a positive approach to paying tax fairly and transparently.
IDEA 2 - INVESTMENT: We need a more honest conversation about tax
The UK’s ‘low tax experiment’ over the last 30 years appears to have failed. We have, generally, had much lower taxes than many of our international partners and now we have ageing infrastructure, overwhelmed public services, high national debt and – to make it worse – we don’t even have much economic growth to show for it either. It may be time to accept that our generation needs to pay higher taxes for the time being, and recognise that this is the only way we are going to be able to invest in the kinds of infrastructure, public services and security that most people say they want.
As voters, it is time to stop insisting on ‘low taxes regardless’ as a precondition for parties winning elections; we need a more grown up conversation about tax.
IDEA 3 - GREENER: Taxation should move us towards a greener economy
Well designed taxes can incentivise helpful behaviours. Moving to a Net Zero Economy is going to need a rejig of our taxes to push us there faster – eg taxes to reduce carbon-based fuel usage and increase the recycling of materials.
IDEA 4 - DECENTRALISATION: More taxation powers could equip local government to ‘level up’
A key part of reforming our tax system, as well as ‘Levelling Up’, is for central government to devolve more serious powers to local government, including more tax raising powers. This should also include reformation (or abolition?) of the rather antiquated property-based Business Rates. My blog on levelling up considers the importance of decentralisation more fully. A House of Commons Select Committee recently called for a fundamental cross-party review of local government, with this kind of option in mind – so, it is perhaps more possible than it might seem[10].
IDEA 5 - FAIRNESS: Let’s level the playing field between businesses
Government should stamp out aggressive tax avoidance, particularly from large multi-national businesses but also across the board. Not only will this raise more tax, but it will level the playing field between businesses giving responsible businesses a fairer chance. Paying tax is a social and patriotic duty. The Digital Services Tax is a step in the right direction, but it will need to be increased and – crucially – properly enforced.
IDEA 6 - SUPPORTING WORK: We should equalise tax between ‘work’ and ‘wealth’
There are a number of injustices currently baked into our tax system. Earned income from work is taxed significantly more highly than income derived from owning assets (i.e. income tax is higher than capital gains tax, dividend tax, etc). It means that people in the top 1% of the income curve often pay lower rates of tax than people lower down the curve. A huge amount of tax is also raised through NI, which is essentially a ‘tax on jobs’. There is a pressing need to redesign taxes so that they favour ‘work’ over just ‘owning stuff[11]. (There is more to say here, but for another day).
Related to this, how Income Tax is levied across the income distribution is also ripe for adjustment. The Chancellor’s recent Autumn Statement laid much of the burden of new taxation onto low and middle income earners in the next few years, not the most well off. Hardly the fairest approach.
Thanks for reading…
There are a number of organisations that research, reflect and campaign on tax issues. If any of this discussion has interested you, why not get involved. Change is always possible, led by those who show up!
Fair Tax Foundation – which offers the Fair Tax Mark for businesses
Just Money Movement - is running a Church Action for Tax Justice Campaign
Tax Justice UK – for lots of wider information and resources
This blog was written by Tim Thorlby, with some helpful comments from Dr Justin Thacker. If you found the blog interesting, you can subscribe for free alerts for future blogs.
Notes
[1] Latest data correct at time of writing for 2021-22, drawn from Keep, M (Aug 2022) Tax Statistics: An Overview, House of Commons Library
[2] OECD (2022) Revenue Statistics 2021 – UK | Access here: www.oecd.org/tax/revenue-statistics-united-kingdom.pdf
[3] Data relates to 2018, from: Torslov, T. et al (2018) The Missing Profits of Nations | Access here: https://missingprofits.world/
[4] The Tax Justice Network provide updated country profiles and international rankings | Access the UK profile here: https://taxjustice.net/country-profiles/united-kingdom/
[5] Data from the OECD for 2020 | Access here: https://data.oecd.org/envpolicy/environmental-tax.htm
[6] NAO (2021) Environmental Tax Measures | Access here: www.nao.org.uk
[7] Data generated by the Institute for Government for 2014 | Access here: https://www.instituteforgovernment.org.uk/charts/taxes-collected-federal-local-level
[8] See Ethical Consumer research: https://www.ethicalconsumer.org/retailers/amazons-tax-avoidance-could-have-cost-uk-economy-around-half-billion-pounds-2021
[9] Clifford, P, & Ritchie, A (2009) The Gospel and the Rich: theological views of tax, Christian Aid | Access here: http://www.theology-centre.org.uk/wp-content/uploads/2013/04/the-gospel-and-the-rich.pdf
[10] Governing England: Third Report of Session 2022-23, House of Commons Public Administration and Constitutional Affairs Committee
[11] There is much current discussion on these, and other ideas, amongst organisations like the IFS, IPPR, the Adam Smith Institute and many others