Why does the UK need tax reform?

0:12Welcome to the latest Margin Notes podcast with me Simony Kiriakou, editor of FTadvisor. We've all been talking tax the past year or so, with strong opinions on all sides. Today, I'm joined by David MacDonald. He's the founder of impact-only investment company Path Financial. Despite being a financial advisor, he's a strong campaigner in his own right on the need for tax reform in the UK. He's an advocate for introducing a form of wealth tax, particularly on second and subsequent properties, in order to address what he calls the stark generational inequality. and he has a vision for improving climate justice in the UK through the tax system.

0:51Thank you, David, for coming in. Let's talk about some of your views. Why is everyone talking about tax right now? Hi, Simone, and thank you for inviting me in. It's a delight to be here. Well, why are we talking about tax? Well, I think the reason is that we saw Rachel Reeves come in last year with her budget And it was a radical, you know, one-off. You know, we're going to take the pain now and we'll be done. And here we are, and we're looking at another so-called black hole of similar magnitude. And the figures are quite stark, actually. If you look at the amount of tax revenue that the government raises, which is around about a trillion, and the level of government expenditure, which is around about$1.1 trillion.

1:41So, you know, government borrowing went up by$137 billion last year. And the cost of servicing government debt was$100 billion. Billion. So, you know, you're looking at a situation where virtually all of the overspend is being covered by borrowing. And I think that looks pretty close to some people, like some sort of doom loop where tax revenues are just not covering government expenditure. And also changes in demographics of who is paying tax and, you know, the age of people in society and the way that tax is being collected. that it's probably looking, you know, difficult in terms of sustainability, but possibly unfair on workers and on employers.

2:36Yes, it certainly seems a big problem. I think it was at McCorber and Dickens who said that, you know, if you sort of spend£20 but you have a shilling left over, then, you know, that's sanity. But if you spend£20 and one shilling and you only have an income of£20, then that's insanity. But, you know, we talk a lot about making sure that we can fill this tax hole, but it does seem quite stark. You called it a doom loop. I think quite a lot of young people would think of this as a bit of a doom loop as well for themselves. You know, they're paying back student debt. The house to income ratio is extraordinarily large and doesn't show any signs of stopping.

3:16I mean, let's talk about generational inequality. The tax system needs to change, right? Well, I think it does. We need to look at where taxes come from, but we also need to look at the level of expenditure that we've got. So my first challenge would be, I'm reminded of the cartoon character Garfield, who said, I'm not overweight, I'm just under tall. What's the problem here? Is it not enough tax or is it too much spending or is it a combination of both? But we've got some quite serious commitments that government has got that it's going to be politically very difficult to back away from. And just focusing on pensions and thinking about the triple lock, for example, you know, state pension only, what, 15, 20 years ago, 15 years ago, I think, was about 15 percent of the average wage.

4:16Well, it's now up to 30 percent. You know, so just looking at pensions is one example of where expenditure is high and tax is struggling to keep up. And that's only going to get worse, though, as demographic shifts kind of lead to us having an aging population. Well, exactly that. I mean, we're sort of already there. When the state pension was introduced after the Second World War, there were four to five workers for every pensioner. hold on to your hat, I'm going to fire a few steps at you. And by and large, there were only men in the workforce and life expectancy was 69 against a state pension age of 65.

4:59So you were paying a pension out for four years to just over half the working population. Spin the clock forward to today, life expectancy is 82. Virtually everybody is in the workforce. State pension age is 68. So that's 14 years versus four. And we've only got two and a half workers now for every pensioner. The baby boomers are now in the retirements, right? Anyone born 1964 or earlier are pretty much in the pension zone. Far fewer people to pay for them, the sort of sustainability quotient or whatever you call it. And that's set to go down to two workers per pensioner by 2070. And it's quite funny, when I came into this industry, that was a long time ago now, in the late 80s, we were told this was going to happen.

5:50And the private sector backed away from defined benefit pensions, but the government didn't. So if you're a civil servant, you're in a better position, by and large. So, yeah, to your Macauber thing, maybe we've just flipped onto the wrong side of that deal now. So do you think that, number one, the government should actually tackle that big bull by the horns and move to a defined contribution scheme for its own workers? Well, that's not for me to say. And it used to be the case maybe that if you worked for the government, the expectation was that the salary would be less good than in the private sector, but the pension would be better.

6:32I don't have the data to my fingertips, but I'm not sure that's quite the case anymore. I think maybe the salary oftentimes is better and the pension is considerably better. But here's the thing. If you take the liabilities that the state has got for civil service and state pensions, it's not taken into account in terms of government debt. And estimates vary, but it's something like another, you know, it's somewhere to doubles or triples the national debt. If you look forward at what that liability is going to be now, that looks horribly like a Ponzi scheme to me. and especially when there are fewer people coming in the bottom of the thing to prop the top up.

7:17That looks problematic. So I'm not surprised that we're talking about tax and I'm not surprised that young people are worried about it. Yeah, well, I can see that young people are worried about that. They're not sure what they'll get as a pension, whether the state pension will even exist or certainly in its current form by the time they get to retirement age. and they're sort of expected to shore up the payments of tomorrow's pensioners. Yeah, as you say, whilst not necessarily being able to afford the things that a couple of generations passed. So if you were in power, what measures or what challenges would you be tackling to help resolve this generational inequality?

8:07Well, that's a big question. I'm not qualified to comment, but I can certainly look at the data. I was looking at the Schroeder Index of house prices, which goes back the better part of two centuries. And back in the mid-19th century, the average house price was up to 12 times earnings. That declined through the Victorian period, you know, with more house building, better wages and all the rest of it. And through most of the 20th century, that affordability was, you know, the average house price was about four times income. So it really wasn't quite, wasn't hard to get on to the property ladder.

8:52Today, it's back up to eight times. And in London, it's 12 times the average income. So, you know, we're in a situation now where there's a real pinch on Gen Z who are looking at these prices and going, how can I or even can I get on the housing ladder? And you either own a lot or you become part of the elite who maybe can borrow from the bank of mum and dad or get a gift to get you started. So I do see inequalities and tensions building there, which, you know, frankly, don't to me seem fair. And maybe the way that the, you know, current tax revenues, we're not really tackling the big picture problems.

9:40We're using stealth taxes and tinkering. So there's immense pressure on employers now, you know, 15.8 % taxed to employ someone, more if you add pension contributions to that. And then workers getting hammered as well, you know, taxes up to 67 % in the most marginal area. So can we keep going back to the soft target of income when there are other areas, especially when we look at the systemic issues which are coming through? You know, my purpose here is to open the debate. It's not necessarily to give any answers, but just to say, is it time to talk about the elephant in the room? Because I think it is.

10:28Well, I mean, I wish you would give answers. Then we could find out exactly which constituency you'll be running for and we can all vote for you. But, you know, you mentioned the Victorian housing stats and I mentioned Dickens. It almost feels like we're in a little bit of sort of hard times or a bit of a bleak house environment here for youngsters. In your day to day, do you get to speak to Gen Z? Do you get a sense of hopelessness from them?

11:02I mean, to some extent, yes and yes. And it does depend who you're speaking to. I mean, as financial advisors, we're typically quite privileged to be speaking to those who maybe have than those who have not. But I think there's, in some ways, there's a bit of a reluctance to invest for tomorrow because there is this sense of, hey, we may as well just live for today. And maybe that goes hand in glove with some of the environmental issues, which we might go on to talk about as well. But I would say there does seem to be not a feeling of hopelessness, but somewhere on that spectrum of, you know, it's just maybe doesn't seem fair.

11:48It's maybe requires a huge amount of maybe luck to get to the level of earnings that would be required to get onto this housing ladder. All the while, rents are very high and taxes very high. I guess it feels like their personal agency, their ability to roll up their sleeves and do the hard graft is perhaps not as easy as it was. I mean, I'm Gen X, so we generally had it. I mean, we did have to work hard, but we always had it hammered home into us that if you work hard, roll up your sleeves, get on with it, save as much as you can, pay off your debts, you will be OK. and that mantra doesn't really work for gen z because um you know when i was in my 20s the idea was you a third of your income should go to your rent stroke your sort of housing bills a third of your income sort of goes for food and travel and you should be saving a third of your income or whatever or roughly or that was your sort of expendable stroke um savings that doesn't exist now because rents can be sort of 50 or even 60 percent of a young person's income so it does seem like there's there's a need to tackle the tax or to to deal with the tax system in a way that perhaps then starts taxing people who don't need to start saving for their future well i i think yeah gen z do look at that inequality and um and i i think it rankles um because i i think it's seen that so much um wealth has ended up with the older generation and those who've got very um large wealth.

13:42So, you know, again, we're back to do we spend too much or do we not raise enough taxes? But there is a principle which is called the Matthew principle. So, you know, this idea that money goes to money, as we say in Scotland, and I think that's also an expression, you tend to hear the further north in the country that you get. And it is not a new thing. It's sort of the Matthew principle, the idea from, I think this is such an old concept, it was even in the Bible, to he who has everything, more shall be given. And to he who has nothing, everything shall be taken. And this idea that the more you've got, the more that you inevitably accumulate.

14:27And it's at the expense of the less well-off. So, you know, the rich are getting richer. The data is absolutely clear. Two minutes on chat GPT will produce you a very fine graph of how that's taking effect. And well, we could walk through an example, which I picked up from Gary's Economics. Gary is someone who advocates for a wealth tax. And I point people to that if they're interested in having a look. but um let's talk a little bit about a wealth tax and why you advocate for it although i will say that matthew principle it's an interesting one um i think you know over the years it it's been sort of uh elided with with wealth it was actually meant to refer to someone's faith if you have a little bit of faith you'll get more blessings out of it and if you don't have any faith and you know tough on you um but let's take the take the faith bit out of it let's go to this this idea of a wealth tax you know we write about it a lot in ft advisor and we say oh rachel reeves just wants to do a wealth tax and it almost seems quite pejorative but if we do the flip side of it it could actually help um help britain help you know sort of resolve some generational inequality so let's talk about why you why you might advocate or necessarily advocate but my why you might be tempted to advocate for a wealth tax?

15:52Well, I think I wouldn't get drawn in saying that I would necessarily advocate for it, but I'd certainly advocate for having the debate around what that might look like. I mean, wealth taxes are notoriously difficult to collect. And it's not necessarily the only answer. So I think looking at that as a possibility, but it would probably have to be in conjunction with some other tax reforms and thinking about the practical overlay of it. Because what we want as a firm is to have a situation where capital is employed for the benefit of everyone and entrepreneurialism is encouraged. And sometimes both is held in closely owned companies, isn't it?

16:46So it's difficult to value. It's maybe difficult to extract. But let's look at inheritance tax, for example. That raises a relatively small amount of money, actually. It's about$7 billion a year. And inheritance taxes have come down. One of the reasons housing got so affordable, I think, in the 20th century was a combination of a number of factors. but one of them was a very high wealth tax, as well as improving wages and house building and what have you.

17:21But, yeah, inheritance tax raises something like well, well, well less than 1 % of government revenue. Now, I'd ask the question, if you are somebody wealthy and your assets are in the UK, or even your worldwide assets, you're going to be paying 40 % of the estate on death. So would it be better maybe to pay a small wealth tax as you go, 1 % a year, something like that? The Green Party advocates for 2 % on assets above 10 million, for example. Um, maybe, uh, some people could be convinced that that would be a fairer way of, uh, looking at things, trading one tax against another, uh, assuming it was workable.

18:11And, you know, this is just, we're sort of trained as financial advisors that, uh, wealth taxes, uh, to be avoided at all costs. Well, let's talk about it. Let's talk about reform of taxation completely, because we have undoubtedly got the case. It's just the fact that tax on income and employment is very easy to collect. It's very predictable. It doesn't go up and down the stock markets, whereas a wealth tax would be more challenging, valuing assets, making sure that they don't disappear into gold or diamonds or Bitcoin. But there again, employments can disappear now, haven't we? We've got people who are nomadic workers who can actually take themselves out of the tax system in a way that never before.

19:00So there are challenges. It's not all just about taxing the wealthy. And it's not for me to say how much is enough for any one individual. That's for others to debate. So you sound like you're not saying tax the wealthy more. You're saying tax them differently. Well, maybe. Or let's just think about the whole tax system, because there are some real tensions in there. The fuel duty surcharge, for example, is a huge revenue raiser for the government. But they pay the oil companies effectively to produce that. And it's in complete conflict with the government's stated net zero targets. And, you know, then it gets quite political, doesn't it?

19:49We had an announcement that Kimi Baden-Ock's determined to extract every drop of oil from the North Sea. I mean, I'm not sure that she's fully understood the mood of most people in the country on that one. But yeah, so there are these tensions in the tax system, notwithstanding the demographic issues that we've got. So I would say, let's look at everything. Let's not rule anything out. And, you know, one doesn't want to be in a sort of confiscatory environment. But we need to decide as a society what we deem to be fair and who should be bearing some of that burden. It's undoubtedly the case that income is taxed far, far more heavily than capital.

20:37So I would just say, let's have a debate as financial advisors that we haven't really had. And actually, society, in a more broad sense, is not confronting, honestly, the issues that we have got to face. No, and I think having a fear about wealth taxes just leads the wealthy to think, well, actually, you know what, I will just apply to go and live in Jersey. I've got enough income. I can afford the house prices. That'll be me. You know, I'll go somewhere. I'll become a tax exile. and then the wealth leaves the UK because they fear the hard hand of the taxman sort of grabbing everything that they or their families have worked hard for.

21:24You know, there comes a sort of a generational responsibility as well. If you've got wealth, it's not a bad thing. You know, you, your family, your father, your grandfather, your grandmother, they've worked hard to accumulate that and to see that disappear or to see it sort of be eroded in a different way. That can be hard because this is familial wealth. And indeed, you've probably, if you haven't inherited it, you've probably paid a lot of tax on the income that you had in order to build that up, or corporation taxes, and probably paid a lot of tax in employing people. And it does rankle, doesn't it?

22:05It should be, well, I've worked hard for this. why should I have to give so much of it away? But, you know, we're there already with inheritance tax to a certain extent. So maybe there's some balancing that can be done there. And if you're a younger person, you're certainly looking at the opportunities that maybe the boomers had that don't look so apparent to you. So I can see that it's a really tempting argument to say, well, there should be some leveling up of this because it's getting out of hand.

22:49So in Gary's economics, he gives a really interesting example of, you know, assume you're a billionaire. And, well, let's just assume that the money is not in a private company but invested in a bank account, for example. With a billion in the bank, you're getting 50 million pounds a year in interest. Well, let's have a little think about that. That's a million pounds a week in interest. Now, there's a setting tax aside for a moment. I mean, what's the most lavish lifestyle you could possibly imagine if you haven't got a need for multiple houses and multiple staff or a rocket, say, like Jeff. if Jesus has got to find some rocket fuel money from somewhere.

23:3310 grand a week, I don't know, 50 grand a week, what's the most you could spend? Well, that still leaves you with sort of 950 ,000 or 990 ,000 pounds a week. What are you going to do with it? Well, you're not necessarily going to be contributing to the economy with it. So what are you doing? Well, you're presumably buying property, aren't you? So this idea of, and thank you for the education on the Matthew Principle, But relating it to just wealth or hierarchies, I think it's an easy argument to follow that, of course, the more you've got, the more you can have. Yeah, yeah. And the harder it is to spend, and I think this is where financial advisors can really come into their own in discussing philanthropy and social impact.

24:16And, you know, PATH is an impact specialist. Can you talk a little bit about sort of how you're sort of uniquely placed to talk about that and to discuss that with clients? Sure. I mean, the firm was set up precisely because we recognized that there was a market out there for people who didn't want their money to be invested in things which were bad for people and planet. So we avoid the big usual exclusions and we absolutely avoid fossil fuel. We see that as being in so many ways detrimental to the planet. It's another example of where wealth can skew government and influence because the fossil fuel companies are doing so much to damage, attempt to damage the renewables.

25:08So we, where possible, move client money into investments which are good for people and planet reference, the United Nations Sustainability Development Goals, for example. So this is all we've done since we were set up as a company. And, you know, we see, OK, we only get a fairly tight vertical of clients, but, you know, they're all really, really committed to trying to make their money, invested money work for the greater. Good. I don't know if that sort of answers the question. Well, it does. And it sort of then leads on to looking at the government. If the government wants to spend its tax revenues or just the amount of tax revenues they're able to get, if they want to spend it, they should be spending it on investing in renewables because that's where the jobs of the future and the energy of the future is going to come rather than maybe sort of give subsidies to the people that are causing a lot of the problems in the first place.

26:12Well, I think it's a really interesting area to get into. And the data is quite hard to find on this. But, you know, renewable energy is being or investment in that, if you will, greener infrastructure. But I hesitate to use the word green because it's sort of been hijacked now by really by the fossil fuel industry. I probably call it sensible investment or existential investment or something like that. But yeah, it seems to me that the level of subsidy that fossil fuel gets is actually extremely similar to the level of subsidy that renewables get. But that's not talked about. Whereas, you know, really, that's a sunk cost.

26:56If you're going to dig up hydrocarbons, move them, burn them and go back and do the same thing over and over and over again, that's not as sustainable as investing in a renewable unit of energy, which is renewables. So it keeps going forever. And the genie is out of the bottle now when it comes to, you know, obviously renewable energy at this point is far cheaper. There's a low barrier to entry to getting it. The energy is democratized. It's cheap. It's accessible. Whereas fossil fuel has got a really high barrier to entry. You can't just go and stick an oil rig in your back garden in the way you might put solo panels on your roof.

27:37So highly profitable. It's monopolized. It's expensive. It's entrenched. It's single use. So, yeah, I mean, I'm all for, you know, some tax money developing what is, after all, an investment rather than a sunk cost. I see it as investing in emerging technology. And if we've got time, we can talk about things like autonomous taxis and the autonomous vehicles and the smart grid versus, you know, sort of really what ultimately has to be sort of more of a dinosaur industry which is in decline, much though it's hanging on as much as it can do to, you know, burning as much as we can as fast as we can, which is probably, again, not helpful for future generations who might want to use that fuel for flying, for example, rather than just for burning right now.

28:31Well, it certainly sounds, again, that that addresses that touch on that generational inequality. You know, the high fuel prices now could be really detrimental to young people, but a greater investment in renewables, a greater use of taxpayers' money to create long-term, sustainable, sensible, existential sort of infrastructure that enables the so-called existential economy, not the green economy, to flourish, would actually help the younger generations of Gen Z and Gen Alpha, who are the next ones coming up. But talking of existential, I can see that the video producer here in the podcast studio at the FT is probably going to have an existential crisis because he's got someone else coming in at 11 and we have actually run out of time.

29:24So, David, I'd love to continue this conversation with you afterwards outside of the podcast. But for now, thank you so much for coming in and talking to us. You've really given us so many questions and so many things to think about and discuss. Okay, well, that's great. Thank you very much, Simon. It's been a pleasure. And thank you very much for listening. For more news and views, keep tuned to ftadvisor.com. And until next time, take care.

29:59Thank you.