Property feeds the roots of inequality in Britain. Inheritance will entrench it

Ian Jack in The Guardian

What did our grandparents leave us? That will depend on who they were and what they possessed, but in my case, not untypical of my generation, it wasn’t very much.

From my father’s side the treasures included: a stuffed canary; a tiny stuffed crocodile (a gharial, taken from the Ganges); some crested china bought in seaside resorts; and a canteen of excellent cutlery given as a wedding present in 1899 and never taken from its box. On my grandmother’s death, a display cabinet was bought to accommodate this sudden Victorian infusion into our household, which already had a fine little portrait of Rob Roy inherited from my mother’s father, to be followed much later (after a diversion to an aunt and then a cousin) by a wall-clock and a watercolour of a street in Kirkcaldy that looked very pretty from a distance. I’m sure to have forgotten other items – for example, I’m just now remembering the 78rpm discs of Enrico Caruso and Harry Lauder – but basically that was it.

If there was money, there was very little. No property, you see. Neither side of the family had ever owned a house – and so, in terms of material changes to their children’s lives, their deaths were inconsequential. I, on the other hand, do own a house. More than that, I own a house in London. My death, and that of a million like me, will be very consequential.

According to Steve Webb, policy director of the Royal London mutual insurance company, “a wall of housing wealth [is] set to cascade through the generations in the coming years”.

A study published this week by Royal London estimates that roughly £400bn presently tied up in homes owned by people aged 65 to 85 will be handed down to their children and grandchildren. A typical estate of what the study calls this “wealth mountain” is worth between £400,000 and £500,000, to be shared out between four or five children or adult grandchildren and often to be reinvested in property.

The study is based on a YouGov survey of more than 5,600 people covering three generations: the so-called “grandparents generation” of 65- to 85-year-old homeowners; the “sandwich” generation of parents aged 45 to 64, who have living parents from whom they might expect to inherit; and a “children’s” generation of adults aged 25 to 44 who have owner-occupier parents and grandparents.

Surveys are only surveys: caveat emptor. Nevertheless, the report discovers some intriguing differences between generations. While the youngest group believes that their grandparents should spend freely to enjoy their retirement, the grandparents themselves think it right to hoard their money for their grandchildren. Many don’t wait to die. A third of those aged 75 and over had given sizeable sums of money to their grandchildren, a generation that according to the study’s calculations have received a total of £38bn from both their parents and grandparents – often, especially in London and the south-east, to spend on property. And while grandparents tend to act out of a sense of distant benevolence, parents are responding to the “pressure” exerted by their children’s predicaments. The study’s title picks up this theme: Will harassed “baby boomers” rescue Generation Rent?

Earlier this year, the Institute for Fiscal Studies published research on the growth of inheritance as a phenomenon in British life. It showed how less than 40% of the cohort born in the 1930s have received or expect to receive a bequest, while for those born in the 1970s the figure is 75%. Their benefactors are on average much richer. In 2002-3, the household wealth of people aged 80 and over averaged £160,000; 10 years later, thanks mainly to increases in home ownership and house prices, the average had risen to £230,000.

So far, the impact of inheritance on entrenching or heightening inequality has been fairly small – the average inheritance equals only 3% of the other income its recipient can expect to generate in a lifetime. But neither the Royal London nor the IFS study expects that to last. “We are entering an unprecedented era where the older generation is retiring with vast housing wealth,” says the first in its final paragraph. “That wealth is largely being preserved through retirement and will in due course find its way down through the generations. Public policy making needs to take far more account of these very substantial financial flows and perhaps focus more attention on those who are not likely to be the beneficiaries.”

In other words, we are re-entering the world of the Victorian novel, in which suitable marriages, contested wills and misplaced legacies drive the plot, while the poor – the people without lawyers – press their faces against the window of this vigorous, scheming world and merely invite our sympathy.

It wasn’t supposed to happen. “Come with us, then, towards the next decade,” said Margaret Thatcher, winding up her speech to the Conservative party conference in 1985. “Let us together set our sights on a Britain where three out of four families own their home, where owning shares is as common as having a car, where families have a degree of independence their forefathers could only dream about.”


Anyone under the age of 45 is now much less likely to be a homeowner than people of the same age 25 years ago

Two years later the writer Neal Ascherson wrote a prescient column in the Observer that he recalls as “the most popular column I ever wrote … It was greedily read by the yuppie generation – and then fiercely denounced for being wrong.” Foreseeing that soaring house prices meant that London’s middle-class young would inherit many millions when their parents died, Ascherson predicted an “explosion of liquid wealth that would create instant and colossal inequality”: a society with an upper class rich enough to maintain servants, in a “court city” drained of industry that had reverted to the production of luxurious baubles.

Economists pointed out that the cash raised from property sales wouldn’t be “liquid” – it would be sucked up by the inflated cost of the new houses the inheritors moved into – but from today’s vantage point Ascherson’s futurism does not look so wrong. A new super-rich class with butlers and housemaids has moved in, though mainly from overseas rather than Britain, while owner-occupation has become a mirage for growing numbers of the less well-off.

Homeownership today stands just slightly above the rate when Thatcher made her speech: 64% of all households compared with 61% of all households in 1985, having declined from a peak of 71% in 2003. Anyone under the age of 45 is now much less likely to be a homeowner than people of the same age 25 years ago, while the reverse is true of older age groups.

Private renters account for more than 20% of the housing market; in 1985 the figure was 9%. High rents rule out the kind of savings needed for a deposit on a house – with an average price in London equivalent to more than 16 times the average London salary, and 12 and 13 times the mean income of people in their 20s and 30s in prosperous cities such as Cambridge and Brighton. Meanwhile prices, which might be expected to slump amid the economic uncertainty of Brexit, have instead held reasonably steady because the fall in the value of sterling has made them more attractive to international investors.

As the IFS says, these developments mean that inherited wealth is likely to play a more important – I would say crucial – role “in determining the lifetime economic resources of younger generations, with important implications for inequality and social mobility”. What can grammar schools do – supposing they really are agents of social mobility – against this coming weight of money, which will deepen privilege like a coastal shelf? The metaphor is borrowed from Philip Larkin. “They set you up, your mum and dad. They say they mean to, and they do.” For some of us, This Be the Verse.

The economic argument against neoliberalism

Owen Jones meets Ha Joon Chang

Poetry or property punts: what's driving China's love affair with Cambridge?

David Cox in The Guardian


On the edge of Scholar’s Piece, the strip of farmland just behind King’s College, lies a granite stone which has become arguably Cambridge’s most coveted tourist attraction.

For the many students who amble past it every day, it’s easily missed; placed rather innocuously next to the bridge that joins Scholar’s Piece to the rest of the college. But for the thousands of Chinese tourists who travel to Cambridge every year, it is this, rather than the city’s grand 15th-century chapel, meticulously manicured lawns or historical statues, that they’ve come to see.

Carved into the stone are the first and last lines of a poem that has gone down in Chinese folklore. Titled Farewell to Cambridge, it was written in 1928 by Xu Zhimo, a 31-year-old poet and writer who was revisiting King’s after studying there in the early 20s.

Zhimo died three years later in a plane crash, but he would go down as a cult figure in modern Chinese history, immortalised through his premature and tragic end, illicit love affairs and success in introducing western forms into Chinese literature.

 

The ‘Farewell to Cambridge’ stone. Photograph:Historyworks/Flickr




And while Zhimo spent most of his life in China, Farewell to Cambridge has become his legacy. It is now part of China’s national curriculum, taught to all schoolchildren as an example of the modern poetry movement in the early 20th century.

“The poem is something we’ve all heard of,” says Pei-Ling Lau from Beijing, who is visiting King’s and seeing Zhimo’s stone for the first time. She studied his poem as a compulsory exam text when she was 15: “It’s been adapted into many pop songs too. It paints such a lovely picture of punting in Cambridge, but it wasn’t until I came here that I realised how beautifully it describes the river. It’s special for Chinese people as the life and story of Xu Zhimo is well known, and this was his city. We want to come here and experience that.”

And come they do. Numbers of Chinese tourists visiting the UK have soared in recent years from 115,000 in 2009 to 336,000 in 2014, following the relaxation ofvisa restrictions to Chinese nationals in 2013. With further amendments in the pipeline to boost this lucrative tourist trade, these figures are only set to increase.

But the Chinese are not just interested in Cambridge as a holiday location; they also view it as a key region for property investment. Cambridge’s house prices are soaring, with new figures revealing they have increased by 50% since 2010, driven in large part by the ongoing biotech boom in science parks around the city. And wealthy Chinese appear keen to cash in: the estate agents Savills estimate that in the past year, one in 20 new-build homes across the city and surrounding villages have been bought by Chinese owners.

Looking to invest? … Tourists enjoy a punt tour along the river. Photograph: Chris Radburn/PA

“There is undoubtedly interest in Cambridge as a place to live from Chinese buyers,” says Ed Meyer, head of residential at Savills Cambridge. “But as well as an investment, the major driver for this is education. The majority of Chinese buyers are coming here with younger children, to try and integrate them into Cambridge society and the schools round here, with the view that they will hopefully go to the university in future. And Xu Zhimo’s legacy definitely seems to be ingrained in their psyche. At some point they always explain, ‘Oh, and we know about Cambridge because we learnt about it in the poem at school.’”

Cambridge’s academic reputation is instilled into virtually all Chinese children at a young age. While domestic universities such as Peking and Tsinghua are respected, those who can afford it are increasingly opting to put their money into sending their children abroad for schooling, with the hope of gaining them an edge in a hyper-competitive job market when they return home. Such are the employability benefits associated with a Cambridge education that increasing numbers are sending their children to the various “feeder schools” around the city to boost their chances of a successful application.

 

Cambridge PhD student Zongyin Yang. Photograph: David Cox

“The reputations of the great universities are passed down from parents to children,” says Zongyin Yang, a PhD student at Cambridge who grew up in Wenzhou. “There’s a respect and curiosity which is instilled at a young age. It’s why Chinese families bring their toddlers to see the campuses. Most children grow up hearing about these ‘dream places’.”

According to China’s Ministry of Education, 459,800 students enrolled at overseas universities in 2014, an increase of 11.1% on the previous year. Of these, 423,000 were entirely funded by their families. And at the top of their list is Cambridge: Chinese students make up the largest ethnic population at the university, with a total of around 900 enrolled for the current academic year.

“A Cambridge degree is definitely perceived to be superior in the recruitment process due to the strength of the brand name,” says Zheng Yao, who studied at Cambridge before returning to Beijing. “There’s a widespread perception that your earning potential in China will be much greater – but the reality is quite different. Pay for new graduates is in fact very limited, no matter where you’ve studied.”

Volatile market

Buying property in Cambridge also makes financial sense for Chinese families looking to invest their money outside of the increasingly volatile market back home. “Chinese parents would rather their children pay rent to them than to another landowner, keeping the money in the family,” explains Keri Wong, a Cambridge student from Guangzhou. “And while the Chinese middle classes have a lot of savings, the market at home is regarded as really unstable. UK property is an attractive divestment. Plus property investment presents the option of being able to eventually gain UK residency status.”


We don’t want our housing market going through a boom-or-bust cycle based on the Chinese economyDuncan Stott

But not everyone is welcoming the new residents. “At some point the world economy will shift and overseas investors will decide that they’re better placing their money elsewhere,” says Duncan Stott, of the local campaign groupPricedOut. “But we don’t want our housing market going through a boom-or-bust cycle based on the Chinese economy. We need a more stable housing market so prices aren’t going to be going up faster than people can earn, before plunging and dropping people into negative equity.”

Stott and many others are especially unhappy about the trend of overseas buyers purchasing homes entirely for investment purposes and leaving them empty for several years, before selling them at a profit. While council taxes are raised on empty properties, the inflation in their price means this does not prove a deterrent. Kevin Price, Cambridge’s executive councillor for housing, says there are currently 240 homes in the city sitting empty.

Is it fair to blame this on the interest from China in particular? “Houses are a safe, strong investment which appeals to people both overseas and those already living here,” says David Bentley, of estate agent Bidwells. “Cambridge is a global brand, so it’s not just the Chinese looking to invest here. We’ve seen a big influx of Russian money too. And the Chinese are typically buying not just as an investment, but for their children, sometimes even before they’ve reached school age.”

The link between Cambridge and China goes back to the 19th century, when the university reformed itself based on the Chinese imperial examination system, before launching the UK’s first professorship of Chinese in 1888.

Two centuries on, the link only looks set to strengthen. With the Home Office launching a new visa system that allowsChinese tourists to make multiple visits over a two-year period, and school and university applications rising every year, the distinct Chinese presence in the city is surely only going to grow.

And for local residents already worried that Cambridge’s housing supply isn’t keeping up with demand, the potential impact of such interest remains a concern – even if, as Bentley points out, the percentage of purchases from overseas buyers is still relatively small.

“It’s a difficult problem to do anything about, but having such strong interest from Chinese buyers just puts even more pressure on an already strained housing market,” Stott adds. “It simply makes it more and more difficult for people who already live here to be able to own their own homes.”

The housing crisis is creating sharp-elbowed husband hunters

Grace Dent in The Independent

“It is a truth universally acknowledged,” wrote Jane Austen, foretelling the British housing situation in 2016, “that a single man in possession of a good fortune must be in need of a wife.” Oh how I struggled, as a sixth-former in the Nineties, with the opening lines of Pride and Prejudice.

How hideous, I thought, that a time existed when a woman would marry a man for a house. Cut forward some two decades to the era of the £80,000 mortgage deposit. How odd that marrying bricks and mortar – with an added spouse as a bonus – seems pragmatic, rather than mercenary, today.

I very much enjoyed a recent column by the writer Esther Walker, in which she admits spying her then-boyfriend Giles Coren’s slightly neglected five-bedroom London townhouse, seven years ago, and being instantly smitten. With the house, that is. Coren, as alluring as he is, came second in the equation. First, Walker says, she saw the chipped front door, the replaceable carpets and all that lovely space. Here was a home in which she could live, nest, and raise children.

It is fascinating to me that, five short years ago, a confession as gloriously candid as Walker’s would have provoked feminists into bringing down the internet. I would have been among them, perhaps. Today, I greet the same news with a relaxed shrug of acceptance.

Just five short years ago, I remained convinced that if a young woman – or a young man, for that matter – dreamed audaciously and worked very, very hard, they need not be dependent on anyone for a home. I bought my own house through sheer slog and bloody-mindedness; why couldn’t Generation Buzzfeed do the same? 

But little by little, I’ve watched the rise of single men and women trapped in later-life house-shares. I’ve seen how grown-up children are reduced to squatting like cuckoos in their parents’ back bedrooms until well after it is polite. Eventually, I was writing about the rise of strangers in London sharing bunkbeds (out of grim necessity, I should point out, not as a niche hobby).

The future seemed rather infantalising. And for women, feminism may well have flourished, but owning the house you live in, like Beyoncé sang about in “Independent Women” has fallen on its arse somewhat.

The facts are sobering: recent research by the Resolution Foundation on inter-generational fairness shows that in 1998, more than half of those earning 10 to 50 per cent of the average national income had a mortgage. This figure dropped to one in four by 2015. Within a decade, if things continue as they are, one in 10 will have a mortgage. In the late 1990s, when I was a strident youthful thing, it took determined people like me three years to save up for a deposit. Today it would take 22 years. That’s a long time to share a bunk bed, even if it’s in HMP Holloway.

This is particularly bleak in the light of new research on the rise of the “crowd worker” – people paid through online platforms such as Uber, Upwork and TaskRabbit. Here, instead of fairly paid, pensionable work which impresses mortgage vendors, there is a generation tied to their phones waiting to accept or decline piecemeal “tasks”.

Crowdworkers tend to work without benefits such as sick pay, holiday pay, pension contributions or minimum wage guarantees. There must – I suspect, as I’ve never worked like this myself – be a feeling for crowdworkers of being tremendously busy and usefully employed. But meanwhile, financially at least, they are treading water. I’m not sure how you conduct a family life or a relationship around crowdwork, although I’m pretty sure the people who profit from it will say that it’s this versatility that is the unique selling point.

One thing I do know is that Walker’s confession unveils an unpalatable truth about the modern British relationship. We are, increasingly, a nation of clandestine Austen heroines in search of those “in possession of a good fortune”. Be you feminist or fervent bachelor, gay, straight, male, cis or genderfluid; for the average person, marrying into property will be your best shot at “owning it” these days. And if you can charm your name on to the mortgage deeds, well, even better. The housing crisis will make sharp-elbowed, radar-eyed Chelsea husband-hunters of all of us.

In another five years, I predict that Tinder will be outmoded by a simple database of single millennials who were lucky enough to inherit – or afford – a three-bedroom house with space for a homeworking office and a nursery. Or an app which lists unwedded people with sickly parents about to cark it who, in the meantime, happen to be sitting selfishly on a five-bedroom pile in Surrey. In the future, these property owners – not the slinky, the booby or the muscular – will be the sex gods of society.
These gods will woo you with their seductive talk of land registry documents, convertable attic space and the downsides of a 20-metre back garden. You will be powerless in the face of their Farrow & Ball catalogue and hopelessly impressed that their bed is on one level and not accessed via a ladder. You will swipe right for a place to call home. Sure, deep, real love will keep you warm in bed at night. But when the place is yours, you can stick in underfloor heating and a reliable combi-boiler.

Bolivia Gives Legal Rights To The Earth

Kirsten Cowart


Bolivia has become the first country in the world to actually give nature legal rights in a huge effort to put a halt to not only climate change but the exploitation of our world, and in turn improve the quality of life for the people of Bolivia.

Our Mother Earth looks to Bolivia as they spearhead new economic and social models based on the protection and preservation for nature.

This idea had been developed by grass root social groups that presented their ideas to politicians and were accepted as one. In doing so, the Law of Mother Earth in Bolivia recognizes the rights of all living beings, whether they be plant or animal. This law gives our world equal status to human beings.

When this law is fully approved, this legislation will then provide the Earth with the rights to life and regeneration; liberation from genetic modification and biodiversity; naturally balanced systems, pure water and clean air; complete restoration from the effects of its human activity; and freedom from the continual contamination on all fronts.



The prioritising of this legislation based on broader principles of looking towards living in harmony side by side with the Earth and moving towards the collective good of all. At the core of this legislation is a full understanding that the Earth is sacred, which comes from the indigenous people called Andean, viewing the world as ‘Pachamama’ which translates to Mother Earth a living being.

Back in December 2010 the initial act had already outlined the rights of the earth as a dynamic and “indivisible community of all living systems and living organisms, interrelated, interdependent and complementary, which share a common destiny.”

With the Law of Mother Earth Bolivia’s government would then be legally bound to ensure the prioritising of not only the natural world’s policies and making sure that they are promoting sustainability and controlling industry, but making sure they have the wellbeing of its citizens and the world are at their heart.

The economy of Bolivia will be looking to operate within the limits of nature as they push towards a renewable green food stability and energy efficient technologies. Helping to prevent the drastic climate changes already taking place, ensuring that the future generations have brighter lives and a more hopeful future.

The Bolivian government is also requesting a call to arms with other rich countries to work together in adopting the recognition of the effects of climate change due to their high carbon emissions. According to an Oxfam report in 2009, Bolivia is particularly susceptible to the impacts of climate change with increasing drought, flooding and melting glaciers.

On the stage international change, the Bolivian government will have a duty to help promote the upkeep of the rights of Earth, while becoming advocates of not only peace but the elimination of all nuclear, chemical and biological weapons.

Following the change to the Bolivian constitution back in 2009, the law will play a large part of overhauling the legal system. It helps represent a strong shift away from the universally adopted western development model to a much greener holistic vision, based on the concept of Vivir Bien meaning ‘to live well’.

The proposal for the new law brightly states:


“Living Well means adopting forms of consumption, behaviour and conduct that are not degrading to nature. It requires an ethical and spiritual relationship with life. Living Well proposes the complete fulfilment of life and collective happiness.”

An umbrella group for five different Bolivian social movements called the Unity Pact helps prepare the draft of the new law. The represent and speak for over 3 million people of the countries 36 different indigenous groups, the majority of them are small scale farmers who still call their ancestral lands home. The bill helps to protect not only their livelihoods but the diverse cultures that feel the immense impacts of the large industries.

One of the leaders of the social movement Confederación Sindical Única de Trabajadores Campesinos de Bolivia Undarico Pinto, states that “It will make the industry more transparent. It will allow people to regulate industry at national, regional and local levels,” helping to signify a large shift away from the exploitation of nature.

The draft laws that refers to the mineral resources of the world as “blessings” and goes further and states that Mother Earth, “is sacred, fertile and the source of life that feeds and cares for all living beings in her womb. She is in permanent balance, harmony and communication with the cosmos.”

Bolivia will also establish a Ministry of Earth to promote their new rights and make sure that they are all complied with. yet the economy of Bolivia is at this moment solely dependent of the exports of natural resources, earning almost a third of its foreign currency which averages around £300m a year from multiple mining companies. Bolivia is looking to create a new balance and obligations against the demands of that industry.

Bolivia Rain forest



Within the next few months, the full law is expected to pass and it is very unlikely to face opposition due to the ruling party, The Movement Towards Socialism, has been able to hold a considerable majority in their parliament. President Evo Morales, its leader, voiced a commitment to what they were creating at the World People’s Conference on Climate change that was held in Bolivia back in April 2010.



The Law of Mother Earth includes the following:

The right to maintain the integrity of life and natural processes.

The right to not have cellular structure modified or genetically altered.

The right to continue vital cycles and processes free from human alteration.

The right to pure water.

The right to clean air.

The right to balance, to be at equilibrium.

The right to be free of toxic and radioactive pollution.

The right to not be affected by mega-infrastructure and development projects that affect the balance of ecosystems and the local inhabitant communities

This law pushes the world “harmony and peace” with “the elimination of all nuclear, chemical, and biological weapons.”

The Joy of Tax

The Joy of Tax

by

Richard Murphy

(extracts)

- It has been said that the only two things in life that are inevitable are death and taxes. This is not entirely true; while death has been with us from the time life dawned on earth 3.5 billion years ago, taxes have a recent written recorded history - 4500 years ago.

- Top UK taxes in (£) 2013-14

Income Tax -                    155 bn - 27.3%

National Insurance -         106.9 -   18.8%

VAT -                               105.1 -   18.5 %

Corporation tax -                40.1 -     7.1%

- Oxford dictionary on tax:

A compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of goods, services and transactions.

This is misleading because; we also charge tax on income from invested savings, pensions and rent. We also charge tax on wealth and on inheritance as well as on occupation of property. The collective term for all this is 'the tax base'. The tax base is made up of things on which we want to charge tax.

There are major problems with the view that tax is 'a compulsory contribution to state revenue'. The whole history of tax, government and democracy is entangled precisely because those who have been taxed have demanded that their consent to taxation be sought before any such charge was imposed. In that case is it true to say that there is a compulsion?

Even if it is undoubtedly true that a great many people in modern democracies are disenchanted with modern politics they do have the right to vote in elections that result in the formation of the governments that set taxes in the countries in which they reside. Compulsion is hard to suggest in this case.

What follows on logically is that tax paid does not become the property of some alien body. It is the property of a government in which we have a stake and in which we participate i.e. the government is something that we want to exist and in whose operation we consent.

We also understand that the government is different from us; the democratic process creates the possibility that there will be governments and taxes that we would not have personally supported with our votes. We consent nonetheless because we recognise that within the democratic process there could be a will greater and different from our own.

- If we consent to the existence of government and willingly consent to its right to tax, the the favourite phrase of politicians, 'they are spending taxpayers' money' is not true. Tax is not taxpayers' money. It is the government's money and it is the government's rightful property.

This property right of the government has been created in exactly the same way as all other property in a modern democracy by statute law.

- Modern definition of tax

In a democracy with a universal franchise that provides every adult with a right to seek election, tax  is that property held in trust by an individual or a company that is due to the state whose rightful and legal property it is.

- Any attempt by an individual to reduce the property right of a state to claim the tax that is rightfully its property is an action like all others that are motivated by the desire to take away from someone something that is rightfully theirs. Conventionally they could be called theft, tax avoidance or tax evasion.

- Why does a government tax? Contrary to popular perception, no government has to charge tax to be able to spend on what it wants to do. The most obvious alternative to tax is for a government to print money to pay for its expenditure. Modern governments tax to meet the expectations they have raised among their electorate as to the services they will provide in exchange for their votes.

In reality the main reason to use taxation is that a tax lets a government reclaim the money it has spent into the economy, in order to stop the money supply from over expanding. It is just as necessary that the government has available to it a means of destroying the money it can create and spend at will into the economy, and that mechanism is taxation. Taxation literally counterbalances government spending by reclaiming all or part of it from the economy. But what it never does is pay for the spending in the first place because any government can spend without tax.

Another reason for demanding payment of tax is to make the local currency, issued, backed and controlled by the government, the only useful currency in that place. By creating a demand for its coins and notes to settle tax liabilities the state ensures that these same notes and coins become readily acceptable as payment for the goods and services the government itself wishes to buy within the economy it manages.

In countries where the shadow economy is very large, meaning that very little tax is paid, there is ample evidence that currencies other than that issued by the local government are often used as the preferred basis for trading.

Another reason for tax (as fiscal policy) is to reorganize the economy to ensure that it delivers the government's economic goals.

Yet another reason for tax is when the market price for goods and services do not reflect all the costs and benefits that result from trade in that activity.

- In brief the six Rs for tax:

1. Reclaiming money the government has spent into the economy for re-use.

2. Ratifying the value of money

3. Re-organizing the economy.

4. Redistributing income and wealth

5. Repricing goods and services

6. Raising representation. 

Death of buy-to-let: landlords wake up to Osborne's 150pc tax

Richard Dyson in The Telegraph

Hundreds of thousands of landlords and their accountants are digesting the impact of George Osborne’s shock tax change unveiled in the summer Budget on July 8.

The tax increase, on which there was no consultation, will be phased in from 2017 and fully implemented by 2020.

The change was unexpected, and the new regime is highly complex, so investors and their tax advisers are only now fully grasping its effects. Many investors remain unaware of the change, or underestimate its severity.

All higher-rate taxpayers who own buy‑to‑let properties on which there is a large mortgage will pay substantially more tax. Some current basic-rate taxpayers will also be hit, because the change will push them into the higher-rate tax bracket.

Those who are worst affected will see:

● the actual tax they pay on their investment rising twofold or more;

● the tax rate payable rising above 100pc, meaning that more than all of their profit is paid in tax;

● a degree of tax that pushes them into loss, making their investment financially unviable and forcing them to increase rents sharply – or sell.

Scroll down for a worked explanation of the changes.

What is also becoming clear is that worst hit will be those modest, middle-class savers who have prudently chosen to invest in buy‑to‑let, often alongside pensions and Isas, as a means to supplement their income.

The mechanism of Mr Osborne’s tax attack is the removal of landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.

So very wealthy landlords who do not need mortgages are untouched.

• Comment: This Alice in Wonderland tax sets a new benchmark in financial absurdity

In effect, the Chancellor wants to tax landlords on their turnover rather than their profit, meaning that tax will be payable on nonexistent income. This explains why tax rates will, for some, exceed 100pc: landlords will have to pay all of their profit in tax, and then pay more tax still.

As landlords absorb news of this shock tax attack, many have turned to online forums to vent their dismay. Some are writing to their MPs and directly to Mr Osborne.

More than 14,000 have signed an online petition calling for the tax to be withdrawn.

Other buy-to-let investors, though, remain unaware of the tax bombshell poised to wreak havoc on their finances. Accountants, mortgage lenders, brokers and other professionals are themselves still working through the ramifications.

Tina Riches, tax partner at accountancy and investment firm Smith & Williamson, said: “We are contacting all of our clients who have mortgaged property which they let, and we want to speak one-to-one with those worst affected. It is going to have a significant impact.”

Smith & Williamson has calculated that any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020.

So mortgage costs above 75pc of rental income will mean the buy‑to‑let investments become loss-making.

For additional-rate (45pc) taxpayers, the threshold at which their investment returns are wiped out by the tax is when mortgage costs reach 68pc of rental income.

The investors worst affected are therefore likely to be those who have bought recently with large mortgages. Low-yielding properties, such as those in London and other parts of the South East, where rents are comparatively low relative to property prices, will also be exposed. That is because rental income is likely to be lower relative to investors’ mortgage costs.

“It will be very difficult for middle-income borrowers to get into buy‑to‑let in future,” Ms Riches said. “It won’t end overnight, but existing investors will sell and far fewer will buy. Buy‑to‑let may well waste away.

“The wider worry is that the Government can make such radical changes without any consultation. What other areas will come under attack?”

Connie Cheuk owns 5 Properties - Photographed at her home in Littlehampton. Photo: Philip Hollis

Read how Connie Cheuk (pictured above), a landlord with five properties, will see her tax bill rise by almost 40pc. She is even contemplating giving up her 18-year career as a teacher as a means of reducing the tax impact

Britain’s big mortgage banks are reluctant to comment and appear to want to downplay the impact, perhaps to reassure their shareholders. But a senior executive at a top-five buy‑to‑let lender admitted privately to Telegraph Money: “For a group of customers there is a challenge, a potential for their cashflow to turn negative. They will be loss-making. Overall, this move makes it substantially harder for investors to generate a net income from buy‑to‑let.”

Of the many landlords to contact us, several are considering selling. This would enable them to pay off mortgages and limit the tax damage. Others will evict tenants and refurbish properties so they can be re-let for more.

One landlord described how a property currently let to a single mother of four, who is on benefits, will “not wash its face” once the tax starts to bite. If he converted the property into two units he could increase the current rent to cover the tax. The council would have to rehouse the family, he said, “and there is already an acute shortage of housing in that area”.

Another landlord described a £110,000 property, on which there is a £68,000 mortgage, let to an elderly couple at “about two thirds of the going market rent”. It generates an annual £1,100 profit, which would fall to £370 after the tax change.

“The property needs a new boiler, which would wipe out profits for years,” the landlord said. “My options are to increase rent significantly, which the tenants can’t afford, or evict them and sell up, or convert the property into smaller units.

“The Chancellor doesn’t grasp the misery he’ll cause – or doesn’t care.”

When George Osborne announced the change, he implied that the extra tax would hit only higher-earning landlords.

It’s true that every mortgaged landlord who pays 40pc or 45pc tax will indeed pay much more under his proposals.

But some basic-rate taxpayers will also pay more tax – because the change will push them into the higher-rate bracket.

In fact, contrary to Mr Osborne’s suggestion, the only buy-to-let investors who will not be hit are the very wealthy who buy property in cash and who don’t need a mortgage.

At the heart of the change is landlords’ future inability to deduct the cost of their mortgage interest from their rental income.

In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.

Here is a worked example assuming you, the landlord, pay 40pc tax.


NOW

Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.


2020

Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.

Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.

You will have to pay £5,000 tax in this scenario, so you make no profit at all.

The Indian mythology of happy old age

Shiv Visvanathan in The Hindu

Indian culture seems too distant and fragile to sustain old age. A sense of tragedy haunts the future. One is forced to ask what is the use of the idea of India, of all our pride in our culture, when the old are left to die or live in indifference

One of the most hopeful sights one can see on Marina Beach, Chennai, is to watch groups of old people walking together, talking boisterously, comparing notes, showering each other with a barrage of anecdotes. Occasionally, one can see an old couple walking like a dignified pair, content with each other, as if their walk is a continuation of their love affair. There is dignity, a companionship and a beautiful everydayness to it. Parks and beaches are often scenes for the celebration of old age. I must confess that these scenes are public and reassuring. Yet, as one probes further, one discovers that this is a small slice of the reality of the old age in India. The HelpAge India report (2014) on old age abuse provides an altogether different picture. The statistics are frightening and the few interviews, deeply disturbing.

Based on a sample study of 1,200 people from six Tier I cities and six Tier II cities, the report suggests that old age is a frightening prospect, an ecology of violence where over half the elderly interviewed report to experiencing abuse within the family. Oddly, while the percentage of abuse has gone up, the report indicates that at least 41 per cent of those abused did not report it. Abuse, choked within and caged in silence festers like a sore. Fear and helplessness that there is no one else to depend upon and few to report to, adds to the penumbra of silence. While our myths and advertisements perpetuate the myth of happy old age, the data tells us the behaviour of our society is an insult to old age

Old age, a commodity

When cities are ranked in terms of the level of abuse, Bangalore tops among Tier I cities with the sample reporting 75 per cent of abuse. Among Tier II cities, Nagpur is highest with 85 per cent interviewed reporting abuse. What is interesting is that such abuse is not occasional but sustained with verbal abuse (41 per cent), disrespect (33 per cent), and neglect (29 per cent) emerging as the three most frequent types of abuse reported by the elderly. Despite their helplessness, the elderly are good sociologists, analysing the roots of their abuse to emotional dependence, economic dependence and the changing ethos of values. There is a sense that in a deep and fundamental way, we are no longer a caring society.

While the numbers speak loudly, the interviews, even if sparse and bald, capture the sociology of old age more graphically.

For many, old age is a space of helplessness, callousness and indifference. Despite being caught in the web of symbolic and physical violence, the old are still able to provide an ethnography of despair. They point out quietly that old age has become a commodity. The younger generation commodifies old age by seeing the old as sources of pension, property, income. The old are like the goose that must lay the golden eggs and move on. Waiting for the old to die seems an unnecessary inconvenience. Yet, when the old have nothing more to give, they are seen as dispensable. Keshav, a 65-year-old from Kolkata, complains that his wife and he are constantly abused because they do not earn. His wife cooks for the entire family and yet they have to plead for a fair share of the food. Worse, as the report notes tersely, “even requests for medicine or clothes are met with taunts of their impending deaths and termed as a ‘waste’ on them.” The political economy of our new old age becomes clearer in interviews. Old age is not a part of the ritual cycle, a natural process where the old retire with dignity, providing a richness of emotion and memory to the family. Today, when the elderly wither away as a commodity, a milch cow to be milked by greedy children, they become waste to be abandoned. One literally sees them as “useless eaters” to be denied food and medicines and to be eventually abandoned in the dust heap and suffer in silence and indifference. Many of the old reported that they went hungry to sleep.

Politics of abuse

What makes the report so devastating is that it is so baldly written. It’s a no-nonsense approach, its census of violence becomes even more devastating because of a sheer absence of sentimentality. It provides the facts and asks you to feel, feel angry or embarrassed. When parents complain that they have been reduced to being less than domestic servants, denied even their basic needs, one wonders what happened to the idea of India, our sense of a civilisation, the empty boast about our Indian-ness.

The report shows that the vulnerability of old age is created out of the political economy of dependency. The old probably grew up expecting their children to nurture and protect them, sustain their sense of worth and dignity. What breaks them is the fact that their children see them as being useless, a burden, and yet what adds to the desperate poignancy is that they are not able to cut loose. The family, memory, emotion becomes a guise of dependency perpetuating the violence as the old feel there is nowhere to go and no alternative system which could sustain them. The extended family or the neighbourhood, the local politician or the policeman are of little help. To the vulnerability that abuse creates, one adds a sense of helplessness. Old age is now an iron cage from which there is no exit.

There is a touch of the new to this politics of abuse. The tyranny of the regime is enforced by the son and the daughter-in-law. The daughter-in-law is the new Hobbesian sovereign in these sociological anecdotes as the mother-in-law becomes a desiccated old creature, unrecognisable from the soap operas of old which glorified her power and authority. The son sides with the wife against the mother upturning one of the oldest norms of domestic politics. It is also clear that there is a generational change here. The new generation wants the old to give them property but then move on. They are not seen as part of the ritual cycles of domestic life. The old grammar has changed. Old age, once a sign of status, a rite of passage to dignity, is now redundant or pathological, a problem for policy and social work, not for the family which states its indifference ruthlessly.

The report can be read both as a sociology and a social policy. As sociology, the old themselves ponder on the distance between generations, the absence of ethics and memory that could have provided dignity to old age. As a teacher I often ask my students — a sensitive lot — to talk about their grandmothers, to give me details about stories they have heard or food cooked. Most of them seemed embarrassed, surprised with such intrusive questions; only one could talk of his grandmother’s pickles with a zest that summoned a whole sensorium. For most of them, grandparents have become occasional question marks, ritual burdens. Few have recollections of stories told, preferring the narratives on TV or the Internet. It is almost as if grandparents are like creatures out of Tussauds; features that can be ignored. I asked one student to describe the touch of her grandmother. She almost felt repulsed exclaiming, “God, she is so old and scaly.” An absence of memories and ethos of sharing disrupts the ecology of old age. Dignity has become a rare word as abuse becomes the sociological constant.

The report also adds that for the elderly, there is little knowledge of helplines or sources of appeal.

Shift in values

The report however raises a deeper question in a tacit way. One has to understand that ours was a civilisation where the old were honoured, where old age was a position of dignity and wisdom. Somehow with modernisation, consumerism, individualism, the values of old age are no longer part of our society, at least as reflected in the survey sample.

The question is does such a problem have to be solved civilisationally or is it merely an act of repair, a creation of social security to be effected by public policy? It is the erosion of values that disconcerts one to suddenly realise that your grandparents are not a refuge, a bundle of stories, a ganglion of memories, an appeal against parents but an appendage, economically useless and burdensome. The question is do we rethink the norms of old age, treat it as a commons of stability and wisdom, and change the values of our culture? The other alternative is to accept that old age is a problem and accept that new institutions of support outside the family have to be built. Social policy as a piece of plumbing and repair haunts the report. Culture seems too distant and fragile to sustain old age. A sense of tragedy haunts the future. One is forced to ask what is the use of the idea of India, of all our pride in our culture, when the old are left to die or live in indifference. As children, we used to laugh when we heard that the Japanese were buying land for old age homes in India. Maybe they had a better sense of the future than us.

Is Britain's economy really on the path to prosperity?

Osborne's autumn statement will likely present a rosy picture of growth. But is it to be short-lived?

• 
• • Heather Stewart, economics editor
  • The Observer, Saturday 30 November 2013 23.12 GMT

George Osborne is expected to be in bullish mood when he delivers his autumn statement on Thursday. Photograph: Goh Chai Hin/AFP

Brightly coloured New Balance trainers are beloved of celebrities, from Ben Affleck to Heidi Klum. But if you buy a pair of the US firm's shoes in Europe or Asia they are most likely to have been made on the edge of the Lake District. From its British factory in Flimby, on the Cumbrian coast, the hi-spec trainer-maker will turn out more than a million pairs of shoes this year, with more than a third of those made from scratch – cut out and intricately stitched by its 245 skilled staff, who spend more than a year learning their trade.

Since the great recession of 2008-09, when production of the high-value "lifestyle" lines that occupy most of its machinists' time was slashed in half, factory manager Andy Okolowicz says things have gradually improved: "We have had three or four years now of very steady business, both in the UK and for export." It has stepped up output of these fashion shoes by 24% this year and hired more than 10 new staff.

This is the US firm's only European factory, selling to markets across the world, including Germany, France, Japan and Australia – and with the union flag stitched prominently on to the back of many of the models, it's exactly the kind of Made in Britain success story the chancellor hopes to see more of as economic growth picks up.

In George Osborne's 2011 budget speech, he laid out a stirring picture of a new model for the British economy: one driven by a "march of the makers", such as Flimby's trainer-stitchers, instead of what he called "debt-fuelled" growth: buy-to-letters, non-stop shoppers and high-rolling City gamblers.

Two-and-a-half years later, as he prepares to deliver his autumn statement on Thursday, the chancellor can finally boast that the long-awaited economic recovery has arrived: growth has rebounded sharply, unemployment is falling, and business surveys suggest confidence has been restored. As Simon Wells of HSBC puts it, the economy has moved "from a state of despair, to repair".

In March, the independent Office for Budget Responsibility, which draws up the forecasts Osborne uses to plan his tax and spending policies, was expecting negligible growth of 0.6% this year. City experts now forecast more than double that. Similarly, the OBR's 1.8% projection for 2014 now looks far too pessimistic. New forecasts, to be published alongside Osborne's statement, are expected to be rosier and the chancellor is likely to repeat his claim that the UK is now set firmly on the "path to prosperity".

In fact, with a number of eurozone countries barely out of recession, it would hardly be surprising if the chancellor allowed himself a Gordon Brown-style bout of economic Top Trumps, comparing the relatively upbeat outlook for the UK with the gloomy prognosis elsewhere.

"Osborne is probably looking forward to this autumn statement, because he doesn't have to announce that growth forecasts have been revised down for the umpteenth time," says Lee Hopley, chief economist at manufacturers' group the EEF.

Yet, as James Meadway of the New Economics Foundation puts it, "this is definitely not the recovery the coalition wanted or forecast". The breakdown of the latest growth figures showed that business investment – critical for rebuilding a new-style, more productive economy – is down by more than 6% year on year; exports are all but flat, despite the 20% fall in the value of the pound since the crisis; and manufacturing output remains 9% below where it was in 2008, despite the successes of the likes of New Balance and Britain's rampant car-makers.

In Flimby, Okolowicz explains that, while it's undoubtedly a success story, his factory is the final remnant of a much larger shoemaking industry in the area: K shoes and Bata once had plants locally, employing several thousand staff, instead of fewer than 300 at New Balance. Britain is a long way from recapturing its role as an industrial powerhouse.

Hopley, of the EEF, says for her members, this year has been, "good, but not spectacular".

Meanwhile, consumer spending is expanding strongly, borrowing is up and house prices are reviving across a swath of the country. Meadway says: "This is not a recovery, it's essentially a reversion: we're going back to the same kind of economy we saw in 2004 or 2005." Mark Carney, governor of the Bank of England, recently said he expected three-quarters of growth over the next year or so to come from consumption or housing – but many economists fear that's a risky model.

In the capital, some of the worst excesses of the property boom years are back. Aggressive estate agents are pushing leaflets through homeowners' doors and lining up scores of buyers to jostle with each other at "open days". Penthouses in the lavish Battersea Power Station redevelopment are expected to go on sale – most likely to overseas buyers – for £30m. And official figures show the UK now has a record number of estate agents.

In many parts of the country, the housing market is barely stirring from a five-year slumber. But the Bank's financial policy committee – the 10 people with the job of bursting future bubbles – have become so concerned about signs of froth that they have scaled back the government-backed Funding for Lending scheme so that it will no longer subsidise mortgages.

Some lenders have said the removal of the Bank's support, which Carney described as "taking our foot off the accelerator", will make little difference because the market has now gathered momentum of its own. But others believe the rise in mortgage rates that is likely to result will be enough to pour cold water on the growing mood of optimism.

As for consumer spending – the other major support for economic growth over the past six months – since wages have continued to lag behind inflation this latest shopping spree appears to have been fuelled not by consumers' growing spending power, but households dipping into their savings or taking out loans – including the short-term, high-cost payday loans that have caused growing political controversy.

"It feels as if there's a significant lag factor between the economic indicators and what it means for real people in their real lives," says Gillian Guy, chief executive of Citizens Advice, whose advisers see two million people with debt problems each year. She says that the spread of insecure, short-term contracts and part-time work, together with benefits cuts and paltry wage growth, have meant that many people in work are struggling to make ends meet.

That's a picture echoed by Chris Mould, executive chairman of the Trussell Trust, which runs 400 food banks up and down the country, providing three days' worth of emergency produce for people in dire straits. "We're seeing more and more people in crisis coming to food banks and we anticipate the numbers of people who find themselves in financial crisis as a proportion of the population to go up in the next few months. Generally, people are being severely squeezed by price rises – energy costs, rent, food – and the price rises in these areas are running way ahead of inflation."

Osborne hopes that, as the recovery gathers pace, employers will start to loosen the purse-strings, hiring new staff and offering more generous pay, helping to ease the squeeze for consumers and validating the mood of rising optimism. But both Guy and Mould fear it may be a long time before the people who come through their doors are able to make ends meet; and if rising real wages fail to materialise, the consumer upturn could prove short-lived. There's no doubt that the backdrop to the autumn statement is far rosier than anyone, not least Osborne himself, could have hoped six months ago. But Britain's economic resurgence is far less of a victory for the likes of Flimby's highly skilled machinists, and more of a blast from the "debt-fuelled" past than the coalition would have wished – and, as yet, there's no telling how long it will last.

What the Maoist slavery sect tells us about the far-left

Far-left 'splittist' sects like Comrade Bala's proliferated in the 70s – and a genuine desire for change was corrupted

• 
• • Tariq Ali
  • The Guardian, Tuesday 26 November 2013 21.00 GMT

Journalists outside Peckford Place in Brixton, one of the properties linked to Aravindan and Chanda Balakrishnan, arrested on suspicion of holding three woman captive at addresses in south London. Photograph: Guy Corbishley/ Guy Corbishley/Demotix/Corbis

The recent Monty Python revival has come with a bizarre reminder from south London that once, long ago, there were a few tiny Maoist groups in Britain who used language that could have been cribbed from Life of Brian.

Aravindan Balakrishnan, 73, and his 67-year-old wife, Chanda – arrested last week on suspicion of holding three women as slaves in a flat for 30 years – were leaders of a tiny sect of 25 members known as the Workers' Institute of Marxism-Leninism-Mao Zedong Thought, invisible to the left at large. This sect had split from its father organisation, the Communist party of England (Marxist-Leninist), which itself had less than a hundred followers. The Maoists' antics were rivalled by a number of Trotskyist sects, smaller and larger, whose implosion often involved the mistreatment of women, and the story is by no means over.

The Balakrishnans' Brixton commune, it is now alleged, kept three women as virtual prisoners against their will. But it prospered. Membership declined, but property increased. The Balakrishnans pre-empted China's turn to capitalism – according to some reports they had interests in 13 properties, three more than their total membership at the time.

What was the attraction of Maoism? The figure of Mao and the revolution loomed large, but the outpourings from these groups did not suggest a close reading of On Contradiction or other texts by Mao that might have stimulated the brain cells. Instead they became fantasy outfits, each with its own homegrown Mao playing on the genuine desire for change that dominated the 1967-77 decade.

As a political current, Maoism was always weak in Britain, confined largely to students from Asia, Africa and Latin America. This was not the case in other parts of Europe. At its peak, German Maoism had more than 10,000 members, and the combined circulation of its press was 100,000. After the great disillusionment – as the Chinese-US alliance of the mid-70s was termed – many of them privatised, and thousands joined the Greens, Jürgen Trittin becoming a staunch pro-Nato member of Gerhard Schröder's cabinet. In France, the Gauche Prolétarienne organised workers in car factories, and set up Libération, its own paper that morphed into a liberal daily. Ex-Maoist intellectuals occupy significant space in French culture, though they are now neocons: Alain Finkielkraut, Pascal Bruckner, Jean-Claude Milner are a few names that come to mind. The leading leftwing philosopher Alain Badiou never hides his Maoist past.

Scandinavia was awash with Maoism in the 70s. Sweden had Maoist groups with a combined membership and periphery of several thousand members but it was Norway where Maoism became a genuine popular force and hegemonic in the culture. The daily paper Klassekampen still exists, now as an independent daily with a very fine crop of gifted journalists (mainly women) and a growing circulation. October is a leading fiction publishing house and May was a successful record company. Per Petterson, one of the country's most popular novelists, describes in a recent book how, when Mao died, 100,000 people in a population of five million marched with torches to a surprised Chinese embassy to offer collective condolences. All this is a far cry from the cult sect now being excavated in Brixton.

What always struck me even then as slightly odd was that, regardless of the political complexion of a sect, the behavioural patterns of its leaders were not so different. Even those most critical of Stalinist style and methods tended to reproduce the model of a one-party state within their own ranks, with dissent limited to certain periods and an embryonic bureaucracy in charge of a tiny organisation. It was in western Europe, not under Latin American or Asian military dictatorships, that clandestinity and iron discipline were felt to be necessary.

Young women and men who joined the far-left groups did so for the best of reasons. They wanted to change the world. Many fought against the stifling atmosphere in many groups. Women organised caucuses to monitor male chauvinism inside the groups and challenged patriarchal practices. Pity that not all the lessons were learned. Easy now to forget that many who fought within and led the women's and gay liberation movements – in Europe and elsewhere – had received their political education inside the ranks of the combined far left, warts and all.

I can still recall a South American feminist calmly informing a large gathering of revolutionaries in the 70s that advances were being made against machismo. "Only last year," she declared, "my husband, who is sitting on the platform, locked me in the house on 8 March so I couldn't join the International Women's Day demonstration." The husband hid his face in shame.

Now the 70s really does seem another country. The thunder of money has drowned much that was and is of value. The campaign to demonise trade unions – indeed, any form of non-mainstream political activism or dissent – continues apace, despite the fact that the left has never been weaker. A sign, perhaps, that the votaries of the free market remain fearful of any challenges from below.

Profit has never been a company’s only duty

Businesses must look after their shareholders - but they should also work in the public interest

It is not enough to be a good corporate citizen, for share ownership carries with it power and responsibility Photo: AFP/Getty Images

By Jesse Norman in The Telegraph

8:20PM BST 16 Jul 2013

The issue of taxation is never far from the headlines, and doubly so in times of austerity. So it’s hardly surprising that the likes of Google, Starbucks and Goldman Sachs have come under fire in recent years for under-payment of tax.

But how much tax should a company pay? At first glance, the answer is obvious: only as much as the law demands. The economist Andrew Lilico put the point well recently: “The assets of… a company do not belong, per se, to the company’s employees… it’s not for the managers or accountants of a company to decide that shareholders ought to pay some extra tax, not legally required of them, and then do so on their behalf.” Not only that, any claim to the contrary is an attack on private property itself: “It is, as it were, to say that all money belongs to society collectively, and 'we’ have an intention as to how much you get to use yourself and how much goes to the state, and if you avoid tax you end up using more of society’s collective money than it intended for you to use.”

This line of thought is extremely seductive, and very widely held. But it is mistaken, both in principle and in law.

First, the law. The Companies Act 2006 requires directors to promote the success of the company, but with regard to six factors: the likely long-term consequences of a decision; the interests of employees; relationships with suppliers and customers; the firm’s impact on the community and the environment; its reputation for high standards of business conduct; and the need to act fairly between shareholders. The effect is precisely to prevent managements from automatically pleading a duty simply to maximise shareholder value. While they don’t have a free hand, they do have a genuine choice as to how aggressively to avoid tax.

But the deeper point is this. Unlike small businesses, or the vast majority of the working population, larger companies (and especially multinationals) have enormous scope to avoid tax. In the absence of common, binding global standards, that scope has expanded alongside the complexity of tax law. 

For many of these firms, tax is effectively optional. In avoiding it, they are using their size to advantage themselves over purely domestic competitors – as anyone who has tried to compete with Amazon can testify. When decent people are outraged by companies that adopt labyrinthine legal structures to avoid tax —whose main effect is to enrich the lawyers and accountants —what angers them is a belief that this power, this choice, has been abused.

So, again, how much tax should these companies pay? Patently, the law cannot answer that question. But neither can economics. For economics sees companies merely as bundles of contracts, which allocate different financial incentives to shareholders, directors, managers and employees.

This can be a useful analytical tool, but it falls short of setting proper standards of behaviour. Indeed, it does the opposite: there is increasing evidence that people exposed to purely financial stimuli become more greedy, more short-term and more individualistic. Since really effective management is about inspiration and teamwork over the long term, monetary incentives often undermine, rather than reinforce, success.

In fact, all power – private and public – brings with it responsibility. In the words of the great American judge Benjamin Cardozo, “a trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honour the most sensitive, is then the standard of behaviour.” So it is not enough just to be a “good corporate citizen”.

This insight demands a shift of perspective, from the language of law and economics to one of stewardship and ownership. It is a shift with profound consequences. Within companies, it implies a long-term focus resilient enough to resist market pressures just to meet quarterly earnings targets. It implies a sense of personal responsibility – indeed, contrition – from management that has been largely missing from recent arguments over tax, or the causes of the banking crisis. It also demands a degree of modesty in how directors and managers reward themselves. And it invites companies to reconsider the privilege of limited liability, and the connection – which existed from the earliest chartered companies on – between corporate activity and the public interest.

But the idea of stewardship does not end there. For share ownership also carries with it power, and so responsibility. A recent review by Professor John Kay has done much to advance such ownership; it could be greatly assisted by a vigorous collective response from fund managers. And Parliament has its own role to play in reinforcing these values. It must ensure a clear, stable yet flexible framework of law within which companies can operate; and it must ensure effective enforcement, and prosecution, when the law is broken.

What really matters, however, are shared public standards. Lew Preston, as head of JP Morgan, once circulated a memo to all staff: “It has come to my attention that some employees have been preferring the interests of their own departments to the interests of the bank as a whole. Henceforth this will be grounds for immediate dismissal.” That’s more like it.

Jesse Norman is MP for Hereford and South Herefordshire