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Before We Debate Tax Rates, Shouldn’t We First Agree on What Profit Is?

This is not an argument for lower taxes.

It is not an argument that landlords deserve special treatment.

It is a question of principle.

Before we debate how much tax people should pay, shouldn’t we first agree on what profit actually is? One of the foundations of a fair system of law is consistency: similar situations should be treated by similar rules. If two people carry on the same business, incur the same costs, and earn the same income, then we would normally expect the law to measure that profit in the same way. Only then should we debate how much of that profit is taxed.

A Simple Example

Imagine two businesses carrying on exactly the same activity.

They own identical rental properties. They receive the same rent. They have the same mortgage. They incur the same expenses.

Both receive:

Rental income: £30,000
Mortgage interest: £18,000
Other expenses: £2,000

Both have earned exactly the same economic profit:

£30,000 − £18,000 − £2,000 = £10,000

So far, there is no difference.

The difference appears when tax is calculated.

A limited company deducts all of its business costs, including mortgage interest, when calculating taxable profit. Its taxable profit is therefore £10,000.

An individual carrying on the same rental business does not deduct mortgage interest in the same way. Instead, mortgage interest is relieved through a basic-rate tax credit. The calculation of taxable income is therefore done on a different basis.

The result is that two businesses carrying on the same economic activity are measured by different tax rules.

That may be good policy.

It may be bad policy.

But it is a different principle.

The Principle at Stake

Some will argue that individuals and companies are fundamentally different legal entities, and therefore different tax treatment is justified. That is a legitimate position. But if that is the justification, it should be clearly explained why those legal differences require measuring the same economic activity by different rules.

Because this is not about how much tax is paid.

It is about how profit is defined.

Tax rates are a matter of politics. Governments are elected to decide them.

But the definition of profit is a matter of principle. It should not change without a clear and defensible reason.

Equality before the law does not mean everyone pays the same tax. It means that people engaged in the same activity should be measured by the same principles unless there is a compelling reason to do otherwise.

Broader Consequences

When different rules apply to economically identical activity, the tax system does more than define profit differently.

It begins to shape outcomes.

Over time, systems like this can influence behaviour—not because the underlying economics are different, but because the legal treatment is.

Different structures may become more or less attractive depending not on the business itself, but on how it is taxed. That can affect how returns are distributed across otherwise similar activities, and can advantage certain forms of ownership over others.

The concern, therefore, is not only theoretical consistency.

It is whether the tax system remains neutral in its effects across different but economically equivalent structures.

A Broader Question

This issue extends beyond property.

It raises a more general question about how we design tax systems.

If identical businesses can be taxed using different definitions of profit, then we are no longer only debating rates. We are deciding that the same economic activity can be measured in different ways depending on legal structure.

That may be justified. Or it may not be. But it deserves explanation.

So perhaps the question is simple:

If there is a principled reason for treating these businesses differently, it should be stated openly and defended on its merits.

And if there is not, then consistency—not convenience—should guide tax policy.

Because a tax system is not made fair simply because it raises revenue.

It is made fair when the principles by which it measures people are applied consistently.

Before we argue about how much tax people should pay, shouldn’t we first agree on what profit actually is?

Resources :

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1020