How to fund new spending commitments is always one of the most salient issues during any general election. In their election manifesto the Labour Party has stated that if it was to win the election, income tax would rise for those earning more than £80,000 a year to help fund the Party’s pledges.
In the press the reaction to this announcement has so far focused on the share of the population that will be affected and how much will actually be raised, with the IFS suggesting that this will affect 1.3 million individuals and raise somewhere in the region of £7 billion per year. What hasn’t been looked at is the geographical impact of these proposals and the extent to which they meet other political objectives such as rebalancing the economy.
To address this issue, we modelled the number of jobs that pay more than £80,000 to see how these proposed changes might play out across the UK.
London will be disproportionally affected by these changes
Using workplace-based data for 2016 our estimates suggest that the vast majority of jobs that would be affected by these proposals are located in London, and mainly in Central London.
The capital already generates the lion’s share of UK tax revenue
As our report 10 years of taxes showed in 2014, cities generated 64 per cent of economy taxes in Great Britain, with London alone accounting for 30 pence in the pound.
When we look at labour taxes, which includes national insurance contributions and income tax, London generated 34 pence in the pound of the Great Britain total in 2014.
And these changes will further increase the country’s reliance on London
Any proposals to tax higher earners, much like previous proposals to tax high value properties, will disproportionally affect London compared to other places across the country. And whilst this may (or may not) be a good thing it certainly will have the result of increasing the country’s reliance on London for the tax receipts to fund public services and activities elsewhere, and runs counter to the main political parties’ ambitions to ‘rebalance the economy’ and reduce the reliance and influence of London on the country.
And this underlines the need to support economic growth elsewhere in the country
Addressing this imbalance requires an emphasis on how to make sure that other parts of the country grow so that they can contribute more to the tax pot. This becomes even more important in the context of Brexit and potential negative shocks to London’s financial sector. To achieve this, any future government should focus on supporting high quality jobs across the country. This would have the benefits of both creating a more balanced economy and a more diversified tax base from which to fund public services and promote economic growth.