If you still believe in opinion polls, the British Labour Party’s plans to raise revenue by taxing the City of London are entirely hypothetical – the polls suggest Labour’s not going to win anyway. If you’re skeptical of the pollsters, or interested in the tenor of the underlying debate, though, the Labour Party’s plans should be of interest. They suggest that banker-bashing is alive and well, in a fiscal sense at least.
The City of London already pays around £71bn a year in tax or 11.5% of the UK tax take according to the City UK. Our estimates suggest that this would rise by at least £12bn in direct taxes if the Labour Party were in power – and by more if taxation of private healthcare and private schooling is added in.
Combined with the uncertainty of Brexit, this may be another reason why demand for banking staff in London is seasonally low: recruiters say banks in the City are delaying hiring decisions while they to see how the election pans out.
A proposed tax on incomes in excess of £80k: expected to raise £4.5bn a year
Labour’s manifesto reveals wants to raise £4.5bn a year by increasing the rate of marginal taxation on incomes above £80k and above £150k. People earning £80k will pay a marginal rate of 45%. People earning £150k+ will pay a marginal rate of 50%.
150,000 people in the UK earn in excess of £80k. They’re not all in the City of London, but as the map below from Britain’s Office of National Statistics shows, it’s in London where the highest earners (marked by dark purple) are to be found and in the City of London and Mayfair in particular. As we noted previously, even new graduates earn around £70k in their first year of an M&A job at a top bank. Earlier, McDonnell called for anyone earning over £1m to publish their tax returns. There are thousands of people in this category working for U.S. banks in London alone.
Labour’s income tax policy has been criticized for ignoring the distribution of wealth, which is the real source of inequality in the UK today. While an income of £70k will put you in the top 5% of earners, you’d need net wealth totaling £1.5m to fall into the top 5% of UK asset holders.
The Labour manifesto also omits to mention the current policy of taxing UK incomes at a marginal rate of 60% between £100k and £121k as tax free allowances are phased out above six figures. This is already the highest marginal tax rate in Europe, and would rise to 65% under Labour’s proposed changes.
A proposed “Robin Hood” Financial Transaction Tax: expected to raise £4.7bn to £5.6bn a year
Separately, Labour shadow Chancellor John McDonnell has said that he wants to levy a tax on financial transactions. McDonnell is proposing an FTT rate of 0.2% of the value of transactions for banks and other finance companies and 0.5% for non-financial businesses.
The EU has its own proposal to introduce a financial transaction tax, which is expected to be ready in draft form by the middle of this year. However, the EU’s proposal is to tax shares at 0.1% and derivatives at 0.01%. The Labour Party’s tax is therefore between two and 50 times higher than the EU’s, which doesn’t bode well when banks are debating where to locate trading floors after Brexit and already facing potentially higher costs from splitting their European operations.
A proposed increase in corporation tax from 19% to 26% (for the whole economy): expected to raise up to £19.4bn a year.
Labour’s proposed seven percentage point increase in corporation tax wouldn’t only impact the City, but it may well impact the City disproportionately. The thing is that UK banks with profits in excess of £25m already pay a corporation tax rate that’s eight percentage points higher than the economy as a whole, at 27%. Is Labour therefore proposing to hike this by another seven percentage points to 33%? This wasn’t clarified.
The Institute of Fiscal Studies notes that even if the UK’s rate of corporation tax is hiked to 26%, it will still be below the rates in France and Germany (at 34% and 30% respectively). At 33%, however, banks in the UK would have their profits taxed on a par with banks in Paris.
A levy of 2.5% on companies paying employees more than £330k
Labour also wants to introduce a 2.5% charge on each individual paid more than £330k. This would effect most regulated (“code”) staff in the City of London. At Goldman Sachs, for example, 512 people earned an average of £2.3m in 2016, implying an additional tax charge of £58k per head and £29m in total for code staff alone.
VAT on private school fees and increased tax on medical insurance
Higher school fees and more expensive medical insurance won’t impact the City directly, but they will impact City employees’ pockets. Labour wants to add VAT to school fees – a hike of 20% and to raise insurance premium tax on private healthcare by eight percentage points from 12% to 20%.
VAT on school fees will be used to fund free school meals for primary children. Higher tax on private healthcare will be used to fund free hospital parking.
A possible increase in the bank levy
Will the Labour Party also want to increase the bank levy? In January 2017, John McDonnell criticized the Conservative government’s policy of cutting the levy and hiking corporation tax. Would a Labour government hike corporation tax and hike the bank levy? Watch this space.