Before the referendum, George Osborne claimed a Brexit vote would require an emergency Budget of tax hikes and big spending cuts. While the new chancellor has said that he will wait until the Autumn Statement before he makes any changes to fiscal policy, it is unclear what he will choose to do.
But what is clear is that, if the UK fails to secure access to the Single Market, particularly for financial services, it will leave a very large hole in the government’s expected tax revenue.
Let’s ignore for the moment the loss of business and focus on the repercussions this will have for jobs and income tax revenue.
HMRC publishes data annually on which groups of the public pay income tax and how much they pay. For the tax year 2013-14, the data tells us that 340,000 income tax payers had earnings over £150,000 in the year. That equates to just over 1.1 per cent of the income tax-paying population – it excludes non income tax payers so there is an even bigger skew within the total population.
That 1.1 per cent earned £126bn, or 13.25 per cent of the total of £951bn earnings, and paid £47.2bn of the total £165bn income tax bill (28.6 per cent).
In the past, one of the arguments against increasing the top rate of income tax has been that high earners can be internationally mobile. Tax them too much and they will leave for sunnier, and less tax intensive, climes. In practice there were lots of other factors and international transfers were relatively rare.
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Now, however, there is unlikely to be much discretion involved. Without access to the EU Single Market in financial services, many financial institutions will need to move their core operations to Frankfurt, Dublin or other EU centres. Current estimates are that over 100,000 of the most important (and highest paid) financial services jobs will move out of the UK.
It may not be that many purely from within financial services, but there are plenty of other high value workers who may find it easier to add their value when based within the EU. And if we lose 100,000 high earner jobs, that implies a pro-rata loss of income tax revenue of £13.9bn (8.4 per cent of the total paid).
If everything else remains the same, that means income tax rates would need to increase by 9.2 per cent (i.e the basic rate would need to go to 22 per cent, the higher rate to 44 per cent, and the top rate to 49 per cent) to make up the shortfall.
Could that load be spread over other taxes? Separate HMRC data shows total taxes paid for 2013-14 as £457bn, so it still represents a loss of total tax revenue of over 3 per cent.
In practice, there is little real opportunity to spread that increase across different taxes, because the same group of employees who will now either be unemployed or working outside the UK pays a disproportionately high share of VAT (as they have more disposable income), capital gains tax (because they have more disposable income to invest), and stamp duty (because they buy more expensive houses). In practice all of those taxes might also need to increase by broadly 10 per cent.
None of the above takes any account of knock-on effects – the loss of these jobs leading to loss of support service jobs and so on and so forth. Nor does it account for the loss of corporation tax receipts. Borrowing will not be an option as these are structural changes (and our credit rating is already being downgraded anyway).
What should we do? It should be the government’s priority to try to secure as many of those jobs as possible – no matter how much the public might have a healthy suspicion about certain groups of high earners, they pay a massive share of our bills. If their jobs disappear, either taxes need to rise substantially or we need to cut all government expenditure, not just benefits, by a commensurate amount. Neither of these are attractive options.