Memo to Osborne: don’t tax the City too much

Anthony Browne
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JEAN Baptiste Colbert, King Louis IVth’s legendary finance minister, didn’t mess about. To uphold standards in the cloth industry, he issued an edict that any merchant found peddling dodgy material three times would be tied up in public with the offending produce.

Like George Osborne, Colbert inherited a fiscal catastrophe, and attempted Herculean feats to overhaul the government’s finances. His guiding principle was that the “art of taxation consists of plucking the goose to get the most feathers with the least hissing”.

It is a good principle to bear in mind as the chancellor prepares his Budget. He shouldn’t just worry about the amount of hissing, but the amount of feathers he is gathering.

A recent report from PwC showed that financial services contributed £53bn in taxes last year – nearly £3,000 for every household in the UK, and more than enough to pay for schools, universities, police and prisons combined. It is a number the government should pay close attention to – a little change could wipe out the entire primary school system, fiscally speaking.

Break down the headline figure, and it shows just how vulnerable the tax collector is to banker bashing. A detailed analysis by the consultants Oliver Wyman for TheCityUK, which represents financial services, shows that about 40 per cent of the total tax contribution comes from international financial services that happen to be carried out in London, but are quite mobile. That’s roughly £20bn of taxes from activities that could move overseas – as much as the government pays on roads, rail and buses combined. Only about 60 per cent of the tax total comes from UK financial services that will almost inevitably stay here.

There was never any prospect of big banks moving overseas lock stock and barrel, but tax revenues are still likely to be heavily affected by how internationally competitive London is. The study suggests high personal taxes and anti-industry feeling mean that the UK could lose around £14-16bn in employment taxes from a small number of mobile high earners, including traders, hedge fund managers, and senior divisional heads.

With higher taxes in London, firms are increasingly looking to book their trades (and so pay taxes) through other more friendly centres. The banking levy will affect the location of balance-sheet heavy global trading businesses; the Financial Services Authority’s capital regime makes it less attractive to base global derivative activities here.

None of this would appear in any public data, but the tax base would still be draining away. It is clear that banker bashing is not a joyful cost-free pastime, producing pleasing hisses. It has severe fiscal consequences, which doesn’t just mean the chancellor will be collecting few feathers. But we could all be paying the price for years to come.

Anthony Browne is an adviser to the Mayor of London