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Richard Cha: UK tax system essay competition

Richard Cha, Cambridge University student

Richard Cha is a Cambridge University student, who is in his final year and studying Land Economy. Originally from Portsmouth, Richard enjoys spending time with friends and family and good food.

Richard was a joint winner of a PwC UK essay competition. We publish his piece with their permission.


How would you change the UK tax system to improve future employment prospects and drive the UK economy?

Since 2010 London has created 10 times more private sector jobs than any other city accounting for 80% of private sector job growth. The Centre for Cities think tank's chief executive Alexandra Jones (from which the statistic above came) remarked that the UK 'is one of the most centralised countries' in the OECD.

More of its public spending now comes from central government than in any OECD country except New Zealand. Moreover, its local government is weaker than nearly any comparable country, including France. She added that cities around the UK should be 'allowed to take their own decisions'.

In light of this, this essay shall seek to explore practical decentralised fiscal reform and investigate how devolving some financial and fiscal powers to London and other UK core cities could potentially develop a competitive environment for cities empowering local leadership and creating jobs. The aim of this essay is not to provide a complete and polished package of taxes that cities might possibly be handed from Whitehall but rather present a vision of how a genuine rebalancing of the UK economy might demand core British cities to be bestowed fiscal freedom to invest in and drive the national economy.

It can no longer be disputed that cities internationally are on the rise and are the nucleus to modern civilization but if the UK continues its existing centralised fiscal model, which could be argued is suboptimal in allocating raised taxes to the pivotal investment cities need to maximise their growth potential, it will not only be to the detriment of the UK's cities but to the whole of the country at large.

The rest of the essay shall proceed as follows: Section I will examine the deficiencies of the current centralised fiscal model. Section II shall advance the case for a possible alternative model concentrating on greater fiscal devolution to UK cities. Section III specifically addresses how decentralised fiscal reform could improve future employment prospects and drive the UK economy. Finally, Section IV will conclude.

Section I

Discussions surrounding tax reform must first acknowledge some of the current tax system's limitations and inadequacies. Admittedly, no tax system is perfect but taxation in the UK is highly centralised when compared to other countries.

Arguably, greater revenue raising responsibility for a region or city as well as expenditure autonomy can improve accountability and transparency by providing a stronger and more visible link between expenditure and tax choices. Centralisation of revenue raising responsibility can also constrain incentives for ideal policy making at the local level.

Simultaneously, spending budgets (raised from taxes) determined by a central government are not directly linked to growth and the employment needs of a regional economy, or the preferences of regional and local population or their willingness to pay for the provision of services. Such deficiencies with the centralised tax system thus lead to inefficiencies in the decision-making process.

A centralised tax system does not always provide regions with the freedom and flexibility to be able to tailor their taxes and spending to their requirements and thus have a greater share of the benefits of the national recovery and future growth.

 

As London's housing and transport infrastructure struggles to cope with the pressure of vast numbers of people wanting to live and work there, regions and cities elsewhere in the country suffer from sluggish growth, high unemployment, a brain drain and fundamental lack of demand.

London is as structurally different to Newcastle, as Liverpool is distinct to Bristol, all with different regional economies so why should they therefore share the same tax rates and brackets? What if these cities shared the same taxes but had the power to set them at differing rates. Against this background, Section II will examine a tax system with a greater appreciation of spatial differences.

Section II

It has been contended that London's portrayed economic boom has left the rest of Britain behind and has thus highlighted how this regional imbalance has raised some troubling questions surrounding who is enjoying the UK's recovery.

To illustrate this whilst the economies of nearly every other part of Britain has shrunk since the crash, London has experienced quite the opposite. Furthermore, during the boom from 1997 to 2006, London and the Southeast were responsible for 37% of the UK's growth in output. Since the crash of 2007, however, their share has rocketed to 48%.

The relationship between the capital and the rest of the UK has even been portrayed as 'A first-rate city with a second-rate country attached'. Any tax system must consider the equitable outcome of its operation and with London and the Southeast regions appearing to benefit the most from recovery there is the notion that the current tax system is inadequate and insensitive towards these regional imbalances. Against this context, this part of the essay shall put forward and contemplate a tax system with an enhanced appreciation for spatial insights.

London, apart from being the capital, offers itself as a leading global financial hub and it has been remarked how a City financier is more likely to travel to Beijing in a given week than to Birmingham due to its leading financial reputation and connectivity throughout the world because of its advantageous time zone. But London's size and influence has arguably made it difficult for regional businesses to grow.

Growing companies from outside the capital are in a permanent dilemma. If they succeed, relocating to London is often considered a necessary step for further expansion. When the FTSE 100 began in 1984, only half of its listed companies were based within Greater London; today the figure is over 70%. This demonstrates perhaps how upon reaching a point of critical mass (or even critical success), firms will decide to relocate to London and this will impinge on regional competitiveness and subsequently regional growth and output.

If however, this dilemma is to be lessened for firms then it may be absolutely necessary for cities to possess greater fiscal policy levers so as to attract and retain expanding businesses. A tax system empowering cities so they can become more competitive would provide incentives for firms to locate in the regions if local stamp duty tax rates, business rates and income tax rates were competitively set in comparison to other cities.

 

Although it may not be as catchy as 'BRICs', 'ManShefLeedsPool', the latest term coined by Centre for Cities's (and formerly of Goldman Sachs) Jim O'Neill could potentially have the same immense impact in the UK as a result of a more spatially aware tax system as it will have a larger impact on where people decide where to live (through city set income taxes), where businesses decide to base their operations (business rates) and where businesses decide to invest.

According to a survey by the Institute of Directors (IoD), published in September 2014, more than two-thirds of managing directors in the UK favour tax powers being devolved to cities or regions south of the border. Sir Richard Leese, Chair of the Core Cities cabinet and leader of Manchester City Council, said: 'Our message is simple: free our cities from central control so they can create more jobs and economic growth...England's great cities have a proud tradition of independence and ambition. Yet our ability to act on that ambition has been eroded as central state control of our finances has increased year on year'.

Leese continues 'we only directly control around five percent of the taxes raised within our cities...this means less local decision-making, missed opportunities, wasted time and money and less competitive cities'. Only 7 percent of London's taxes are retained by the Mayor of London and the London boroughs, compared to 50 percent in New York and 70 percent in Tokyo. Moreover, Bristol mayor George Ferguson remarked that 'Cities are this country's principal drivers of growth and it is vital that we're given the freedoms we need to maximise this for the benefit of our regions and the national economy'.

He added 'That we're so far behind many of our foreign counterparts in terms of devolving power to cities is a national embarrassment given the demonstrable benefits it brings elsewhere'. From this it is clear there is an appetite for the UK's core cities to be endowed with greater control and the capacity to set their own taxes would be an impressive and substantial step toward cities reaching a greater level of competitiveness driving growth, output and the economy.

But how might a spatially mindful tax system look in practice? Ferguson suggested that it could start with devolving property taxes to cities before moving on to devolve local income taxes. The think-tank ResPublica published the report 'From Devo Max to Devo Manc' calling for an experimental devolution to take place in the Greater Manchester area.

But first some background, since the early 1990s, the city has created a distinct identity and an integrated economic strategy. The University of Manchester has doubled in size in less than a decade. New developments such as MediaCity, the home of several divisions of the BBC and ITN, have created clusters of high value activity of the type that London currently monopolises.

The city has taken stock of its major assets and sought to build on them: the area around Manchester Airport, the third busiest airport in the UK, has been designated an enterprise zone and the MetroLink, a hitherto inadequate tram system, has been extended to connect Salford Quays to an increasingly vibrant city centre.

A spatially aware tax system providing core cities like Manchester with control over business rates, stamp duty, council tax before others such as income tax and perhaps most ambitiously at some stage differential corporation tax rates between cities would generate a wider range of revenue streams at its disposal and without the 'the fiscal grip of Whitehall' the city would be able to invest in infrastructure and projects that mattered locally without having to rely on or wait for handouts from central Government.

Section III

A framework for presenting and appraising a potential tax system is usually required to gauge its
effectiveness. Some characteristics associated with tax systems may include its equitable (fairness) impact, adequacy (meeting society's revenue requirements), transparency, neutrality and its contribution to economic growth and efficiency among other factors.

However, due to the essay's brevity and title, this section will focus on how the proposed decentralised tax system would impact on future employment prospects and drive the UK economy and argue that cities have the potential to be the drivers of the UK economy promoting regional rejuvenation.

 

How might this alternative devolved tax model improve future employment prospects? Aforementioned, regional businesses and individuals alike often experience a similar predicament; for the sake of business or personal (and very possibly career) development, both firms and individuals may often take the decision to locate in London.

A devolved tax system where cities initially had control over property taxes and perhaps in time equipped with local income taxes and even corporation taxes would create incentives to firms and individuals to consider locating to metropolitan areas with the most competitive tax rates. Arguably, the country's brain drain to London harms the regions especially as one in three graduates between 22 and 30 move to London.

Regions are left weakened as talented workers leave for the capital. The Business Secretary, Vince Cable, supports this view opining that the capital is 'a giant suction machine draining the life out of the rest of the country'. A devolved tax system could provide incentivising tax rates and bands for families, workers, firms and investors, and local projects would be prioritised as budgets were set by elected city representatives.

Healthy competition between cities with greater control over taxes would be good for economic growth through the competition it may create however, with the freedom to set varying income and property taxes it may be argued that such taxes would participate in a 'race to the bottom' so as to encourage firm and worker relocation to its city over another.

However, cities would have to ensure that set tax rates would reflect and meet the basic needs of society guarding against tax rates being set too low. Moreover, taxes, set too low by elected city representatives, incapable of covering the expense of locally desirable projects and schemes would be brought to account.

 

Taxes are unpopular with the electorate but are necessary to pay for government programs that are popular with the electorate. Taxes therefore possess a high place on any government or politician's priority list. Bestowing tax powers upon cities would naturally raise the local leaders to an elevated decision-making position and by extension require elected city officials to set tax rates.

A quasi-federal tax system in the UK furnishing cities with tax setting and collecting powers although conceptually radical would transform local politicians into highly accountable figures. As Clive Betts, MP for Sheffield, has remarked devolution plans would mean that if local politicians failed to deliver (selecting unsustainable tax rates or bands) they 'wouldn't be able to hide behind Whitehall and Eric Pickles'.

That said the opportunities would be enormous. Mayors could galvanize a political consciousness for their cities and increase the city's profile attracting investment, creating jobs and driving the UK economy through competition between cities.

When Alex Salmond speaks up for Scotland, and Boris Johnson fights London's corner, most cities in
England have no such outlet. There is no name synonymous with Manchester, Leeds or Newcastle. The full model of a devolved tax system where mayors and local politicians held significant tax setting powers from business rates to income taxes and possibly corporation taxes would insist on highly answerable locally elected politicians but would also present the opportunity for metropolitan areas to turn their fortunes around, provide much needed local jobs and act as the engines of the UK's economy.

Local representatives are conceivably optimally placed to comprehend the particular needs of their regions; whether public transport and infrastructure, town centre regeneration projects or other locally desired schemes. City tax and spend controls would improve the feasibility of such activities being undertaken, creating positive multiplier effects in the area thus generating employment, output and beneficial competition between cities driving the UK economy.

As London competes for foreign business and investors, it should also prepare itself for a challenge from the provinces if granted tax powers.

Section IV

Aforementioned this paper did not aim to produce a fixed and finished parcel of tax powers that
Westminster ought to hand down to UK cities but rather offer a vision for a decentralised tax system that would improve local employment opportunities by providing cities with tax and spending powers to attract and retain skilled workers and invest in city programs that Whitehall may not be sensitive to.

 

David Cameron said that 'for too long our economy has been too London-focused and too centralised'. It is clear that even the Prime Minister is not out of touch on this matter and understands and appreciates the fact that cities and its locals often know what is best for their areas instead of the central government.

The Deputy Prime Minister concurred commenting that 'a culture of Whitehall knows best' is not conducive to national recovery and future growth. In light of this, this essay's proposed alternative of a reformed tax system based on the recognition of the spatial economy (or regional economies) is paramount to the UK's competitiveness and local jobs to slow down and possibly reverse the brain drain to London and Southeast.

Even a partially devolved tax system would encourage cities to provide tax incentives to local people and firms to stay rather than relocate generating jobs and providing competition between cities. Such inter-city competition would drive the UK economy to be able to reach its full economic potential.

 

In conclusion, this essay has sought to highlight that a tax system involving the significant empowerment of cities would stimulate regional growth and jobs, and rebalance the UK economy away from the current London-centric blueprint.

In opposition in 2006, Cameron promised to 'share the proceeds of growth' and used an analogy from Polly Toynbee's book: Hard Work: Life in Low Pay Britain. She asked, if society is a caravan moving through the desert, though all the members are moving forward, how far away do the ones at the back, the allegorical English regions, have to fall before there are two caravans, not one?

Generally the English regions lack a distinct competitive advantage or identity and will continue to serve as the hinterland of Britain's capital until significant powers and freedoms are granted. Reforming the tax system so as to specifically address this imbalance is by no means a tokenistic step toward generating local jobs and driving the economy through increased regional competitiveness.

Laurie Brennan, policy officer at Sheffield city council, said the government is finally recognising that the 'socio-economic cohesion and success of the UK is dependent on strong, successful cities'. This essay has sought to demonstrate that a devolved tax system could be a vital element of this realisation.

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Bibliography

http://www.london.gov.uk/media/mayor-press-releases/2013/09/london-and-englands-largest-cities-join-to-call-for-greater

http://www.standard.co.uk/news/mayor/give-london-back-its-tax-boris-johnson-demands-return-on-cash-that-capital-makes-forbritain-7618555.html

http://www.theguardian.com/public-leaders-network/2014/dec/12/mayors-local-government-mps

http://www.res.org.uk/view/article1Jan13Features.html

http://www.cityam.com/1414379970/city-matters-power-cities-it-s-not-just-london-needs-more-control-tax-revenue

http://economia.icaew.com/news/july-2014/mps-want-english-tax-devolution

http://www.localgov.co.uk/Select-committee-sets-out-vision-for-Englands-devolution/36708

http://economia.icaew.com/news/september-2014/bristol-mayor-calls-for-tax-devolution-to-cities

http://www.independent.co.uk/news/uk/politics/local-government-shakeup-british-cities-seek-to-raise-own-taxes-and-go-it-alone-9938087.html

http://citywire.co.uk/money/hit-the-north-with-supercity-says-bric-inventor/a779352

http://www.contractoruk.com/news/0011726company_directors_want_tax_powers_devolved_uk_cities.html

http://www.bbc.co.uk/programmes/b04l0gf1

http://www.ft.com/cms/s/0/4b04932a-3bfe-11e4-a6ce-00144feabdc0.html#axzz3NV4DGuvK

http://www.economist.com/news/britain/21620256-westminster-has-already-begun-giving-more-power-english-cities-devo-manc

http://www.newstatesman.com/politics/2014/09/devolution-we-must-go-beyond-english-parliament-cities-towns-and-regions

http://www.citygrowthcommission.com/what-the-us-can-teach-the-uk-about-devolution/

 

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