Britain’s tax roller-coaster and levelling down North London

Top of the Charts

Afternoon all,

Another Etonian resignation this morning. We need to be careful because at this rate social mobility may get a real boost. The danger is real – remember no Etonian managed to become Prime Minister between 1964 and 2010. Disgraceful. Luckily the Conservative Party/country has got back into feudalism the habit of electing them since.

Britain has a reputation for electing toffs, and TOTCs has one for providing some topical reads. This week we’re covering the ongoing row about what’s causing inflation and the impact of rate rises on house prices, plus a COTW on the tax policy roller-coaster that not having a tax strategy has left Britain on.

Have a great weekend.


Pricey Profits. This week’s contribution to the “whose fault is high inflation” saga came from the IMF (summary). It decomposes Euro area inflation into the roles played by wages, profits and imports (ie higher gas prices). Their conclusion is that profits was where the action was in 2022, accounting for around 45 per cent of the rise in consumer prices (vs 25 per cent from (vs 25 per cent from wages), reflecting firms being able to adjust prices more quickly than workers can push for higher wages – with the latter now starting to come through. It’s a useful framework for thinking about the phases of this inflation shock and reminding everyone it’s not just workers trying to maintain their living standards. But a word of warning on interpretation. First, profits contributing to inflation ≠ firms’ profit margins increasing (just maintaining margins as input costs rose would contribute to inflation). Second, the result will be different for the UK and US, thanks to their tighter labour markets (Jonathan Haskel’s recent speech has some useful comparisons). Third, as Simon Wren-Lewis notes, whether the inflation pressure is coming from profits or wages won’t change central banks’ view of the answer: higher rates.

Indian inequality. You’ll have seen all the news of India overtaking China as the most populace country– but the balance of economics papers is still heavily in China’s favour. Rebalancing that slightly is a new note on wealth inequality in India during the 2010s. It argues that official surveys underestimate levels of wealth and wealth inequality in India, for the usual reason: the super-rich don’t fill in surveys (due to having yachts to sail/privacy to protect). The authors use the likes of Forbes lists of rich Indians to adjust the official survey results (note that even the richest Indian in the survey is far poorer than the poorest rich lister). The revised data finds that wealth inequality rose rather than fell during the 2010s, and that the Indian top 1 per cent’s wealth share has now overtaken those in both the US and China. Only the Russian elite does better – oligarchies will have that effect.

Being breadwinners. Policy (i.e. on childcare) + slow death of patriarchy social trends = more dual earner households/female breadwinners. That’s good for GDP/gender equality, but more complicated life satisfaction wise finds research looking across nine European countries. The headline: among heterosexual couples, men and women are more likely to be unhappy when the women is the breadwinner – especially in countries with more traditional gender role views (hello Germany). Before you start clamouring for the 1950s, note the effect is mainly driven by couples where the man doesn’t work (rather than working part time). This is disproportionately due to unemployment (vs inactivity for women) so the involuntary nature of the not working is unsurprisingly worse for well-being. That said, note too that women’s well-being is equally hit by their partner’s unemployment as their own, but for men their partners’ unemployment is much less damaging than their own. Which is nice.

Rate results. Too often policy debates about high house prices in the UK turn into a row between people saying all that matters is supply (i.e. not building enough) or interest rates (which have broadly been falling for the past 30 years, driving up prices). In the real world both matter – and they interact – is the lesson of a new Bank of England blog considering where in the UK house price falls prompted by rising interest rates might be largest. The basic argument is that house prices are more affected by changes to interest rates in areas where housing supply is less responsive (ie the south). The scale of the estimated differences between areas is large… “Islington would face a fall in house prices that is 30 percentage points greater than Northumberland” when rates rise by 1 percentage point. That’s some proper levelling down.

Equal employment. Employment rates for those with disabilities 1) improved during the 2010s, and  2) remain dreadful, as we’ve shown. Policy efforts to further raise the disabled employment rate are key going forward given more of us have a disability – but where should they focus? A new report, which reminds us of the 33 percentage point gap in the employment rates of disabled/non-disabled people, warns against too much focus on education. The key proof point is that even if the average education level of disabled people matched that of non-disabled people, the employment gap would only fall by four percentage points (i.e. because disability employment gaps exist between disabled/non-disabled people with the same qualification levels). Unfortunately, the paper is better at telling us what policy makers shouldn’t focus on than what they should…

Chart of the week

Britain doesn’t have a tax strategy. There’s the normal reason for that – political constraints make optimal tax policy hard. But the problem has got more acute because of the clash between the rhetoric of tax cuts and reality of (very large) tax rises. One result of this is lots of fiscal fudging (in some cases actually making problems in our tax system worse) and another is shed loads of flip-flopping. Take corporation tax. Back in 2010, Chancellor George Osborne cut it by four percentage points to ‘help companies invest’. 11 years later, Chancellor Rishi Sunak raised it by six percentage points as part of a package to, you guessed it, ‘encourage businesses to invest’. The only consistent thing has been change (the worst thing to encourage investment). Roller-coaster 2: the Personal Tax Allowance (PTA). Conservative Governments spent billions raising the PTA for the first half of the 2010s. 11 years later, Rishi Sunak has done the exact opposite – freezing it in cash terms for six years and undoing 58 per cent of the post-2010 rise. Instead of this roller-coaster, what the country needs is a tax strategy (we set out ours in the latest Economy 2030 paper). Then we might just get better, not just higher, taxes.