King's College London

Researchers found a single tax cut can increase the size of the finance and insurance sector by 0.4 per cent of gross value added (GVA) as higher profits make the industry more competitive globally and lower tax enables firms to attract skilled workers from further afield.

This rapid growth relative to other industries has, in turn, fuelled the financialisation in advanced democracies in recent decades as governments have sought ways to boost growth. However, while the impact of financialisation on growth is contested, extensive research links it to rising income inequality.

The findings were revealed in a new paper, Taxes on top incomes and financialisation, co-authored by Dr David Hope and Dr Julian Limberg, from King’s College London, with Dr Lukas Haffert, from the University of Geneva.

“Despite supposedly aiming for ‘neutrality’, governments clearly still shape the development of their economies through the design of the tax system. By burdening some activities and reducing the burden on others, tax reforms induce economic actors to invest in certain sectors and to shun others.

“Financialisation is a particularly clear example of this.”

Data for the study was drawn from 20 Organisation for Economic Co-operation and Development (OECD) democracies, including the UK, from 1970 to 2019. The researchers measured the size of a country’s financial sector by looking at the share of GVA its activities made up.

In the UK, for example, the researchers found the finance industry had grown from 4.1 per cent of GVA in 1970 to seven per cent by 2019.