It is a bit surprising that three of the main parties in the forthcoming Holyrood elections are going into their campaigns promising a rise in the amount of tax we pay, with one other suggesting less generous thresholds than the rest of the UK.
Paying higher taxes is not a policy that has proved popular with voters in the past. Indeed, it is a long time since Denis Healey did just that, and more recently, Alistair Darling’s highest rate rise to 50p was quickly reversed by George Osborne.
We desperately need to attract back our bright young emigrants and higher taxes certainly won’t helpDavid Watt
Naturally, to take more money out of our income is not generally seen as a vote-winning strategy.
Typically, Chancellors have been attracted by other solutions to raise income – from VAT to air passenger duty and excise duty, even now a sugar tax – and perhaps the key issue for Scottish politicians is that they have taken control of the nation’s least popular tax, which one suspects they may already be regretting.
However, with income tax in their control and the need to raise income for their social agenda, MSPs feel bound to make an early statement of intent and for them that equates to raising taxes and making the rich pay.
This all sounds super – socially responsible, and many would think justified to a point. However, there is a key flaw – notably that Scotland does not have many rich people!
The number of people paying 45 per cent tax is estimated by politicians to be 19,000, by HM Revenue & Customs to be 16,000 and by some accountants to be as few as 12,000. So increasing their taxes will not bring in much money at all. In addition, these individuals are tax savvy and mobile so will find a way not to pay the full amount.
Indeed, when George Osborne dropped the rate back down to 45p, he actually brought more money back into the Treasury. So this policy is at best ill-informed and illogical if bringing in more money is the aim.
Counter-intuitive to politicians, but by far the best way to get more tax from rich people is to create an environment that makes people richer, and attracts more wealthy people – because the tax take will go up, both from those individuals, and the people they employ. Wealth creation actually enhances the public purse as well as the personal one.
As far as tax rates are concerned, it would also be nice to introduce some facts to the debate rather than just rhetoric and perhaps shed some light on the myth that we are currently a low tax rate economy. If you add in other taxes – especially VAT at 20 per cent and council tax – it is disingenuous to promote Scotland as a low tax economy; it certainly is not. Anyone considering coming here from the US, France, Germany, Canada or Sweden, to name a few, would certainly think twice.
The individual disincentive effects of high taxation are potentially widespread and damaging across both the private and public sectors and can include an unwillingness to work more hours, or to accept more demanding and modest promotions, as well as a reluctance to move jobs.
As a nation we also have a real danger of appearing uncompetitive in attracting inward migration of individuals and businesses – especially if the rest of the UK was to follow a lower tax regime. We desperately need to attract back our bright young emigrants and higher taxes certainly won’t help.
For the IoD and the wider business community, the key questions are around what the tax take is spent on and what efficiency savings could be made in the delivery of public services. So tax for a purpose might be more appealing to the public but “wasting” money in certain areas is not, for example very high salaries for senior staff even when compared to the private sector, and interfering in the governance of higher education establishments – to name but two such issues.
What I would really urge politicians to do is to devise a long-term economic strategy for Scotland and then do the income and expenditure costings for that plan. That would allow some detailed planning and some certainty about business costs and provide clear direction for us all to follow.
The equation is fairly simple: knee-jerk populist policies to tax the rich get us all nowhere and will lead to us lessening the attraction of this fantastic country – and potentially damage our economy.
• David Watt is executive director of the IoD in Scotland