Bill Jamieson: Devil’s in detail of tax questions

Shadow chancellor John McDonnell attacked business tax relief and subsidies, to cheers from Labour ranks. Picture: Getty Images
Shadow chancellor John McDonnell attacked business tax relief and subsidies, to cheers from Labour ranks. Picture: Getty Images
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POLITICAL rhetoric is rife but the nitty gritty will prove harder to resolve, writes Bill Jamieson

Step forward to the “new sort of politics”. There’s no detail about exactly how new it will be. But that was hardly the concern of this year’s Labour Party conference. Its task is to create an evangelical zeal and expectation of change around the new leader after a crushing general election defeat in May.

Similar fervour will mark the upcoming SNP conference in Aberdeen: firing up the troops ahead of the Holyrood election next May for an unassailable grip on power in the Scottish Parliament.

The rallying cry at both events is an end to austerity and the promotion of “fairness”. Why encumber us with tedious minutiae of detail and policy exactitude? As Confucius put it, “when the finger points to the moon, the idiot looks at the finger”.

But the time of the idiots will come. What exactly will be involved in ending austerity and promoting equality? How will cuts be restored or public spending raised without recourse to more debt? And if we opt to raise tax, what taxes in particular would be raised, by how much and how much extra revenue would be raised?

Grinding, pettifogging details. But why spoil the rhetoric? Shadow chancellor John McDonnell received a standing ovation at the Labour conference when he targeted the billions of pounds of business investment reliefs and tax subsidies, declared corporate giants like Google and Amazon should pay more taxes, urged a beefing up of HMRC to chase wealthy individuals who exploit tax loopholes - and left the door open for a 60p tax rate. Details? Tomorrow’s problem.

Scottish Labour leader Kezia Dugdale has already made clear she would use the new tax powers to raise taxes, scrap tax breaks for independent schools, and consider a 50p tax rate for top earners while challenging SNP First Minister Nicola Sturgeon to show her own socialist credentials on tax.

While Finance Secretary John Swinney is not an ideological tax-raiser and has ruled out rises next year, subsequent increases under the Smith powers may have to be substantial to meet the annual £10 billion funding gap identified by the Institute for Fiscal Studies. Just to raise this problem risks being howled down.

Making best use of Scotland’s new tax powers will become an increasing preoccupation of the Scottish Government. Indeed, it would be remarkable if its policy-makers are not already crunching through the options on how current levels and rates of tax might be changed.

Income tax remains the single largest source of public sector revenue in Scotland. Receipts currently are running at some £11 billion, making up a quarter of the revenue total.

In 2011-12 there were an estimated 2.65 million taxpayers in Scotland, with proportionally more basic rate earners and fewer higher and additional rate earners relative to the UK. The proportion of top rate earners in Scotland – 0.5 per cent – is almost half the proportion for the UK overall.

So how much extra tax revenue would the Scottish Government be able to rake in to meet its spending aspirations, and where might it strike? What of behavioural effects? Is there a saturation point beyond which higher tax levels and rates result in a fall in tax yields? And what, after all, is “fairness” when it comes to levels of income tax?

Extra tax charges might be confined to the top earners - those earning £150,000 or more currently paying the 45p top rate. Re-introducing the 50p top rate scrapped in 2010-11 might please those in Labour and the SNP seeking greater income and wealth equality while at the same time raising extra revenue to fund higher public spending.

But in 2010-11 the number paying this top rate in Scotland was 14,500 – just 0.5 per cent of all Scottish income taxpayers and less than 0.3 per cent of Scotland’s population (yet accounting for 12 per cent of total Scottish income tax receipts).

The Institute of Chartered Accountants of Scotland (ICAS) calculated that another 10 per cent on the top rate might raise about £240 million - or less than 0.4 per cent of public spending in Scotland, even assuming higher-rate taxpayers did not leave Scotland or find others ways to avoid paying more tax.

This would be a fleabite in relation to Scotland’s spending needs. So how might extra revenue be raised? The threshold currently for the higher 40 per cent rate of income tax is £32,000. Could this be raised? At the current level, many people, particularly young professionals seeking to build a home and family, can already scarcely believe that they are liable for this higher rate. It is catching hundreds of thousands in Scotland who do not at all regard themselves as “well off”, let alone rich.

And they are acutely aware that this is by no means the only tax impost. There is National Insurance, VAT at 20 per cent, council tax and various extra charges, from excise duties to air passenger duty.

Any attempt to achieve extra tax revenue by hiking up the 40p rate would create a political storm. So what are the alternatives? We could see higher taxes on property, for example through further upward adjustments to the land & buildings transaction tax, and/or further revenue from business rates (where revenues have already risen by 40 per cent since 2007).

A readily available lever would be ending the council tax freeze. This looks the most likely option. But this is a particularly unpopular tax for home owners as it is so highly visible - paid out of already taxed income. Property revaluation would compound this problem.

“A new world is possible,” runs the rhetoric. “A fairer, less unequal Scotland”. “An end to austerity”. Such noble aspirations can be met by higher economic growth, raising both income and business tax yields. The SNP administration could show projections of continuing growth of employment and incomes – despite those charges of continuing austerity bearing down on performance.

Forecasts will be produced by the new Scottish Fiscal Commission on economic growth and tax yields. But how reliable might these forecasts be? And would the public have confidence in them?

This raises an important question on the independence and credibility of the Commission, its directorate and its work. This week the Scottish Government published draft legislation giving a statutory footing to the SFC, marking, it said, an “important milestone” on the journey to further fiscal devolution. The Bill will also provide a legislative basis to expand the commission’s scope as further fiscal powers are devolved.

But it raises the issue of quis custodiet ipsos custodes? Can it be right that the government gets to choose its own nominations for the role of SFC watchdog?

Surely nominations should be made by independent experts outside government for the parliament to consider. As this will be the body that will run the checks not just on revenue projections from any tax changes but the present and future performance of Scotland’s economy, its independence matters.

A pettifogging detail? Lift our eyes as we may while those conference fingers point to the moon. It will all come down to detail in the end.