Brian Monteith: Flatter tax system for a sweet life

The more of your earnings you want to enjoy, the more gets taken in tax. Picture: Jane Barlow
The more of your earnings you want to enjoy, the more gets taken in tax. Picture: Jane Barlow
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High earners should be encouraged to stay, and reducing the gap between top and basic rates would create wealth, writes Brian Monteith

IT IS beyond dispute that the United Kingdom has a structural deficit, because it has annual spending commitments that are greater than what it is able to generate in tax revenues. To address this it is making spending cuts and borrowing significantly to cover the difference. With one of the fastest growing economies of developed nations it is expected to move to surplus by 2018-19 and begin to reduce the national debt.

Without such a recovery, our children, grandchildren and great-grandchildren will be required to service the colossal interest on that debt and, if they are lucky, reduce it.

Those high debt service costs – already greater than a defence budget that includes Trident – means less funding for public services such as the NHS or providing welfare benefits for the weakest in society.

As I argued last week, given then that Scotland is benefitting from those same spending commitments it has a share of that deficit, but more so for it has committed itself to additional spending commitments. It follows that Scotland’s structural deficit is greater and the road to ruin more hazardous and difficult to leave.

Nearly all Scottish politicians refuse to countenance the Scottish state living within its means; not only do they refuse to consider what spending programmes are surplus to requirements and could be trimmed or abolished, they will seek to take on greater borrowing to disguise their problems. This leaves only one option, of increasing tax revenues to balance future budgets. Unfortunately, as we have seen with stamp duty, higher tax rates can be undercut by competing neighbours and even cutting tax rates to generate higher productive growth (and therefore higher revenues) faces competition too.

What, then, can be done to generate higher revenues to support most if not indeed all of Scotland’s public largesse that is so coveted by Holyrood MSPs?

Without the courage to make public spending cuts and being so hemmed in by tax competition, there really is only one answer, and that is to introduce tax reforms so radical, but suited to smaller nations, that they cannot easily be matched by larger competing neighbours. If such reforms were designed to encourage greater entrepreneurial activity those elusive tax revenues could be generated.

Rather than fiddle with cutting one penny or even thruppence off the basic rate of tax, our politicians should redesign income tax to better reward harder work and greater productivity. That means adopting a simpler, flatter tax system.

By way of an analogy, let me explain how our current system plays against everyone’s interests.

A boy asks his dad how personal tax works, so the father sends him to wash the car. He pays his son just enough to buy an ice cream cone. When the boy comes back, his dad takes the cone and slurps off 21 per cent from the single scoop.

“Why did you do that?” asks the son. “That’s what the government does son, everybody gets to keep a cone’s worth of their earnings tax free, but it then takes a big slice of what’s left.” Unimpressed, the boy next week tries to earn more, washing both his parents’ cars. He gets extra money and asks for a double scoop of ice cream. He comes back and says to his father: “You can have your share, but I’ve got more for myself.”

To his astonishment, his dad slurps first his 21 per cent and then 45 per cent of the second scoop. He had taken more, both in volume and as a share.

“That’s not fair! Why have you taken so much more? I worked harder and did more,” demands the boy.

“I’m afraid that’s what happens son, when you earn more you also pay more in tax, not just in the amount – but in the share too. It’s called social redistribution, and it’s your job to help those that don’t or can’t work as hard as you.”

The boy was resigned to his ice cream cones being slurped by his dad for ever.

He went down to Tony’s for another ice cream and when he came back proclaimed to his dad that he was ready for his taxing slurp, but smiled for he could at least enjoy the chocolate Flake he had added. His dad licked his large share of the ice cream, and then bit off the end of the Flake.

“Dad!! What did you do that for?” he asked, almost in tears that his Flake had been got at.

“Sorry son, I forgot to tell you about National Insurance.”

The moral is that we remove incentives from people who seek to work harder, be more productive, be more creative and inventive. There are only 13,000 top-rate tax payers in Scotland. If we follow the policies of the SNP and Labour, that number can be expected to fall when what we want is for it to increase. Our politicians should be introducing policies that encourage our own entrepreneurs to stay here rather than go to London, Hong Kong or elsewhere. They should be looking to attract entrepreneurs from the rest of the anglosphere and foreign shores.

By creating a flatter tax system – where the difference between the basic and top rate is reduced or even removed altogether – we can grow tax revenues by encouraging more wealth to be created. By having more high earners we not only can attract higher personal tax revenues that more than make up for the initial cut in the upper tax rate, but additional revenues can be generated from increased contributions to consumption taxes.

Ironically, having more high earners creates a less unequal society and raises the mean earnings of the nation – making it a more attractive for investment by businesses.

It is no coincidence that many east European countries coming out of communism have turned to flat personal taxes to increase economic growth and secure higher tax revenues. Collectivist Scotland should turn to a flatter tax and thus be able to afford the style of living it has unjustifiably become accustomed to.