Brian Monteith: What to take into account with tax

Picture: TSPL

Picture: TSPL

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Globalised economy means Scotland must take account of rival countries when setting tax, writes Brian Monteith

Yet another attempt will be made this week to try to encourage the thought that a Scotland possessing full control of taxation powers could afford a more bountiful welfare state and public sector – without any corresponding cost to personal incomes.

The Common Weal, a project supported by a range of academics, politicians and single-issue campaigners and financed by the Jimmy Reid Foundation, is publishing a paper arguing that by growing Scotland’s tax base, through higher levels of employment and higher earnings, an extra £4 billion of income tax revenue can be found.

I have no doubt computer modelling can be used to make such speculative assertions work – but the idea that Scottish politicians can simply cherry-pick what they find attractive in Scandinavian countries ignores two fundamental weaknesses.

The first is that with our globalised economies tax policy can no longer be seen in domestic isolation. We live in a competitive world and consideration has to be given to tax rates in neighbouring states.

The second is that the stereotypical Scandinavian model of high tax and high welfare has been changing over the last 20 years with marginal tax rates actually coming down – in part, due to a lack of tax competitiveness against other countries.

In Sweden the corporate tax rate has been cut to 22 per cent, four years after cutting it from 28 per cent to 26.3 per cent. This put pressure on Denmark to do the same and its corporate tax rate was reduced from 25 per cent to 22 per cent this year.

Whether politicians and academics advocate economic programmes based upon sovereign independence or fiscal autonomy within the United Kingdom, the most notable aspect is that international tax competition is rarely given consideration. We must waken up to the reality that Britain is already addressing this issue in both corporate and personal tax rates – but with a new constitutional settlement England alone could go much further, making it more competitive.

The idea that the rest of the UK, with a more conservative-leaning parliament, would leave its tax rates alone is risible. It would seek its own reforms and, while Scotland’s might seek to be “fairer”, the others’ taxation might seek to be more “rewarding”.

In the UK, George Osborne is taking corporation tax down from 23 per cent to 21 per cent next year, and then to just 20 per cent from 2015 – the lowest of Europe’s large economies. Although the average EU corporate tax rate is 23.4 per cent, the rates in Germany, France and Italy are all above 30 per cent.

Having had one of the highest top rates of personal tax, that too has been reduced (from 50 per cent to 45 per cent for incomes over £150,000) and a Tory England could be expected to continue that trend – both by raising thresholds and reducing rates.

The presence of a highly competitive low-tax economy across the border – which would also happen to be Scotland’s biggest market – would place real pressures on the finances of any government in Edinburgh. The prospects for increasing taxes are therefore exaggerated. No doubt some politicians might try to introduce more punitive rates but the resulting flight of capital and talent would result in such policies being reversed.

Suggesting Scotland is somehow more ethical and morally superior and would become a fairer society through higher taxes is nothing but a patriotic conceit disproven by the many Scots whom you can find in Monaco, the Caymans and other low-tax jurisdictions.

The idea of Common Weal, designed no doubt to avoid scaring the horses with talk of higher taxes, is to expand the tax-take by increasing employment levels and raising average earnings. This would mean more people would be paying tax or paying larger amounts of tax without the need to change the tax rates.

Again, while this is politically attractive, as it gives the impression that public services and welfare benefits can be protected or even enhanced without cost, it has to be put in a context of record levels of employment in the United Kingdom.

Improving such statistics cannot simply be wished; no legislation can force it to happen, nor does giving every school-leaver a university place mean that earnings will match qualifications (everyone knows someone who has at least started in a low-paid job after graduation).

It is apparently a “massively unhealthy” assumption that taxes can only get lower, despite the harm to public services. Well, it’s nowhere near as unhealthy as believing that our personal and corporate earnings belong to the state and we should be grateful for what we are allowed to keep after taxation. No sooner had the British top rate of tax been cut from 50p to 45p in the pound than year-on-year revenue for April improved by £1.5 billion. It is a fallacy to argue low taxes must mean poorer public services – as previous tax cuts and subsequent improved revenues have persistently shown in Britain, the USA and around the world.

The prospects for higher earnings and greater employment also have to be seen in the competitive context. To deliver such an ideal requires not just investment in people but attractive conditions to keep them in Scotland. If taxes are lower in England and if the best-paid jobs are in London, Scots will continue to be attracted to them, making it harder if not impossible to build the higher levels of employment or raise the earnings that are being projected. What then for Scottish public finances? Greater debt through public borrowing or, ironically, having to cut taxes to attract Scots back to Scotland?

Far greater faith could be placed in our politicians if, rather than developing ideas about how to raise revenues, they spent more time looking at what we can afford and where we can get better value for money. Scotland – like the UK as a whole – lives beyond its means and until we address this issue and accept we need a smaller, more affordable state debate about creating a Good Society will be little more than wishful thinking conducted above the heads of a more realistic Scottish public.

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