Why it’s precisely the wrong time for Scottish Government to think about £800m tax rise – leader comment

Higher taxes may seem like a good way to solve Scotland’s problems, but could just make them worse by depressing economic growth.

Taxation is a complicated business (Photo: Shutterstock)

The Scottish Government has welcomed a new report from the IPPR Scotland think tank which suggests Scotland could raise more than £800 million in extra taxes.

A new local inheritance tax – of ten per cent on estates worth more than £36,000 – would provide up to £200m a year, the report says, while a payroll tax on businesses whose staff receive what are regarded as low wages would raise in excess of £600 million.

The aims are multiple – more money for cash-strapped councils, encouraging low-payers to give their staff a better deal, reducing inequality, tackling “environmental breakdown” and helping to create a “fairer society”. A win-win for all, then?

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Unfortunately not. The problem with any new taxes is that Scotland already has a considerable income tax gap with the rest of the UK, and is also considering plans for parking taxes and a tourist tax. And all this extra tax has a fairly simple, easily understood effect. It makes Scotland less competitive with England and a less desirable place to live and work.

Firms that pay low wages sometimes do this because they make small profits. A payroll tax would increase their costs, relative to competitors in England and, at some point, if they are able to relocate, they may decide they have no choice but to do just that.

The current inheritance tax threshold is £325,000, meaning it is restricted to people who are fairly well off. Introducing a 10 per cent rate at £36,000 would force the majority of Scots to hand over wealth they have created over their lives – and already paid tax on – that they would rather pass on to their children or give to good causes of their own choosing. This hardly seems fair.

Many well-intentioned politicians have sought to fix society’s problems by increasing taxes to give them the funds to do so. It must be deeply frustrating to be in power but lack the means to make life better for those struggling in hard times.

However, time and again, past experiences have shown that the best way to raise revenue is through economic growth, not higher taxes. If taxes go up, economic growth has a tendency to suffer.

Given the news that the Scottish economy contracted by 0.3 per cent in the second quarter of the year, this is precisely the wrong time to be even thinking about increasing the tax burden.