As Brexit looms, Scotland should not create too large a difference in income tax rates with the rest of the UK
Scotland can ill afford to start a brain drain of people leaving Scotland for lower income tax rates south of the border, particularly as Brexit could cut off the supply of skilled workers from the EU.
The Scottish Government last year took the historic step of utilising its ‘tartan tax’ powers for the first time. However, the changes were fairly modest with just over half of Scots paying slightly less, while those earning more than £33,000 paid a bit more than people in the rest of the UK.
But even then there were warnings that further increases might actually be counter-productive as higher earners would be more likely to move south of the border, resulting in lower, rather than higher, revenues. Then, in his budget in October, Chancellor Philip Hammond announced what amounts to a significant tax cut for the better-off: the higher-rate income tax threshold in the rest of the UK is due to increase from £46,350 to £50,000 from next year.
According to the Fraser of Allander Institute, if Scottish Finance Secretary Derek Mackay decides to increase the Scottish higher-rate threshold simply by inflation, someone earning £50,000 a year in Scotland will pay £1,350 a year more than if they lived in England. That is a fairly sizeable surcharge for the privilege – which it most certainly is – of living in Scotland.
However, speaking to the Financial Times, Mackay suggested he thought there was scope to increase the tax burden – and the difference between Scotland and England – further. He did say that Scotland should have a “competitive tax regime” and he would “follow the evidence to understand tolerable levels of divergence”, which was reassuring, but he added his “sense” was that Scotland was still some way from the point at which higher taxes would mean lower revenues.
There is always a temptation for people in high political office to raise taxes. Faced with regular complaints about significant problems in the NHS, schools and local authorities and calls for greater help for low-paid people who have suffered most from austerity, it is easy to see why someone with the best of intentions would decide to take ‘just a little bit more’.
But The Scotsman urges the Scottish Government to exercise caution, particularly given the approach of Brexit, which may well hit Scotland harder than the rest of the UK. The road to a brighter future can only be built by a stronger economy and the extra revenue that would bring. Increasing taxes risks the worst of all worlds: a vicious spiral of high taxes, low revenues and a brain drain.