Bill Jamieson: John Swinney faces taxing conundrum

John Swinney has hinted at raising income tax rates in Scotland, but how he would manage that is unclear. Picture: TSPL

Policy discussion in Scotland has proceeded on the assumption that paying a “little extra” in tax would be a good thing. And for those enjoying higher than average income and wealth in Scotland it would only be fair that they should pay more than they currently do in tax.

Both rest on the belief that when it comes to giving effect to higher tax, Scots would be happy to oblige. We would have no fundamental objection to paying more than if we lived in, say, Carlisle or Newcastle.

Now I am not at all sure these assumptions are safe. It may well be the case that for those on the lower end of the income scale there would be little objection.

But others – those, as the election mantra had it, with “the broader shoulders who should bear the greater burden” – may be less supportive when it comes to the reality of coughing up.

The belief that Scotland is a nation comfortable with rates of tax higher than in the rest of the UK has yet to be put to the test. But that test is now fast approaching.

Finance supremo and Deputy First Minister John Swinney let fall this week that he is “considering” increasing income tax in Scotland next year, invoking the Calman Commission powers handed to Holyrood by the 2012 Scotland Bill.

What gives this urgency is the obligation to meet at least some of the spending pledges in the election campaign and, at the least, to fill some of the gap in public spending from cuts by the UK government.

But the problem is not just that (for now) these powers are limited but that the administration cannot simply target those already paying the higher tax rate.

The Calman proposals stipulate that a change to one tax band has to be replicated in other tax bands.

This would mean having to increase taxes on basic rate taxpayers – a deeply controversial and high-risk move for a party hoping for further major gains in the Holyrood elections next year. It is thus likely that any move to pull those tax levers will be postponed until well after the election and indeed may await the delivery of extra powers under the Smith Commission proposals – once approved by Westminster.

But this only delays and does not avoid that moment of truth for Scotland: do we really want to pay higher income tax here than in the rest of the UK?

The SNP’s “penny for Scotland” campaign in 1999 failed miserably to persuade voters of the merits of higher tax, while culturally we have benefitted from a strong entrepreneurial streak that higher taxes would work to discourage.

Two figures in particular now haunt the Scottish administration. We have a very small base of high net worth individuals to “bear the greater burden”. In 2010-11 the number of Scots hit by the top 50p rate of tax was just 14,500 – barely 0.5 per cent of income tax payers in Scotland. And, according to the Institute of Chartered Accountants in Scotland, a 10 per cent increase in the top rate today would yield just £240 million – or a mere 0.4 per cent of Scottish Government spending.

For a tax rise to make any significant impact on Scottish Government revenues while mitigating the impact on basic rate taxpayers, the increases in higher rates would have to be Draconian, almost certainly triggering “behavioural effects” – a reduction in the motivation to work or a significant business and personnel exodus.

I believe Mr Swinney is well alive to this behavioural risk. At a recent tax seminar I heard him eloquently spell out the three basic principles of taxation enunciated by Adam Smith: that tax should be proportionate to the ability to pay; that there is ease and efficiency of collection; and that taxes conform to a sense of fairness and equity.

I have no reason to doubt he fully embraces these excellent precepts. But the problem arises in sticking to them in a highly charged political environment and with sky-high expectations on public spending maintenance and growth.

So what other taxes might the SNP administration consider? It could revisit the land and buildings transaction tax and impose, for example, an extra tax on properties with garages – additionally helping with those ambitious carbon reduction targets.

With the precedent of a higher business rate impost on edge-of-town supermarkets, other businesses deemed socially problematic could be targeted – off-licences, for example, betting shops, premises selling high-sugar “fast food”, and tobacco products.

Recreational pursuits favoured by “high net worths” such as golf, boating and shooting could face additional levies. Second homes could be charged a council tax premium rather than a discount. Private homes with more than two bedrooms could attract an additional levy. Tax breaks on savings products such as individual savings accounts could be withdrawn.

Such small imposts could in aggregate yield a significant sum to the Scottish Government over the years to enable it to meet its progressive welfare spending policies and help mitigate rises in income tax.

Popular? I suspect there would be uproar. But that would dramatically expose the myth of a Scotland happy with higher tax.

Arguably the greatest disincentive of all to significant rises in tax would be the Scottish Parliament itself. Faced with the responsibility of having to raise in tax the money it has hitherto been able to spend with impunity, many MSPs would be reluctant to contemplate the impact of higher taxes on their constituents and the potential political costs of a “high spend” administration.

All this would finally concentrate minds on that eternal truth of government – that it is about priorities and having to choose between one spending commitment and another.

Some may criticise this as austerity by another name. Surely the SNP at Westminster should fight to ensure that Scotland’s borrowing powers are maximised so that budget constraints can be reduced?

But the purpose of “austerity” is to halt the rise in government net debt which continues to rise, and with it an annual interest bill now at £43 billion, equivalent to 8 per cent of UK government tax income – and still rising.

Setting aside the generational impact of this debt burden, reducing Scotland’s share of borrowing and debt should be a priority under “full fiscal responsibility”.

These are the taxing problems which the next phase of the “more powers” battle cannot but face. And they are by no means the moment of truth for Mr Swinney alone.

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