Over the long rise of the SNP one refrain has been constant: more tax powers. But now that substantial new powers are approaching, what exactly do we wish to do with them?
Under the new powers, Scotland’s control over tax by revenue generated is set to rise from £8.6 billion to £20.6bn once the new Scotland Act takes effect.
This new freedom on tax affairs will be intoxicating for many, and fuel many political spending ambitions. But I have had few more chastening experiences over the past year than addressing exactly this question as a member of Scottish Conservative leader Ruth Davidson’s independent tax commission. It reported this week, its work enhanced by the inclusion of members who were not Conservatives or indeed conservative-inclined.
The result – I hope – is a wealth of information that will be an indispensable ready reckoner for those of all parties and of none who will come to wrestle with this biggest of questions for Scotland: how can we best use new tax powers to ensure a fair and competitive tax system that works to improve our economy and its performance?
For those who like inside information on how such commissions work, here are two snippets. First, its marathon meetings chomped their way through Tunnocks tea cakes – an unnerving aural experience for those participating by conference phone. Caramel wafers made an even greater noise. For the sugar tax inclined, low-fat digestives were consumed in silence – as befitted biscuits of such austerity, even weevils would have given them a miss.
Second, just when we thought we were making progress, sharp-minded outside experts and scrutineers waded in to question our early conclusions right back to where we started.
For as long as I can remember, I have approached the broad question of tax policy with the admonition of Franklin Pierce Adams ringing in my ears: “Count the day won, when turning on its axis, the Earth imposes no additional taxes.”
How compelling that seemed – but in today’s world of barely taxed corporate moguls such as Google, Starbucks and Amazon, and the powerful advocacy of lifestyle taxes to correct our misbehaviours and make us healthier –how helpful is it really?
It may be said of all studies on tax policy that the Devil is in the detail. But that is to overlook the bigger Devil of first agreeing and setting down the broad principles of approach before setting out on particular and specific tax proposals.
Whether you are SNP or Labour, Conservative or Liberal Democrat, key principles need to be agreed on developing a fair and competitive tax system. The commission settled on five. It should be simple in operation and compliance and avoid further complication of the existing complex network of different rates, tiers, thresholds, allowances, reliefs and exemptions.
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It should be progressive – having regard to people’s ability to pay: disproportionately low levels of tax being just as unfair as disproportionately high ones. Fairness must be borne in mind.
Third, it should seek to incentivise and not put Scotland’s economy and entrepreneurs at a disadvantage relative to the rest of the UK and EU competitors.
Fourth, taxation powers should be designed around local accountability. And finally the tax system should be readily understandable for the average citizen. There should also be independent scrutiny of data, budgets, development plans and disclosure of debt and deficit projections in Budget statements.
To these, two other strictures were added: that proposals for new taxes or amendments to existing taxes should be evidence-based; and that account should be taken of behavioural response – that is, how taxpayers might react – to ensure that projected tax revenues from a proposed change take into account changes in taxpayer behaviour.
These principles are universal, and are vital for any administration of whatever political colour to pay heed. I suspect SNP finance minister John Swinney is no less mindful of the need for evidence-based policy and assessment of behavioural response as any commission member.
Such considerations may be seen to act as a constraint on alteration. But these are the ties that bind any administration. Better, surely, an assessment of consequences before implementing change than having to pick up the pieces afterwards from poorly considered legislation – the dreaded unexpected consequences that haunt all policymakers. They cannot wholly be eliminated. But any responsible administration has a fiduciary duty to undertake such research.
A central feature of Scotland’s income tax system at present is how dependent it already is on the contribution from additional rate taxpayers. While they represent just 0.7 per cent of the taxpayer base, they contribute 13.9 per cent of all tax revenue in Scotland – more than £1.5 billion. As a result, changes in the number of additional rate taxpayers (increases or decreases) would have an exponentially higher impact on tax revenues.
Evidence from Professor David Bell of Stirling University on the potential behavioural responses to tax changes – “that higher income tax rates will lead to behaviours that have a negative effect on tax revenues – reducing labour supply, tax avoidance or migration” is particularly noteworthy.
On a broader front, what is the likely impact of tax increases on economic growth? Academic papers summarising a wide range of research concluded that, despite significant variance in methodology, data and scope, the vast majority found that tax rises have a negative effect on growth. These range from relatively small effects on GDP growth to more significant downturns in investment levels, output per worker and growth rates – up to 2 per cent annually.
Finally, what of new taxes? Here again the popular impulse to bring in behaviour taxes has to be chastened by the need for evidence as to their effects – that they will really do what their proponents say they will, and will not lead to harmful displacement effects. And new taxes, argued on the grounds that they will only have a modest effect on incomes – a wee nibble, little pennies in the greater scheme of tax – turn out to be Big Creepers.
The tax yield on air passenger duty, for example, with increases in short haul and long haul rates, has risen by more than sevenfold since its first year of operation. The yield from Stamp Duty on property transactions UK-wide has shot from £675 million in 1996-97 to a forecast £11.5bn in 2015-16. Insurance premium tax (IPT) is another Deadly Creeper. It was first introduced in 1994 and the rate has now risen four times. The latest rise to 9.5 per cent will bring in an additional £8.1bn for the Treasury.
The temptation to avoid unpopular income tax rises by seemingly less controversial “wee penny” lifestyle taxes needs to be subject to the same audit and scrutiny. If the tax commission has done no more than remind policymakers of all parties of the key principles that should govern policy and the need to consider the consequences for Scotland’s economy and competitiveness it will have well served its purpose.