Brian Monteith: The devolution appealing tax plan

Ruth Davidson could prove tax-lowering devolution better than separation. Picture: Neil Hanna

THERE is a contradiction at the heart of the SNP’s economic approach in the event of Scotland becoming independent, and it is one that deserves to have some light shone on it. For while, at the moment, it is of no great consequence to the SNP leader Alex Salmond, it could be opened up and exploited by some nimble footwork from his kickboxing opponent in the Scottish Conservatives.

Very simply, the claim is made by the SNP that corporation tax will be cut to stand at least three points lower in an independent Scotland than whatever the UK rate is, so that a competitive advantage is given to companies that operate here. It is said that such a cut is necessary to help attract businesses to locate (or stay) in Scotland and avoid the “gravitational pull” of London. Indeed the SNP has toyed previously with making an even larger cut in the business profits tax, but George Osborne has been reducing the tax himself and it will be only 20 per cent from next year, the lowest of any large developed economy.

Borrowing from the Laffer theory that cutting marginal rates can lead to higher revenues, it is believed that the competitive rate will pay for itself as more profits are declared in Scotland by companies choosing to register here. Yet by comparison, there is no intention by the SNP to cut income tax in a similar manner, denying the same tax incentive to the self-employed who account for a substantial share of Scottish economic activity.

For people who run their own businesses, the corporation tax is often of no importance, for the profits are their personal income and they will be liable for income tax on them. It is therefore important to consider what competitive advantage might attract such people to Scotland – or keep them here, as they are usually highly mobile and can do their business from anywhere with a cellphone and laptop.

The SNP clearly understands the attractions that tax competition can offer if you are providing a more competitive rate – or the dangers if you are levying a higher rate – so why limit the tax cutting initiative to only corporation tax? If Scotland is to attract entrepreneurs and wealth creators then personal taxes have to be part of the tax portfolio, including the taxes on earnings, savings and wealth.

But the SNP is conflicted, because while it can sweet-talk its business supporters with promises to keep corporation tax low, it also has to retain the support of its radicals and collectivists who wish to build a so-called fairer society based on punitive personal tax rates that redistribute income. This means that the income tax rates are not being suggested for a cut and the aspirational self-employed are being ignored.

Alex Salmond’s approach to taxation was highlighted earlier this month when he made it clear that he did not want to see personal tax rates put Scotland at a disadvantage. Asked about the possibility of reintroducing a 50p top rate of tax in Scotland to replace the 45p level set by George Osborne last year he commented “we certainly are not going to put ourselves at a tax disadvantage with the rest of the UK”.

This sensible admission put him immediately under pressure from the Scottish Labour Party which saw itself able to advocate higher personal tax rates of 50p across the UK in a way that Salmond could not do himself.

As well as undermining his credentials as a class warrior it also served to show just how much taxation policy of an independent Scotland would be owned by the UK Treasury. An SNP government has signalled that it could only raise personal tax rates if the UK did so too, while having no policy to cut tax rates itself, but it would also need to shadow a cut as well. Indeed, with the likelihood of more Conservative governments in the rest of the UK, an independent Scotland could find itself regularly having to adjust its tax rates down to remain competitive.

Going either up or down because of what the UK does is hardly independence.

Salmond has clearly identified the risk of high-earners migrating south in the event of them being taxed at higher rates here than they would experience in the rest of the UK. Such a flight of able people would reduce tax revenues and damage Scotland’s public finances, a policy that does not seem to trouble the Labour Party, for it is now being openly talked about as an option through their new proposals for further devolution.

Labour wants Holyrood to control the top rates of tax as well as the standard rate, which is fair enough, but it wants the power limited to only being able to increase the tax rates. This is absurd, for if it put the top rate up to 50p or even 55p, a future devolved Scottish Government would not be able to reduce the tax even if it found the UK government had cut its top rate to 40p and an exodus of talent to London, Manchester and Leeds had followed.

The incoherence of the SNP approach to taxation and the rabid nature of Labour’s new proposals present a weakness that Ruth Davidson should look to exploit. The Scottish Conservative leader has already said that she would seek to cut income tax in Scotland by at least a penny once the powers to vary income tax are returned to the Scottish Parliament (having been let go by first Jack McConnell and then John Swinney). Such a pledge is further than either David McLetchie or Annabel Goldie were willing to make and she deserves credit for it.

She should now look to be bolder and demand that firstly, Holyrood be given control over all personal tax rates, with the ability to vary the rates up and down. Secondly, that inheritance tax also be devolved so that she might recommend that the threshold it starts at be raised progressively to the point that it no longer makes sense to collect it in Scotland at all – when she would then abolish it.

By advocating a range of lower personal taxes that would give Scotland a competitive advantage, Ruth Davidson could show how devolution can be more radical than Alex Salmond’s supposedly independent Scotland before the referendum is held. It would galvanise the entrepreneurial class and present a positive alternative – and is that not what the unionists are needing?