Brian Monteith: Why should John Swinney care if higher taxes ruin Scotland’s economy?

We should be thankful for there being politicians like John Swinney. By his own actions the evidence that devolution is failing the Scottish people continues to mount, building a funeral pyre for the democratic experiment.

John Swinney delivers the Scottish Budget for 2023-24 to the Scottish parliament

John Swinney would not want it any other way, he does not and never has supported devolution as a democratic ideal that should be made to work. For Swinney, demonstrating devolution can never be enough is his political mission, for the collapsing public services and economic stagnation under his watch can be used to justify it should be replaced by secession.

Step back and consider the perverse incentives at work; no matter how bad a mess Sturgeon, Swinney, Yousaf, Forbes and all the other SNP/Green ministers make of devolution they are being bailed-out by Westminster – but can and do turn round and blame UK politicians for retaining powers that could be used to improve our lives.

It is a lie, of course, for the Holyrood parliament has considerable economic and welfare powers the SNP refuses to use. These include having powers over VAT and Air Departure Tax for several years, but Forbes and now Swinney have refused to clarify if they will ever be used while welfare powers have not been taken up. Instead it’s flags that matter and Swinney et al, swaddled in our Saltire, play the victims and have convinced many voters Scotland subsidises the UK while Holyrood is powerless to act.

So it matters not to Swinney that for the short term gain of virtue signalling he can raise taxes on middle-income Scots who the STUC frame as the “wealthy” and the “rich” – only for the medium and long term damage of eroding Scotland’s tax base to be rescued by others, such as English taxpayers, in the future.

Let me just remind readers what he announced. The higher rate of income tax in Scotland rose from 41p to 42p and the top rate increased from 46p to 47p. In the rest of the UK the corresponding rates are 40p and 45p.

The direct impact of Swinney’s announcement, while ostensibly appearing modest, are in aggregate considerable and damaging.

Employees living in Scotland earning between £43,663 and £50,270 will now pay 42 per cent Income Tax, as well as 12 per cent Class 1 National Insurance, on each additional £1 they earn – delivering an effective rate of tax of 54 per cent in that range – 22 per cent more than comparative employees elsewhere in the UK. Someone living in Scotland earning £50,000 will pay £1,552.48 per year more on this level of income than someone on the same salary in other parts of the UK from April 2023.

Lowering Scotland’s top rate threshold to £125,140 (matching Jeremy Hunt’s tax grab announced last month) pulls thousands more people into the top bracket at the higher Scottish rate of 47p. Scots with earnings of £150,000 (the previous top rate starting threshold) will pay an extra £3,857.88 compared to someone earning the same amount elsewhere in the UK.

Only 362,000 Scots pay the higher rate of tax, but together with the 15,000 who pay the top rate, they account for 60 per cent of Scottish income tax receipts. Losing any has a disproportionately damaging effect.

Faced with the opportunity to make similar tax increases in the Welsh Senedd the Labour administration chose to leave the rates and bands the same as Westminster’s. Swinney could have done the same - after all, Westminster is providing him with £1.5bn additional funding through the consequential pooling of its own additional spending.

The reason he did not is purely political, it is to his political advantage for devolution to fail (as he and fellow nationalists will claim) and he desperately needs to appear on the left of Scottish Labour so his social media foot soldiers can berate Anas Sarwar’s party as Red Tories.

Swinney’s choices provoke the question of who are the wealthy, who are the rich, in today’s Scotland?

Taking account of rpi inflation the starting salary for today’s higher rate of £43,663 was equivalent to £26,400 only 12 years ago in 2010. That’s a really low salary level at which to start confiscating over half of Scots’ income. Such employees include registered nurses and physiotherapists, senior grade teachers and of course train drivers and local authority managers.

Likewise, while the £125,140 starting level of the top rate will undoubtedly sound high to most people it was equivalent to earning £75,663 in 2010. Such figures might make people comfortably off – but rich?

It's not as if John Swinney has not been warned that raising tax rates can and will lead to lower revenues. As the Scottish Government’s own Scottish Fiscal Commission has pointed out, hiking higher marginal rates of tax will raise less revenue.Previolusr tax hikes brought £200 million less than if the Scottish government had kept taxes the same as the rest of the UK.

How can this be so? Simple, higher taxes changes the behaviour of people – earning and spending differently or moving altogether.

Such trends can take a while to make an impact but they can be very serious as the damage is compounded over time and the phenomenon is real. IRS data for 2019-20 shows California, the US state with the highest income tax, lost a net 123k people to the nine states with no state income tax – that’s 46 per cent of the entire net population loss of 263k. They took with them $10bn of gross income.

Scotland faces the same fate, but John Swinney is not worried. Scotland’s ruin under devolution will be played to the SNP’s advantage.

Brian Monteith is a former member of the Scottish and European Parliaments and a senior adviser to the Tax Reform Council