Comment: Don’t count on broader shoulders to bear tax burden

The lack of clarity on spending and taxing ahead of the general election is infuriating. Picture: Getty

An across-the-board ban backed with heavy fines cannot come soon enough. But there’s one refrain that all too easily slips off the tongue of several party leaders: “Those with the broader shoulders should bear the greater burden.”

There’s a murmur of agreement. It evokes our sense of community and fair play while sticking it to the bank bonus guzzlers and the Flash Harry wealthy – them over there, different from the rest of us. Who but an ogre could not agree?

But there are two problems with this incantation. First, seldom has so much public spending been promised to voters in this election with such a massive overhang of deficit and debt and with such little clarity as to how the money will be found.

The Institute for Fiscal Studies (IFS) took the party manifestos to task last week for lack of clarity on where the spending cuts might come.

Since the 2008-09 financial crisis the national debt has doubled to 80 per cent of GDP. Under Conservative plans it would be cut to 72 per cent of GDP by 2020, but to just 77 per cent of GDP under Labour.

Labour is promising a slower rate of deficit reduction and the SNP a slower one still – but with a commitment to a 0.5 per cent a year public spending increase. That, says the IFS, threatens more austerity than Labour if the deficit is not to spiral further upward.

This leaves tax increases. But here, too, there is lack of clarity on where the rises might come. Labour, the Lib Dems and the SNP favour a UK-wide mansion tax and further imposts on bank bonuses. Both the SNP and Labour are signalling higher rates of income tax for the wealthy – those with the aforementioned “broader shoulders”.

But who are the wealthy, exactly? They may be easy to identify in the south-east of England and in London’s Belgravia especially – the ’orrible non-doms with their iceberg homes.

But in Scotland we run into a problem. And it is one that cannot be dodged because of the extra responsibility that will fall on the Holyrood parliament as a result of “more powers” and the drive towards “full fiscal responsibility”.

That, as First Minister Nicola Sturgeon warned last week, will take “a number of years”. But in the meantime there’s a deficit to be funded and promises to keep. The SNP might support Labour in introducing higher taxes across the UK on the calculation that Scotland would benefit from hitting rich English taxpayers. But this would be to increase Scotland’s fiscal reliance on UK.

New IFS analysis last week showed that Scotland’s finances would fall behind the rest of the UK’s, leading to a “fiscal gap” of  £9.7 billion by 2020. This, it says, would have to be bridged by spending cuts or a dramatic increase in taxes. Without such action Scotland’s shortfall or “fiscal gap” would rise from £7.6bn in 2015/16 to £9.7bn in 2019/20.

And there are those SNP pledges to be met – including, in addition to a 0.5 per cent annual rise in UK spending, an annual UK target of 100,000 affordable homes; an increase in minimum wage to £8.70 by 2020 and restoration of the 50p top income tax rate for those earning more than £150,000.

So will those with the “broader shoulders” – those with the gilded epaulettes and decorated shoulder boards – please take one step forward. Your country needs you – and how!

In Scotland we have 2.65 million income taxpayers, together contributing £10.9bn to government coffers. Of this total, the number paying the top 50p tax rate in 2010 comprised no less than… 14,500.

These individuals represented just 0.5 per cent of all Scottish income taxpayers (and less than 0.3 per cent of Scotland’s population). Yet they accounted for 12 per cent of total Scottish income tax receipts, implying an average tax bill of £85,000 per person (although the median tax bill for these individuals was £65,000).

The 50p rate was scrapped and the top rate is now 45 per cent. But restoring the top rate back to 50p is unlikely to result in a full pro rata gain as the arithmetic might suggest. This is because of behavioural effects – individuals re-arranging their affairs to reduce their tax liability, or by moving out.

Accountancy body ICAS calculated that “another 10 per cent on the top rate might raise about £240 million – or less than 0.4 per cent of public spending here, even assuming higher-rate taxpayers did not leave Scotland or find other ways to avoid paying more tax.

So, if there are not enough of the top rate “broad shoulders” to “bear the greater burden”, the definition of “broad shoulders” could be expanded to include those in Scotland currently paying the 40p tax rate. These number around 280,000.

Note that the proportion of additional rate earners in Scotland is almost half the proportion for the UK as a whole. If a heavier tax rate was to be imposed on those currently liable for higher rate tax without a commensurate increase in the rest of the UK there would almost certainly be a “behavioural effect”: individuals would be more tempted to take up employment offers in the rest of the UK and Scottish firms would find it difficult to tempt middle and senior management to relocate in Scotland.

And if the ranks of those “with the broader shoulders” are thus depleted, a Scottish government would then have to call upon those with shoulders rather less broad to carry the greater burden.

Be in no doubt that this is an election with potentially massive consequences – political and constitutional as well as financial. The consequences for “those with the broader shoulders” could become particularly acute if the outcome was a government reluctant to cut public spending – or indeed, committed to increasing it further, every year. One escape route would be higher borrowing. But isn’t this where we came in?

The choices now facing us are the greatest since 1945. And it is this that makes the lack of clarity on spending and taxing all the more infuriating. Glib slogans under the TV arc lights just don’t cut it. «