Peter Jones: Smith faces some taxing questions

Lord Smith must consult experts as well as the politicians who make up his commission. Picture: PA

THIS week, the Smith Commission will take evidence on how Holyrood’s powers should be enhanced from a selection of the civic groups that made submissions to it. Good. But where is the expert external advice on what will work and what will not? So far it seems to be absent, and if that remains the case, far from solving a political problem and making Britain’s political union work better, the commission could end up creating headaches that put severe stress on the Union.

Lord Smith’s starting point was the proposals put forward by the five political parties represented in Holyrood for the Scottish parliament to have greater powers. The ten commissioners are all drawn from those five parties. That gives the commission very strong political impetus which Lord Smith, since his role is mainly to mediate, has to go with. Let’s be realistic and acknowledge that political parties exist in order to win political power and therefore to secure advantage for themselves. Power is used to reward supporters and to distribute some reward to non-supporters in the hope of securing re-election.

I’m not saying there is anything particularly wrong with that; it is just how politics works. But in the context of the issue at stake in the Smith Commission – the re-writing of Britain’s constitution to give Holyrood greater power, particularly over taxes – it is not the most sensible approach.

All the parties have accepted that the big message from the independence referendum was that a majority of Scottish voters want Holyrood to be more powerful. Despite the fact that the headline vote was to stay in the Union, ideas that would make the Union work better for both Scotland and the UK and thereby strengthen the Union seem to be taking second place.

That’s because the political parties are focused on the game of winning as much as they can in the commission’s final report so that they can say they were the crucial players in the gains made in meeting Scottish voters’ desire for a more powerful Holyrood.

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Again, I don’t object to a more muscular legislature – the imbalance between Holyood’s spending and tax-raising power needs to be addressed and dealt with by additional revenue responsibilities. But I do object to ideas that may have the unintended consequence of weakening the UK because that’s not what the majority of Scottish voters want.

This is where experts are needed. I have already written about the concept, supported by the Conservatives, the Liberal Democrats, and the SNP, that all of income tax – save for the setting of the personal income allowance, reliefs such as pension payment allowances and taxation of non-earned income – should be devolved to Scotland.

I imagine that the three supporting parties may argue that, because of these reservations to Westminster, this amounts to a sharing of income tax between the two legislatures. They may also claim that, if UK finance bills are excluded from the English votes for English laws principle supported by David Cameron, then there is no problem.

I don’t believe that for one minute. If you were an English voter would you not think that it is mightily unfair that the Scots get to vote on their own income tax rates and bands on which you have absolutely no say, and also get to vote on your income tax rates and bands?

It is the West Lothian question writ horribly large. It would draw it from the back of English minds where it lurks as a minor irritation to the front where it would become a festering sore.

This is not just my view. Angus Armstrong, director of macroeconomics at the National Institute for Economic and Social Research, in a submission to the Smith Commission, wrote that this income tax plan would “violate at least three economic principles and possibly undermine the integrity of the union”.

He said: “First, high income earners are particularly mobile and there is a risk of creating inefficient tax competition. Second, income tax has a large yield and is highly dependent on the local economy. Without the capacity to borrow this may create macroeconomic stability problems.

“An adverse shock leading to a sudden fall in taxes would require fiscal tightening perhaps leading to a deeper downturn. If higher earners migrate then this could worsen the outcome further.”

He also raises the West Lothian question, pointing out that if the answer here is to let English MPs vote on English income taxes, “because England is 84 per cent of the Union, its decisions on income tax would have a strong influence on macroeconomic policy for the whole of the UK. Since an English government may not be the same as a UK government, Scotland would have no say on what would effectively be UK-wide macroeconomic policy. Imposing a symmetric solution on an asymmetric Union would be undemocratic.”

In other words, whatever way you try to solve the unfairness problem associated with this particular income tax plan, you wind up creating another unfairness. If, for example, English MPs decided to reduce the top rates of income tax, for whatever reason, Scotland would have little choice but to follow suit, even if Holyrood unitedly opposed it. Otherwise Scotland would face the probability of high-earners moving south of the Border to pay less income tax, reducing the Scottish tax yield. Economic basics mean that Scotland’s new income tax autonomy would exist more in name than in reality.

For example. most of the high-earners are concentrated in financial services, which accounts for about 8 per cent of onshore Scottish GDP.

Could Scotland really afford an income tax differential which results in that business migrating away?

Heads England wins, tails Scotland loses.

The Smith Commission needs to discuss this with experts such as Mr Armstrong (others have submitted equally compelling arguments) before it makes its final recommendations.

Lord Smith certainly does not need serious flaws like this to remain, for they will certainly be spotted when his report gets turned into legalisation at Westminster. Anything which gets weeded out then, even if it is a big flaw, will certainly raise angry claims of a London stitch-up and sell-out. Then Scotland will be back where it started in 2011, with the drive for independence revived and kicking.

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