Derek Allen: Finding ways to live off fat of the land

WITH the SNP's Scottish election victory a key priority for the re-elected First Minister will be the Scotland Bill.

The SNP has already pledged to lobby to improve and strengthen the Scotland Bill to help make the Scottish Parliament more accountable and boost Scotland's economy. The power for Scotland to set its own rate of corporation tax has already been raised by Alex Salmond as a key goal for his new administration.

The Bill provisions represent an extension of the Scottish parliament's tax powers, with the flexibility to raise or lower income tax and also to introduce new taxes. For the first time, the Scottish parliament will be accountable for how a sizeable proportion of the money raised in Scotland is spent.

Concern has been expressed about the impact that changes may have on the competitiveness of the Scottish economy in relation to other parts of the UK. But this is not a leap in the dark.

Many countries throughout the world have differential rates. America, Australia and Canada have a uniform federal rate and then differential state taxes. Large employers can operate payrolls within differential rates. The Scotland Bill proposal for a Scottish rate of tax is workable if the political will is there to impose the cost.

The UK government's estimate that it will cost 45 million to create the register of Scottish taxpayers has probably the same accuracy and credibility as the original budget to build the Holyrood Parliament.

The real question is whether it is worth doing, or just an exercise in moving the same money from one government pocket to another and charging the Scottish taxpayer for doing so.

One of the clauses in the Scotland Bill gives the power to add new devolved taxes of any description which are considered necessary. This is a very wide power, and, if enacted, the Scottish government could look to other areas to raise tax revenue.

Politicians are aware of the truism that no one likes to pay tax. Earlier this year, MSPs rejected the Scottish government's plan for a levy on large retailers.

The controversial proposal was dismissed by 68 votes to 48. Finance secretary John Swinney failed to win over the support of Labour, the Tories or the Liberal Democrats. But a new majority Scottish government might find it easier to push through fresh proposals. Let's assume ministers would seek to flex the fiscal system to enable policy outcomes.New taxes could include:

• A "fat tax" on fast food carry out establishments selling high fat foodstuffs

• A minimum price of alcohol

• A tax on plastic bags supplied by retail outlets

• Toll roads

• Congestion charges in city centres

• New environmental taxes designed to reduce pollution

Would they work? That depends. As a purist, I stick to the principle that the purpose of taxation should be to raise revenue, not to affect behaviour. But let's examine some international examples to gain an insight into the potential effects for Scotland of introducing new taxes.

Ireland introduced a tax on plastic bags to tackle litter and environmental concerns. They estimated that this caused a 90 per cent reduction in usage, but actually raised very little revenue.

If the political calculation was that litter needed to be addressed, the tax was a success, but ministers' budgets wouldn't have bulged as a consequence.

To the United States now - the fattest nation on earth. Obesity is a huge problem in the US, putting pressure on healthcare and social services budgets. Consequently, Detroit and New York have proposed taxes on junk food. It's a very difficult decision to take. Fast food is most widely eaten by the most disadvantaged in US society. It's cheap and filling. It is also not a root cause of disadvantage - education outcomes and social dysfunction are. So in policy terms, you would probably affect eating patterns but you arguably wouldn't affect social change. You'd also potentially rob individuals of a fleeting moment of McPleasure in an otherwise tough reality.

What about revenue? Well, let's say a 2 per cent tax on burgers and large doners might raise 120m in Scotland, provided it did not affect eating patterns.

But that, of course, is exactly what ministers would like to happen if such a tax was introduced.

Burgers and plastic bags are all very well, but if the point of fiscal freedom is to raise revenue, the big prize is corporation tax. The Scottish government has talked of encouraging inward investment by being able to control this rate. Looking at the UK government's projections, the yield from corporation tax is projected to increase, despite the rate falling from the current 26 per cent to 23 per cent.

Ireland has a rate of 12.5 per cent and has been successful in encouraging inward investment. Would Scotland benefit from a similar reduction to create a differential from the rest of the UK? I find that difficult to answer because the question might be simple but the behaviour could be complex.

The UK is moving towards a 23 per cent rate of corporation tax. In "big" economy terms, that is comparatively low. All of the major economies like the US (39 per cent), Germany (30 per cent) France (34 per cent), Italy (27.5 per cent) and Japan (39 per cent) have higher rates.

However, in recent years, the UK has not been doing as well as it might in attracting inward investment.This has probably got more to do with the constant change in the UK tax regime. Business likes certainty. A lack of stability and frequent fiscal tinkering adds to compliance costs. Ireland's example suggests that there are benefits to an attractive headline rate. But almost as important is that Scotland has a clear fiscal policy that is stable and that gives confidence to companies that locate here.

The Scotland Bill and Holyrood's parliamentary arithmetic combine to provide a genuine prospect of radical fiscal change - at the very least, more concentrated debate on the subject of Scottish taxation than ever before.

The wide power to introduce new taxes needs to be carefully considered. If you adopt the purist's approach that a tax exists to raise revenue as its primary aim, policy outcomes should not form any part of the decision to introduce new taxes. That naively assumes that ministers do not see fiscal powers as a way of shaping behaviour and tackling social problems. Just don't expect to raise much cash - and be prepared for unintended consequences.

New taxes will not be popular. But if the money raised enables a lower rate of income tax in Scotland, it might make it more attractive to be a registered Scottish taxpayer.

• Derek Allen is director of taxation at the Institute of Chartered Accountants of Scotland (ICAS)