Scottish Government urged to adopt tax band system

Creating new income tax bands may be a better way for the Scottish Government to raise its revenues than simply increasing the levy on top earners, an economics expert has suggested.

Nicola Sturgeon has already ruled increasing the highest rate of income tax. Picture: AFP

Professor David Bell cautioned against raising the top rate of income tax to 50p - as Scottish Labour proposes to fund public services - saying research indicates a previous tax hike of this scale had “no effect on revenues”.

He suggested opting for a more “Scandinavian solution”, where additional tax bands are created between the current 20p basic rate and the higher 40p rate, could generate more money for Holyrood.

He raised the possibility as he gave evidence to MSPs on the Finance Committee, warning that the economy could be “in for a difficult period where hard choices are going to have to be made” over the coming years.

Prof Bell, from Stirling University, said the “sudden and dramatic” depreciation in the value of Sterling in the wake of the Brexit vote “is likely to lead to a rapid rise in inflation”.

He continued: “This will almost certainly lead to a decline in real income since wages are unlikely to keep up with that rate of increase in prices, and that is likely to lead to a slowdown in the economy.”

While he said the UK economy is currently “performing quite well”, he added that tax revenues “are not performing as well as might be expected given the rate of growth in the economy”.

Prof Bell warned the country could be “entering a somewhat difficult and uncertain period where the sources of growth are not obvious”.

With Holyrood to be responsible for setting income tax rates and bands from April 2017, he said Scottish Government ministers would effectively control around 40% of the total tax revenue generated north of the border.

First Minister Nicola Sturgeon has already ruled out increasing the highest rate of income tax, applied only to those earning more than £150,000 a year, from 45p to 50p in 2017-18

Prof Bell said : “One has to be very careful about the use of these powers.

“Certainly one could introduce new bands and spread the costs of income tax somewhat more down the income distribution, that’s really the Scandinavian solution to having high provision of public services, it’s not that you have very high top rates, it’s more that you have more progressive rates because you introduce intermediate bands to income tax.

“It would certainly be open to the Scottish Government to introduce new bands, there’s no question it could do that and could generate additional revenues from so doing.”

Professor David Heald, an expert in public sector accounting from the University of Glasgow, told the MSPs: “I’ve long thought that the jump from 20% income tax rate to 40% income tax rate was actually too abrupt.”