TAX RISE IS A MISTAKE, BUT ALSO AN OPPORTUNITY FOR MATURE DEBATE AND FRESH IDEAS

Think tank says income tax rise may end up raising less money, but welcomes the increasing maturity of debate around tax and spend.
Reform Scotland, the independent, non-party think tank, has said that the risks of the changes to income tax introduced in the Draft Scottish Budget statement for 2018-19 today outweigh the potential for any increase in tax revenue.

The think tank has welcomed what it has described as an “increasing maturity” in the debate about public finance in Scotland but has said that because Scotland’s taxation powers are so heavily skewed towards income tax, changes in the rates and bands introduce significant risk to the Scottish Budget without the remaining “basket” of taxes to offset that risk.

Despite the devolution of income tax, which was significant and welcome, the Scottish Parliament still raises only around 40% of what it spends, and the disproportionate dependence on income tax is highlighted by the fact that it accounts for around two-thirds of all the tax raised by Holyrood.

Reform Scotland believes that the lack of balanced fiscal levers could lead to a situation where increasing income tax could actually reduce the total revenue raised because of a change in behaviour, whether through changing to dividend income; changing domicile away from Scotland; or not moving here in the first place. A fall in revenue in turn would necessitate a cut in funding for public services as well as damaging economic growth.

Commenting following the Draft Budget statement, Reform Scotland’s Chairman, Alan McFarlane said:

“We think the Scottish Government has taken an unnecessary risk today which could end up producing less revenue. However the decision is made, and we were pleased that it was preceded by good information and discussion via ‘The role of income tax in the Scottish budget’. As Reform Scotland pointed out in its recent report on economic data, there is an urgent need for more and better data on the Scottish economy and fiscal position which is essential to a grown-up discussion on tax.

“For the first time in the life of the Scottish Parliament we now have real differentiation on tax policy. It is incumbent on our political parties to continue to debate in a positive, mature and robust way, creating fresh ideas and offering the country clear positions on how they will tax and spend.

“One of our key contributions to that debate is that Finance Secretaries should be able to consider tax reform as a key lever in delivering the policy programme on which the Government was elected. In our view the present devolution settlement does not allow for these changes to take place without introducing significant risk to the overall budget.
“An over-reliance on any single tax, in this case income tax, means that the risks to any changes outweigh the potential benefits, and could result in raising less money than expected.

“For tax reform to be a meaningful option for future Scottish Governments, there is a need to return to a wider discussion about how and where taxes are raised in line with the services they are used to fund.”