The Calman Commission's proposals to give Holyrood more powers over income tax are fundamentally flawed and likely to place the Scottish Government in "an unsupportable position", according to a study by independent economists.

Jim and Margaret Cuthbert have written an open letter to the Calman Commission outlining their fears for what they call a potential "disaster for a Scottish Government" operating under these proposals.

They say making up a shortfall in public funding by increasing income tax could result in a decline in overall economic activity, but conversely using the levers to boost the economy by cutting tax would see any benefit flow not to Holyrood coffers, but to the Treasury.

Loading article content

They state: "In other words, a devolved Scottish Government operating under the Calman income tax proposal could find itself in a deflationary trap; where it was forced, by its need to raise revenue, to increase the Scottish rate of income tax - but at the expense of deflating the Scottish economy.

"Note that an independent government, faced with an overall tax yield curve with similar characteristics, would not be in this trap. Such a government could cut its tax rate, increasing both its revenues, and overall economic activity."

The SNP said the Cuthberts had highlighted real dangers underlying the Calman proposals but Labour dismissed the contribution as "Alice in Wonderland economics".

Jim Cuthbert was chief statistician with the Scottish Office and also worked for the Treasury, while his wife Margaret was an academic. They now run their own consultancy looking in particular at public finances.

They see a second problem in the Calman proposals - that the Scottish Government would never secure the same proportion of revenues raised from each tax band, a situation which would worsen in time and be liable to extreme variations whenever Westminster introduced changes.

The effect of so-called "fiscal drag" would be for Scotland to receive a declining share of top-rate taxes and therefore of tax income as a whole. "At the very least, this would open the Scottish Government to the danger of unpredictable and unplanned changes in its tax revenues," they say.

"At its worst, this situation could be manipulated by a UK Government, if it wished to trim the resources going to the Scottish Government. Either way, the Scottish Government would be placed in an unsupportable position."

They calculate that at the new Scottish baseline 10p tax rate Holyrood would receive 50% of basic tax collected, but only one-quarter of 40% rate tax and only one-fifth of the new 50% rate tax.

The Cuthberts argue the only way to make such system work would be for the UK and devolved governments to operate "in a collegiate manner" of a more federal approach.

Pointing out how this works in the Canadian system - as highlighted by Calman's expert economic group - the Cuthberts observe: "It would be very unfortunate if the Calman Commission had been forced towards its flawed proposals on tax sharing because it was unwilling to countenance the implication that a proper system of tax sharing would inevitably involve a more federal aspect to the operation of the UK constitution."

The SNP's Linda Fabiani, a member of Holyrood's finance committee, said: "In creating this untested proposal, Calman and his commission have jumped through hoops to create a system that offers Scottish taxpayers and voters little upside and lots of downside.

"This system appears deliberately designed to catch Scottish finances in a fiscal trap. The only beneficiary appears to be the Treasury - no matter what steps a future Scottish Government would take."

A Labour aide at Westminster said: "This is Alice in Wonderland economics. It is right that if the Scottish Parliament used tax-varying powers that would have consequences for the budget of the Scottish Government - that is the point. It's barmy to argue that the Treasury should make up the shortfall."