Since its inception nearly a decade ago, Reform Scotland has argued for more fiscal powers for the Scottish Parliament. We believe that those who exercise power should, as far as possible, be responsible for raising the money to pay for their decisions.
So, having spent so long arguing for more tax powers, it may seem contradictory that the ask we have of all of Scotland’s political parties is that they do not use the income tax power which has been devolved, but instead peg it to Westminster.
We do so because the devolution of non-savings and non-dividend income tax alone represents a disproportionate and blunt instrument which is incapable of creating the conditions for economic growth.
Around two-thirds of the tax raised by the Scottish Parliament now comes from this single source of income tax. Contrast that with Westminster, whose basket includes the very large elements of National Insurance, VAT and the smaller but significant Corporation Tax.
Furthermore, despite the admittedly substantial latest instalment in the devolution journey, the Scottish Parliament still only controls about 40% of what it spends.
It is simply not possible to introduce coherent tax reform which will allow any government to grow the economy, or even grow the tax take, when the levers at its disposal remain so limited.
Indeed, altering the Income Tax rate to make it different from Westminster, far from being beneficial, could be detrimental to Scotland’s economic performance.
We could yet see that outcome in microcosm from the decision not to match Westminster’s changes to tax thresholds.
The Scottish Government has itself raised these concerns.
Its own paper on Income Tax shows that, depending on the route taken, behavioural changes in response to income tax policies could actually lead to a reduction in revenue, which then necessitates a reduction in spending.
There are two very obvious levers which could balance the tax basket.
The first is VAT.
Much was made of the assignment of 50 per cent of VAT revenues to the Scottish Parliament. However, by assigning the revenue, the tax is still controlled by Westminster.
The UK Government’s rationale for this, at the time, was that “EU VAT law does not allow for differential VAT rates within a member state”.
With the UK voting to leave the EU, there is no reason why the UK Government cannot give a commitment now to devolve VAT in full once we have formally left the EU.
Secondly, there is precedent to devolve Corporation Tax within the UK, as it has been done in Northern Ireland. The circumstances of that devolution (tax competition with the Republic) are irrelevant; the only relevance is that it can happen, not why it has happened.
Income tax, business tax, sales tax. That is a basket. And a basis for coherent tax reform. Until then, no change, please.
Alison Payne is Research Director at Reform Scotland
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