Today new income tax bands come into effect in Scotland. The new bands, which were signed off by the Scottish Parliament in February, will compound Scotland’s image as a high tax economy. Although, the new bands mean that those on low income in Scotland will pay less income tax, which is welcome, it will also see those on medium to high income paying more.
It is a long-standing idea that lowering taxes results in higher economic growth and thus greater tax revenue. This could be because it leaves more money in people’s pockets for them to spend in the shops or encourages companies to invest. If it is true to say that lowering taxes encourages people to spend money, it can also be assumed that higher taxes force them to keep a firm grip on it and hide it away. Generally, those who pay higher taxes have more means and motivation not to pay it.
As we have seen with the free movement of capital within the European Union, companies will move their money from country to country to limit their tax bill. Multinational companies move their profits out of the UK, where corporation tax is 19%, to the Republic of Ireland where they pay 12.5%. International tax avoidance is a growing problem as a result of globalisation and is resulting in governments around the world being left out of pocket. Where multinational companies will use the rules to lower their tax bill as part of their accounting practices, individuals will do so if they believe they are being unfairly taxed and that the government is spending their money unwisely.
Devolution has now created the same problem within the UK that EU governments have experienced, but in reverse. The EU seeks economic and tax convergence to create a European super state. The UK, as a unitary state, had tax uniformity until devolution. Individuals will now be tempted to move their earnings around the UK to lower their income tax. And who can blame them! After a decade of SNP rule and 20 years of devolution, the Scottish Government is failing in just about every area. The economy is slow, education standards are dropping, there is still the age-old question of how to fix the NHS and endless independence debates. You would have to be mad to want to give the SNP more money to throw at problems of their own design.
Perhaps for the SNP this isn’t about raising more money but of diverging Scotland away from the rest of the UK. There is little evidence that increasing income tax will increase government revenue. If history is anything to go by it tells us it won’t. When the SNP replaced Stamp Duty with the Land & Buildings Transaction Tax the money brought in was considerably less than what was expected. Landlords are exiting the Buy-to-Let market because of LBTT. Bad news for the housing market and Scottish economy.
One thing is certain about the income tax rise. It sends the wrong signal to anyone who is thinking of investing in Scotland and confirms us as a high tax economy. When taxes go up they rarely come down. People will go the extra distance to keep their hard-earned money away from the SNP, and with no means to stop the flight of capital to the rest of the UK it will slip through their fingers.