Scotland is taxing itself to death

The authorities in Scotland are undermining the economy’s appeal. They had better watch out, says Matthew Lynn.

Heilan coo © iStockphotos
Scotland: pretty but pricey

The authorities in Scotland are undermining the economy's appeal. They had better watch out.

You will be taxed more than anywhere else for parking your car at work. You will have to pay an extra levy if you spend the day exploring a historic site. If you buy or sell a property there will be another charge, and you will owe higher income tax as well.

In the first few years after Scotland was given the power to raise its own taxes, it used it sparingly. Now, however, it is really getting into its stride. New tax rules are passed all the time. The trouble is, they only ever go into one direction upwards. And that is going to start undermining the country's competitiveness.

Scotland's latest taxes

Last week Scotland approved plans to allow local councils to levy a tax on car parking spaces at work. One or two councils in England have experimented with those, but in Scotland they may well soon be the norm. Of course you can argue the rights and wrongs on that particular idea. Maybe it will encourage more environmentally friendly ways of getting to work and back. But it will be another cost for companies and their staff.

That is just one of several new taxes. Scotland has approved plans for a tourist tax on visitors to cities. Tourist taxes are a levy on one of the world's fastest growing industries and if they reduce demand that will hurt investment and jobs. Scotland has already introduced its own version of stamp duty, the land transactions tax, which is often higher than the English version. And it has raised the top rate of income tax to 46%, 1% higher than in the rest of the UK. There is, of course, nothing wrong with regional tax rates. Lots of countries, including the US and Switzerland, have those. Regional variation allows devolved governments to decide how much they want to raise and how much they want to spend. It gives voters a say in deciding how much they want to pay. Regional tax rates can make the whole system more flexible, and allow lots of room for innovation. Done right they can be far better than centralised national tax systems.

The only way is up

There is a problem in Scotland, however. The devolved government so far only seems interested in putting taxes up. Within a country some regions can get away with imposing higher taxes than the rest of the country. The most obvious example is California. It has significantly higher taxes than many other major states. But it is also hugely wealthy, and in both technology and media is home to two of the most successful economic clusters in the world. The higher taxes don't help. But its unique ecosystem in both industries means it can prosper despite them. There is nowhere else a tech start-up or film company would rather base itself. Much the same is true of Geneva in Switzerland. Cantons such as Zug are far cheaper. But in finance Geneva has so much else going for it that the taxes are hardly crippling.

But Scotland? It is hard to argue it really falls into the same category. Sure, the Scottish economy has some strengths. In financial services both Edinburgh and Glasgow are significant hubs. It has some manufacturers, and a sprinkling of tech start-ups. The whisky industry is going to stay in Scotland whatever taxes get thrown at it. A bottle of Scotch distilled anywhere else just wouldn't be the same. But everything else is mobile. At a certain point, if it is much, much cheaper to base yourself in Liverpool or Birmingham, then both companies and people are going to make that move.

With lots of fiddly little levies, Scotland is carving out a space for itself as a high tax enclave within an only moderately successful economy. Its pitch? We are much the same as the rest of the UK except with no unique expertise, worse weather, and higher taxes. It doesn't sound like much of a pitch to multinationals, entrepreneurs or highly skilled workers. It won't happen right away. But slowly higher taxes are going to drain the life out of the Scottish economy and by the time its government notices it will be very hard to reverse that.

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