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

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/519223/how-can-we-raise-more-money-in-tax
Economy

What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
Visit/518715/what-are-the-biggest-mistakes-investors-make-when-it-comes-to-tax
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019
Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019

Most Popular

Visit/investments/commodities/gold/600686/gold-and-silver-bull-market-2020
Gold

Want to make money in 2020? Gold and silver are looking like a good bet

If you want to make money from investing, says Dominic Frisby, it’s simple: find a bull market and go long. And in 2020 gold and silver are in a bull …
22 Jan 2020
Visit/economy/global-economy/600711/the-charts-that-matter-coronavirus-or-a-liquidity-air-pocket
Global Economy

The charts that matter: coronavirus – or a liquidity air pocket?

With the yield curve showing worrying signs of flatlining again. John Stepek wonders what's to blame and turns to the charts that matter most to the g…
25 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600672/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
24 Jan 2020
Visit/investments/investment-strategy/600709/the-coronavirus-is-scary-but-its-irrelevant-to-your
Investment strategy

The coronavirus is scary – but it's irrelevant to your investments

The spread of the coronavirus is causing alarm around the world. And, while it could be a serious short-term threat to human health, it’s not somethin…
24 Jan 2020