A hole in the plans of Scotland’s ‘tax the rich’ brigade

I went on a Scottish TV programme last night to talk about the various attempts from the various parties to come up with an income tax plan that will differentiate them from each other. It isn’t going that well.

The Tories are (perfectly sensibly) sticking with the tax structure on the go in the rest of the UK. The SNP is (oddly in my view) having a little kick at middle Scotland by refusing to pass on George Osborne’s rise in the 40% threshold to them. Labour has a plan to make everyone pay more (1p on the two lower bands and 5p extra on the additional rate band), and the Greens have gone nuts with a plan to introduce a new band that would have everyone earning not much more than £27,000 paying more tax and those on £150,000 plus being hit with a nasty 60% rate.

One of the things the “tax the rich” brigade like to say in Scotland is that not very many of the well-off will leave if their tax rates goes to 50%. That may be so. But here’s the problem. You don’t need many of them to leave to have a serious fiscal problem.

One person on £300,000 would pay a total of around £138,000 in tax (assuming no pension contributions and the like) if the top marginal rate in Scotland went to 50% – that’s £7,500 a year extra. Let’s say that was the last straw for this person and he moved – perhaps to England or perhaps to Singapore or somewhere his skills in finance, medicine or software will be highly valued and lowly taxed.

Pah you say, who cares about him? He’s only one guy. Indeed he is. But that leaves the coffers £138,000 down. You need another 18.4 people on £300,000 not to move to make up the difference (18.4 x 7,500 = 138,000). There are around 17,000 additional rate taxpayers in Scotland. Assume they all make £300,000, and it only takes 890 of them to think Northumberland (there would be only a millimetre of land between being taxed at 45% and being taxed at 50%) or Wiltshire or London or Singapore or Dubai looks nice for no extra money at all to be raised.

That’s before the rich start looking for ways to avoid the new rate. It’s also before we take into account the £40,000 of employers’ national insurance (NI) that will be lost when he goes. Take that into account and you will need 23 people to pay to replace one that doesn’t fancy it much. Look at it like that and it really doesn’t seem like a good idea to raise taxes in one borderless area inside a single nation state, does it?