Merryn's Blog

An independent Scotland could dramatically improve on the UK's tax system

A vote for independence could give Scotland a one-off chance to implement a simple, efficient system of taxation.

In all the talk about how Scotland might or might not end the decade an independent country, all sorts of things are being just a little too fudged.

Offering any sort of idea of just what Scotland might be like as a financially independent nation is tricky given that the referendum is just that - a referendum. As Tom Miers rightly points out it is not an election. So while it is possible that the Scots will vote for independence (although the polls still tell us that they are more likely to vote for continuing union) it is also possible that in the first election after the referendum they will not vote for Alex Salmond.

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The referendum looks set to be in 2014. Salmond wants to see an independent Scottish parliament by 2016. However, the next election to the Scottish parliament is in May 2016, something that creates the possibility that Salmond might not still be the big man if his dream comes to fruition.

Still, just because he can't be sure he will get to be in charge doesn't mean he shouldn't give the important stuff some thought. So far it isn't entirely certain that he is.

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Take monetary policy. There has been some confusion about which currency Scotland might use. It has now been confirmed that it will be part of a sterling zone.

You might wonder why Salmond would want to have his country using someone else's currency, and hence their monetary policy, given how we now know that tends to end up. You aren't alone.

He says that Scotland would be able to influence the monetary policy set by the Bank of England for the benefit of England and Wales because it would have a role of some kind at the MPC. This, as the Times points out today, is a "scenario immediately dismissed by the Treasury."

But monetary policy isn't the only thing the SNP, now they come to think of it, don't really want to control. The front page of the Times today notes that they now say that, in the event of independence, the "highly integrated UK financial services market" would remain as it is ie the BoE would continue to regulate the Scottish financial industry.

That leaves, as the unionists have wasted no time in pointing out, a situation in which a foreign central bank would set Scotland's interest rates, monetary policy and financial regulation. At least now Scotland has a say over this stuff. It looks like under independence it wouldn't have a say so it'd have less control than it has now.

So what might Scotland have more of a say over as an independent state than as part of the union?

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How about tax? To a degree it is true that if Scotland plans to give up control over its monetary policy it automatically gives up control over its fiscal policy. But that doesn't mean it can't fiddle around with how it raises its revenues ie its tax policy. In fact, starting a new state will give it a one off chance to be disruptive - not just to mildly improve on the current UK tax system, but to change it dramatically into a good system.

How might it do that? ICAS has put out a good report listing all the questions Scotland might ask. But the key question in it is: should a new tax system just be there to raise the revenue required to run a country (in which case it only needs to be simple, efficient and fair) or should it be there to influence behaviour? Most countries go for the latter which is why the UK tax system is so shockingly complicated and inefficient. Wouldn't it be nice if Scotland just went for the former via a flat tax perhaps?

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