The Scottish government has said that it doesn’t intend to change income tax rates for the next tax year. That came as no surprise to most people: after all, doing what the UK does has long been the SNP’s default position. However, come 2017, there will be change. Until now, the rules of devolution have meant that Scotland is obliged to move all tax bands together – so if it puts two percentage points on the 45% rate, it has to do the same on the 20% rate. This isn’t the look it is after.
The new fiscal framework will allow SNP leader Nicola Sturgeon to change all the rates as she likes. And a good many of her supporters will be expecting to see taxes on the “rich” go up – a lot. Those, as they like to say, “with the broadest shoulders” should pay more. So here’s the question: will they? The answer, I suspect, whether Sturgeon puts up tax rates or not, will be no. For why, we need only look to the Scottish government’s own work on the matter.
There are around 17,000 people in Scotland currently paying the additional rate of tax at 45%. That’s around 0.7% of the working population. Guess how much of the country’s income tax-take comes from them? The answer is 14%. Now let’s look at the 40% taxpayers. There are 372,000 of them. They make up 14.8% of the working population. They’re punching above their weight too: they pay 38% of Scotland’s income tax.
So the first point is this: this is already a stunningly progressive system. Over 50% of the income tax in Scotland is paid by a mere 15% of the population. The second point is this: the 0.7% of the population who pay the additional rate, and quite a lot of the 372,000 who pay the 40% rate, are pretty mobile. When the UK top-rate of tax moved to 50%, there was muttering about people leaving the UK. Not many did – it’s tough to uproot families and move them to other countries with different systems and different languages just to cut your tax bill (although put taxes up enough and people will do this – note the number of French people in London).
But making taxes higher in Scotland than in England is a different matter. You don’t get much more porous than the border between the two. Most people have family on the other side. We all speak the same language. Our education systems are much the same and anyone who can get a job in Edinburgh can probably get a similar one in Newcastle, Birmingham or London. He can also buy a house in Hexham and commute to Edinburgh. And if he thinks that his tax rate in Scotland will be permanently five to ten percentage points higher on one side of the border than the other, why wouldn’t he? But that’s not the only problem.
As you can see from the Scottish government’s analysis, and in particular on page 24, here, they expect that people who don’t leave will do just what they did when the 50% rate was introduced in the UK as a whole. They expect them, as they put it, to “react the most”. They will shift their income around – so that it comes in as lower-taxed dividends perhaps. And – crucially – they will work less. The more you are taxed on each marginal hour of work, the less worthwhile it is to bother doing it – and the less tax the state takes in.
For proof of how rising taxes cut the incentive to work, doubters today need only look to the NHS. Right now, managers say they are horribly worried that highly paid doctors are soon to retire early en masse, because the new pension Lifetime Allowance effectively acts as a whopping great tax rise, and they no longer feel that working is worth the bother.
I don’t often feel for Nicola Sturgeon. But I sort of do on this one. She knows that politically she has to find a way of looking like she is putting up taxes on the rich (even though they are already digging super deep). But if she does, there’s a very strong chance she’ll collect less tax than Scotland is collecting at the moment. And that won’t be a good look for her either.