“With [the] greater ability to levy tax comes a corresponding duty to do so responsibly and in a balanced way” – Nicola Sturgeon.

Yesterday, the Scottish Government released a discussion paper outlining the potential future of income tax in Scotland.

The paper was introduced by the First Minister in a press conference which can be watched below

Scotland’s Devolution Journey on income tax has been a long an winding one – one of my older blog posts chronicled it here – but until this year it has been somewhat of a theoretical one as it is only this year that divergence started to open up between Scotland and the rest of the UK.

With Austerity deepening and continuing though, the Scottish Government is now opening discussions over what the various parties in the parliament want to do about tax. It’s one thing for an opposition party to snipe from the sidelines and telling the government to “use your powers” but it’s another to come up with a coherent plan detailing what they would actually want done within the very tight limits set by those powers. This was a smart plan by the government to lay down the challenge and offer the chance for some actual consensus building over taxation.

Four Key Tests

The Scottish Government has framed the discussion paper around four “key tests” which any change in income tax must pass in order to stand a chance of gaining support from the government. These tests are as follows:

1. Increase Revenue:- The change must bring in more revenue than at present otherwise it cannot help to mitigate the UK Government’s Austerity cuts.
2. Make the tax system more progressive:- Tax Progressivity is the measure by which people on higher incomes pay more tax as a percentage of their income than people on lower incomes.
3. Protect Lower Earners:- Defined as those below the median wage of £24,000 per year. Many folk here are just barely scraping through each month so any additional tax may be difficult for them even if the overall system is considered fair.
4. Support economic growth:- The net effect of any tax change and the change in public services which come with it should improve economic growth.

The Party Proposals

Each of the parties were challenged to present their plan for income tax in Scotland. The Greens and the Liberal Democrats supplied a detailed prospectus of their tax proposals. Labour replied with an outline of their general principles but did not include detailed figures. The SNP policy is based on their proposal laid out in their 2016 Scottish election manifesto and the Conservatives didn’t reply to the call. For the purposes of the paper, the proposals laid out in the Labour and Conservative manifestos were assumed to still be party policy.

All of the parties bar the Conservatives proposed raising taxes in some form. Most of them proposed retaining the three bands over which tax is spread at the moment with only the Greens proposing an additional tax band – effectively splitting the current basic rate into two.

No surprises that the Conservative plan would see a tax cut of £400 for those earning over £45,000 per year (as they would bring Scottish rates and bands back down to the same level set by Westminster). The Greens were the only other party to offer a tax cut to anyone, though in their case it would be for those earning less than about £27,000.

The Lib Dem plan is relatively simple flat 1% increase over all bands. Labour does the same but also increases the higher rate of tax to 50% as well as freezing the higher rate threshold and the SNP don’t change the rates but do slow down the rate of increase of the higher rate threshold which results in an effective tax increase for folk with incomes above that threshold.

The Plans and the Key Tests

Test 1:- Increase Revenue

This can be tricky to measure as simply increasing tax rates may not result in additional revenue. Taxes don’t exist in a vacuum and if you tax someone’s income then they no longer have that income to buy goods and services (which may mean a drop in VAT and other tax revenues). Also, taxing people – especially on the upper end of the income scale – may mean they leave Scotland (though this also means leaving services paid for by tax like free prescriptions and education) or may mean they look to tax avoidance tricks like shifting their income into dividends.

So the tax schemes were modeled first based on them not causing any shift in behaviour and then using a model laid out in the discussion paper. The Green proposal would raise the most tax before behaviour changes but the Labour plans seem to bring in the most revenue after such changes.

The Greens, I’m sure, would be keen to note that revenue isn’t the sole function of tax and may even argue that such behavioural shifts could be a feature of the tax rather than a bug – but that’ll be for the politicians to argue and voters to decide.

The Conservative plans were found to reduce revenue with the additional spending power of those receiving a tax cut being unable to re-coup the lost direct revenue through other means.

Scores:-
Tory – Fail
Green – Pass
Labour – Pass
Lib Dem – Pass
SNP – Pass

Test 2:- Increase Progressivity/Reduce Inequality

The standard measurement for inequality in a nation is the GINI Co-efficient which is defined on a scale of 0 – where everyone has exactly the same income – to 100 – where one person has all of the nation’s income and everyone else earns nothing.

Scotland’s GINI score at the moment is 34.

The tax plans were all assessed by what impact they would have on the GINI score and, to be honest, none of them have a huge impact by themselves. There were, however, clear differences between the plans.

The Conservative plan would increase inequality in Scotland whereas the other plans would reduce it – with the Green plan having the largest impact.

Scores:-
Tory – Fail
Green – Pass
Labour – Pass
Lib Dem – Pass
SNP – Pass

Test 3:- Protect Low Earners

Here there were no clear fails of the test which says that those earning less than the median wage should not pay more than they do under the current scheme. The SNP and Conservative plans both have no impact at all on low earners so Pass the test.

Labour and the Lib Dems have a somewhat mixed result as whilst they offer a tax rise to low earners, the increase in the Personal Allowance (which is controlled from Westminster) compensates for it. People earning less than £18,800 would be better off than they are now under both of these plans although they would also have slightly lower net incomes than someone on the same salary in England.

The Green plan offers a direct tax cut to lower earners thus passes the test although the discussion paper notes that this increase in net income may have consequences for certain means-tested benefits like Universal Credit (again, controlled from Westminster)

The discussion paper does say that talks are underway with the UK government to adjust the Fiscal Framework to ensure that any increase in net income due to Scottish tax decisions doesn’t result in folk losing their reserved benefits.

Scores:-
Tory – Pass
Green – Pass
Labour – Pass
Lib Dem – Pass
SNP – Pass

Test 4 – Improve Economic Growth

The paper admits that predicting the impact on the economy from these tax changes is difficult (the cynic in me then wonders why this test is included then). Ultimately the impact will come down to how behaviours change as a result in the tax change (Will people actually move either themselves or their taxable income? Will the reduced buying power of a person taxed more highly be compensated for by the impact of the public services they pay for?).

The paper notes that the Green proposal is the one most likely to cause behavioural changes and attaches the highest margin of uncertainty on the actual revenue raised by it. It also notes that only the Green and Labour proposals are substantial enough to have any measurable impact on the economy at all (with the others changing net revenue by less than 1% up or down).

Conclusion

I’m actually glad to see this discussion take place the way it is. It’ll do all the parties good to start forming policies as if they are intended to be enacted rather than just calling for others to “do something” without specifying what, how or at what cost. Ultimately, this particular proposal to start changing income tax is likely to have only a small effect on the overall shape of the Scottish economy and budget but the attitudinal shift that Scotland CAN do something and can do something that suits Scotland rather than just constantly comparing ourselves to the rest of the UK may well be a much stronger signal than the result of any one policy. My one concern is that the “key tests” approach did immediately make me think of Gordon Brown and his “tests” to enter the Eurozone. These were set up less as a target to meet and more as a barrier to fail. It would be unfortunate if the Scottish Government used this kind of co-operative approach as a means of excusing itself to inaction.

Ultimately what Scotland does with its tax powers is something for us to discuss and decide and I’m glad we’re now able to have that discussion. I’ll throw things open to the comments and ask which of the plans above is your preferred one or what would you do instead?