Scotland will be the loser in tax competition

Brian Monteith portraitThe evidence that the Scottish Government is travelling down a road to economic ruin is mounting, but we should not expect the Finance Secretary, Derek Mackay to listen and turn around.

This week the Fraser of Allander Institute published a report that gave cause for concern about affordability of current spending commitments – such as “free” student tuition fees and the likelihood of the NHS accounting for 50% of all government spending by 2021 – if tax revenues begin to fall.

It’s not the first warning. Earlier this year the Scottish Government’s Fiscal commission warned that revenues would be £220m lower than expected due to slower growth – which Mr Mackay’s shadow, Murdo Fraser, puts down in part to higher taxes.

In addition Holyrood’s non-partisan Scottish Parliament Information Centre (SPICe) provided figures about the various options available to M Mackay showing a higher rate taxpayer in Scotland could end up paying £1,343 more than someone in the rest of the UK, plus a further £365 in National Insurance. 

Other reports that suggest Scotland will tax itself into economic decline are not hard to find. The Office of Budget Responsibility warned last week that a growing tax burden for Scotland’s higher earners could lead to more people changing their tax arrangements so their contributions would go to the rest of the UK.  

This is no idle speculation, it is commonly understood that higher earners have greater ability to find entirely legal tax shelters or move their tax affairs than standard rate taxpayers. In the majority of cases that would probably mean people physically relocating out of Scotland, taking their indirect taxes with them too, together with their retail spending and the benefit of their talents.

The general argument in favour of Mr Mackay continuing with his tax threshold freeze is that it will “cost” him revenue that will lead to cuts in public expenditure. This is a sleight of hand that needs to be called out, for it presumes a straight line of receipt from taxes without taking account of people behaving differently when they might be taxed at higher or lower rates.

If a tax threshold is not increased by the rate of inflation then an individual taxpayer faces the equivalent of a tax rise. If there is any “cost” at all it is to the taxpayer of the earnings now taxed at the higher 41p rate rather than 21p if the threshold had been raised.

Any talk of a “cost” to the Scottish Government only looks at one side of the equation, for it does not consider the “cost” of lost businesses from the business decisions made by those hit by higher taxes.

Scotland has long had a problem with business start-ups, compared to the rest of the UK; the net number of start-ups created being 2.4 per 10,000 people in Scotland, compared to an average of 13.2 per 10,000 across the UK.

To heap the pressure on Derek Mackay only this week it was revealed there had been a loss of 8,830 private firms in Scotland up to the end of March, compared with the same date in 2017. The total fall of 2.5% included an even more worrying fall of 5% or 8,720 businesses not registered for VAT.

Income tax own picIf start-ups and small businesses don’t increase their turnover and begin to pay VAT, generate PAYE and NIC revenues, then Scotland’s economy could stall – with a severe effect on public revenues and the public services they fund.

The central problem with the debate in Scotland is that most political economists and Holyrood politicians come from the school of thought where what we earn is not ours’ but the state’s. 

It is all very well for those on lower earnings to say good riddance to those that choose to leave Scotland due to higher taxes (as I have witnessed many remark on social media in the last week) or to say taxes on high earners should be even greater – but when the top 10% of earners pay 27% of all direct and indirect taxes the idea that “the rich” can be taxed far more is to ignore today’s reality of easy job mobility. 

Furthermore, tax competition is only going to get worse. A number of European countries such as Portugal are offering new tax deals to attract high earners and France is soon expected to follow suit. Establish a new business in Porto or Portobello? Base a new consultancy in Montrose or Montpelier? It is not just London that entices successful Scots. 

Yet despite all of this evidence about the damage of higher taxes the First Minister and her Finance Secretary continue to talk about shameful tax cuts and the need for Scotland to have a more “progressive” approach.

There’s nothing progressive about encouraging our brightest and best to take their abilities elsewhere, but their attitude suggests we will have to endure further pain before Holyrood wakens up to the damage it is causing.

Scotland will be the loser in tax competition was originally published on Daily Business

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