The tax debate needs to move beyond the narrow confines of incremental rises and falls

Written by Mandy Rhodes on 28 March 2016 in Editor's note

If your principle is that the wealthiest in society should pay more to help government tackle inequality, then raising the 45p rate of tax is the right thing to do, regardless of its fiscal outcome

Tax is now at the very heart of May’s election with some clear blue water on policy at last being seen between the parties. Or is it?

The headline news is that for the first time some 40 per cent taxpayers in Scotland will pay more than those in England.

Two weeks ago, the Chancellor, George Osborne, announced in his budget that he will raise the threshold at which people pay the 40p tax rate to £45,000 with plans to raise that further to £50,000 over the course of this UK parliament. Effectively, a tax cut for some higher earners.


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But with income tax powers now coming to Scotland via the much fought over Vow and the newly enacted Scotland Act, for the first time the Scottish Government is able to choose a different path.

And after years of arguing that with more powers she would do things differently, be fairer, more progressive, Nicola Sturgeon last week chose to do nothing.

Or at least by choosing not to pass on Osborne’s cut, she is de facto imposing a tax rise on some Scots compared with their English counterparts, effectively allowing her to take credit for some element of squeezing the rich, although hardly enough to make their pips squeak.

So, over the five years of the next parliament, taking into account low inflation rises and Osborne’s expected threshold rises, an estimated £1.2bn will pour into the Scottish Government’s coffers – simply by doing nothing. A cash bonanza as a consequence of inertia. How thrilling.

Scottish Labour, meanwhile, who have proposed an immediate 1p tax raise across all bands, with a compensatory facility for low earners and plans to then raise the 45p tax to 50p next April when the new powers come in, have, understandably, called foul. This, they say, is the real mark of whether Sturgeon gets to call herself a socialist. And in their book, she fails.

But the reality is that while income tax has now largely been devolved, the current debate is entirely driven by political point-scoring, focused on the minutiae of whether to raise or lower thresholds or rates by small percentage points. It’s dancing around on the head of a pin. The truth is, that while the politics are obvious, the economics are less so.

Just last year Sturgeon campaigned in a UK general election for a rise in tax to 50p across the UK – a position she still holds, by the way – and given its broader tax base, that makes sense. But in a devolved Scotland, it simply does not.

Firstly, there are too few high earners in Scotland to justify the 5p increase on monetary terms alone. Secondly, it would put Scotland at an economic disadvantage to the rest of the UK if its higher tax rate was lower. That much is obvious.

But then you have to consider principle. If your principle is that the wealthiest in society should pay a bit more to help government tackle inequality then raising the 45p rate of tax is the right thing to do, regardless of its fiscal outcome.

But be honest about it. Explain your rationale and get some experts along to back you up.

Don’t say that you believe in something in principle but in practice you can’t make it work.

And especially if you are the leader of a party that argues for independence, don’t leave yourself open to accusations of hypocrisy by saying that you won’t do a thing because it could force people to run away to England. That’s just silly.

What matters is what works and the debate about income tax needs to break out of the narrow confines about incremental rises and falls and into the wider debate of how to increase Scotland’s tax base.

Increasing productivity, attracting high earners, making work pay, these are all part of the income tax equation and yet we are fixated on a penny here or five pennies there.

Ultimately, income tax is not a badly designed tax in itself. At least it is progressive in the sense that if you earn more, you pay more. The only debate to be had is about how much to tax and how much more progressive you make it.

And on the face of it, Sturgeon has taken the powers and decided to do nothing. While economists tell me that this is an entirely reasonable economic position for her to take given the tax base Scotland has to work with, it makes her look much less radical than her rhetoric. And that might not sit well with her new left-of-centre supporters.

There are some, like the left-wing French economist, Thomas Piketty, whose work, incidentally, Sturgeon has previously referred to, who would argue that while raising the highest rate of tax might not be a valuable revenue-raising tool in itself, importantly, what it does do, says Piketty, is contribute to reducing inequality by persuading high-earners not to demand higher pay awards on the basis that any change would simply get eaten up by tax.

Sturgeon won’t increase taxes now with the new powers ahead but why would she? They’re not popular, there’s an election coming and the polls are all in her favour. However, after May, if, as expected, she forms the next government and is as serious as she says she is about reducing inequality, then committing to reintroduce the 50p rate would, unquestionably, demonstrate that her criticism of the UK Government’s austerity agenda is more than just rhetoric and perhaps the politics, this time, trump the economics.

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