Guy Stenhouse: There’s an easy way to reduce Scottish income tax while increasing the amount of money collected
ONE of the words that you are not allowed to consider as anything other than a good thing is “Progressive”.
Progressive social policies like trans rights simply shouldn’t be questioned – you have to agree that they are a good thing or the defamation will follow. Resistance is not only futile but dangerous for those who try it.
This love of progression extends very well to taxation. Our tax policy is firmly rooted in the fact that those with higher incomes must not only pay more income tax because they pay it at the same percentage on a higher amount, but they must also pay a percentage higher.
How can you argue with that? With the broadest shoulders bearing the heaviest burden, fairness and social cohesion are all deployed as arguments in favor of progressive taxation.
The difficulty arises when a morally sound concept is taken too far.
In England, someone earning £125,000 pays fifteen times more tax than someone earning £25,000. In Scotland, the multiple is sixteen. By any judgement, this is a very gradual result indeed.
Where progression becomes dangerous is when it is pursued to such an extent that the tax base becomes too narrow. It is not good policy for a very large part of the tax collected to be paid by just a few people who are both geographically mobile and can devote time and effort, which is wasted time economic view, to try to pay less.
At the other end of the scale, too much of the population pays little or no taxes, increasingly wants to spend, and has no economic or political interest in whether that spending is efficient. Too few people pay too much tax and too many people don’t pay it, it’s a source of trouble.
In Scotland, over 40% of the population over the age of sixteen does not pay income tax. Of the 4.2 million Scots over the age of sixteen, around 10% pay tax at the top rate of 41% and well under 1% – around 30,000 people – pay the additional rate of 46%. Over 60% of all income tax in Scotland is paid by those who are top or additional rate taxpayers. The proportion of taxpayers in the rest of the UK who pay the additional rate is roughly double that of Scotland.
There are three important points the Scottish Government should take away from this analysis.
First, the position is not stable. Relying on just a few tens of thousands to pay so much of the biggest tax is bad enough. Pushing income tax rates higher, as so many in the nationalist movement would clearly like to do, is foolish and likely to lead to less rather than more revenue being collected to pay for public services while people reduce their taxable income or choose to settle elsewhere.
Secondly, there is a fantastic opportunity here for Scotland, if only we had the political courage to seize it. If Scotland is serious about increasing entrepreneurial activity, the number of businesses based here and reducing the fiscal deficit we have against the rest of the UK, there is an easy way to do this: it is to abolish top and additional tax rates of income tax. and have an income tax rate of 20%.
In the rest of the UK there are about twenty times as many additional rate payers as in Scotland due to the much larger population. If we could attract just a tenth of them here, we would triple the number of people who have incomes above £150,000. Despite the lower percentage rate, Scotland’s tax levies would increase, not decrease. The rest of the UK could not respond by doing the same because they have too much to lose and too little to gain.
Not only would Scotland raise income tax but most people who earn over £150,000 do so because they are good at skilled work, having more of these people would be a benefit to Scottish society in many ways. The Scottish Government currently has the power to do so, it cannot blame Westminster for its inaction, only itself and its own dogma.
Thirdly, we must recognize both in Scotland and in the UK as a whole that the progressive element of our income tax system is already reaching its reasonable limit. We need to look elsewhere – housing, carbon, road tolls, sugar, alcohol are examples – to raise the tax we need to fund the services we want.
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