Mhairi Black Wrong on Labour Tax Plan
In this article in The National Mhairi Black makes three main points about Scottish Labour’s proposed 1p increase in the Scottish Rate of Income tax. The points she makes are that:
- Labour have a cheek proposing the tax because it is only necessary due to a No vote subjecting us to Tory austerity, a position that Labour actively campaigned for
- The tax is unfair as it disproportionately hits those on lower wages
- The £100 rebate that was offered was poorly devised
I agree with Mhairi on one of her points, and disagree with one, and think one is irrelevant.
First, the point I agree with. The £100 Scottish Labour rebate is a sham. As Mhairi says:
because we voted No and therefore still have incredibly limited power, the Scottish Government does not have the power to direct HMRC to pay a rebate. Therefore, Labour proposed using councils to pay a £100 rebate to income tax payers – which makes it a government “cashback deal” rather than an actual tax rebate. This then makes this “rebate” taxable income which further reduces its value (as it has to be taxed). Because welfare is not devolved either, it would also create further difficulties for those on benefits, ranging from Jobseekers Allowance to Working tax Credits, as these could all be affected by this “cashback rebate”. But how would councils know who to pay the rebate to? Either they would have to establish a new system to work out how each applicant was eligible (you would have to apply for the rebate as it would not be given automatically), or they would have to contract this work out to HMRC. It is also worth noting that contracting this work out would incur an additional cost also.
The point I disagree with is that a tax increase is the result of a No vote. Certainly there is some truth in this. A No vote has subjected us to Tory austerity against our will and the SNP have campaigned on an anti austerity banner. However, it is hard to argue that a Yes vote would not also result in tax increases. The Scottish deficit per share of GDP is currently 50% higher than that of the UK as a whole due to the fall in oil prices. On latest figures it is over £12 billion. Mhairi refers to the Labour 1p increase in tax as a Union tax. Fine, but she would need to explain exactly how we intend to clear the deficit without raising taxes and/or cutting services in an Independent Scotland. Were we not all sold on the Nordic Model? I have no doubt that this could be done progressively and slowly over time but Mhairi doesn’t even acknowledge the financial trouble we would be starting off with.
The last point she makes is factually correct however it doesn’t detract from the fact that post increase income tax would still be a progressive tax.
She gets her figures from Calum Cashley’s blog. He shows in his blog that someone earning £20,000 will pay 5% more tax while someone earning £200,000 will only pay 2.66% extra. Here are his workings.
So if you earn the £20,000 that just excludes you from Labour’s £100 giveaway (some nurses earn about this amount) the figures go like this: £11,000 tax-free so £9,000 to be taxed. At 20% tax that’s £1,800, at 21% it’s £1,890. Tax going up from £1,800 to £1,890 is a 5% rise.
A teacher on £30k –£30,000 – £11,000 = £19,000 taxable. At 20% the tax is £3,800, at 21% it’s £3,990 – a rise of £190 or 5% in tax payable
MSP on £59,089 –First £11,000 tax-free. Next £32,000 @ 20% = £6,400 and @21% = £6,720. Next £16,089 @ 40% = £6,435.60 and @ 41% = £6,596.49. Total tax for an MSP on current system adds up to£12,835.60 and under Labour’s proposal £13,316.49 – a rise of £480.89 which is 3.74653307987% – call it a 3.75% rise in tax payable.
Company director on £200,000 –First £43,000 is the same as an MSP on each tax rate; the next £118,000 @ 40% is £47,200 and @ 41% is £48,380; and the final £39,000 @ 45% is £17,550 and at 46% it’s £17,940. Total tax under the current system is £71,150 and under Labour’s new system £73,040 – a rise of £1,890 or 2.66%
Now on the face of it what he says it true, the lower earner has a higher percentage rise in tax payable. But that is only because income tax is already fairer than most other taxes. The reason that the percentage of tax payable increases less for the company director is that the company director is already paying a lot of tax at a higher rate than the lower earner. A one percent increase on 40% is proportionately lower than one percent increase on 20% percent. OK, I agree that’s not a perfect solution. But it’s not grossly unfair. The higher earner is paying well over 40% on a large chunk of their earnings whereas the lower earner is paying 21% on less than half of their earnings. The total amount of income the lower earner has to pay may have risen by 5% but its 5% of a relatively small proportion of their overall wage. The lower earner is paying an extra £7.50 a month which I don’t believe is unfair for someone on £20,000 in exchange for better public services.
To put the figures into perspective.
The person earning £20,000 has an annual tax increase of £90 whereas the company director has a tax increase of £1890. The tax increase is 0.45 percent of the lower earner’s wages but 0.95 of the higher earner’s. So the increase is nearly double as a percentage of earnings for the higher earner and over 21 times in real terms. Post increase, the lower earner is paying 9.45%of their wage on income tax, whereas the higher earner is paying 36.5% of their wage on income tax. It is hard to argue that this isn’t reasonable under the current system. Especially, as people earning under 20,000 will be getting £100 back through the ill thought out rebate.
Ideally we would be able to set income tax bands and the amounts payable in those bands so we don’t have to raise the taxes at all for lower earners. If the Scotland Bill passes this will happen. However, income tax is a fair tax compared to most other taxes like council tax and VAT, where people pay the same amount for the same thing regardless of income.
I think these issues are important as during the referendum the Yes campaign came across to many as economically illiterate. No voters are not going to change to Yes if this perception continues. We need to acknowledge the massive black hole in our finances and have a credible plan to close it, while admitting this would probably include tax rises; albeit more progressive ones. We also should credit Labour with having the bravery to suggest a tax increase just before an election which is never going to win any votes. Poorly thought out cashback scheme aside, it is a reasonable and proportionate way to begin to claw back some of our current deficit using the powers we have.
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