The facts behind the future Scottish income tax rise
It is all but certain that the Scottish Government will shortly use its new powers to implement a Scottish income tax rise.
How they will do this has not yet been decided. Each party at Holyrood has different ideas as to what should happen. As no party holds a majority then a compromise has to be agreed upon.
The Scottish Government has recently published a paper looking at each party proposal and measuring them against some key tests.
As things stand, about 37 percent of the Scottish Government Budget, is made of taxes that the Scottish Government control.
The rest comes from a block grant from Westminster.
- Around 30% of our budget comes from income tax receipts in Scotland
- Around 7% comes from other taxes set by the Scottish Parliament including NonDomestic Rates, Scottish Landfill Tax, Air Departure Tax, Land and Buildings Transactions Tax and Aggregates Levy.
When the Scotland Act 2016 powers are fully devolved, a further 15% of our budget will
be based on VAT revenues raised in Scotland, although the rate of VAT will continue to be
set by the UK Government.
As a result, less than 40% of our spending power can be directly impacted by tax decisions made by the Scottish Government and Parliament, with income tax being by far the biggest of these.
To give an example of what this limitation means in practice, increasing income tax receipts by 5% would raise around an additional £590 million per year, which is just 1.5% of our total budget.
So, who pays tax in Scotland?
There are projected to be 4.5 million adults in Scotland in 2018-19 and 2.5 million income
taxpayers. Around 2 million adults, or 44% of the total number of adults, will not pay
income tax as they will earn less than the personal allowance.
The large majority of taxpayers, around 2.2 million individuals, will pay the Basic 20p rate of income tax. Around 346,000 individuals, or 8% of Scottish adults, also pay the Higher 40p rate, and only 20,000 taxpayers (or 0.4%) in Scotland pay the 45p rate.
Half of Scottish tax-payers earn less than £24,000 a year.
Although higher and additional rate tax-payers make up less than 10 percent of Scottish tax-payers. they pay 60 percent of Scottish income tax, which shows income tax is a progressive tax.
According to the Fraser of Allender institutes, the Scottish budget has been cut by 2.9 billion pounds in real terms in the decade leading up to 2020.
This means it is becoming increasingly harder to provide the services the public expects.
The current budget for spending controlled by the Scottish government is £39 billion.
Over the years, the Scottish Government has tried to nurture a social contract between taxpayers and the state. While the social contract has diminished in England due to cuts, in Scotland citizens still benefit from the following.
This social contract is in danger of breaking down due to continued austerity forced upon Holyrood by Westminster.
One way to ease the strain on the Scottish budget is to increase income taxes.
Each of the main political parties has a policy on income tax. The Scottish Government have come up with four rules by which they intend to measure proposed tax changes.
Any income tax changes should:
- Mitigate UK Government spending cuts and maintain and promote the level of public
services: Income tax policy should help maintain the provision of, and promote the level
of, public services which people in Scotland expect.
- Make the tax system more progressive: Any tax changes should make the tax system
more progressive and reduce inequality
- Protect lower earners: The lowest-earning taxpayers should not see their taxes increase
- Support economic growth: Income tax changes, and the accompanying change in public
spending should support the economy.
Here are the current rates and bands if no changes are made.
Here are the proposals made by each political party in the Scottish Parliament.
The Greens want to add additional bands. They want to add a lower rate for low earners and a higher rate of 60p for high earners.
Labour would increase the higher rate to 50p and increase the rate for all other bands by 1 percent.
The Scottish Liberal Democrats propose an increase of 1p on each rate of income tax and want to index the higher rate with inflation.
The SNP have committed to increasing the higher rate by no more than the rate of inflation in 2018-19
The Scottish conservatives want tax to be the same as in England which would mean a tax cut for those paying the higher rate and no change for everyone else.
The Scottish Government has analysed each proposal using the four tests set out above.
In terms of revenue.
- The Scottish Conservatives’ proposal is estimated to reduce the Scottish Budget by around £140 million (£150 million without behaviour change)
- The Scottish Greens’ proposal is estimated to increase the Scottish Budget by between £200 million and £470 million (£870 million without behaviour change)
- The Scottish Labour proposal is estimated to increase the Scottish Budget by between £550 million and £630 million (£760 million without behaviour change)
- The Scottish Liberal Democrats’ proposal is estimated to increase the Scottish Budget by between £440 million and £450 million (£500 million without behaviour change)
- The SNP proposal is estimated to increase the Scottish Budget by around £90 million (£100 million without behaviour change).
In terms of progressivity.
- The Scottish Conservatives’ proposal does not improve the progressivity of the current system. This is because it reduces the tax paid by higher rate taxpayers, the top 8% of highest earning adults in Scotland, by up to £432 while leaving taxes unchanged for those on lower incomes.
- The Scottish Greens’ proposal is progressive as tax rises are largely concentrated amongst the top earners. At the same time, taxpayers on incomes below £19,000 would pay a lower rate.
- Both the Scottish Labour and Scottish Liberal Democrats’ proposals would increase tax rates across all three income tax bands and therefore improve progressivity.
- The SNP proposal would also improve the progressivity of the tax system.
In terms of protecting Lower Earners.
- Under the Scottish Conservatives’ proposal, taxpayers earning below the median income of £24,000 in 2018-19 would not see any increases in their tax liability.
- Under the Scottish Greens’ proposal taxpayers earning below the median income in 2018-19 would not see any increases in their tax liability. Reducing the Basic Rate up to £19,000 would benefit those earning less than £26,150.
- The proposals put forward by Scottish Labour and the Scottish Liberal Democrats would increase the income tax paid by everyone earning more than the PA, compared to the current regime. As such, taxpayers earning below the median income in 2018-19 would not be protected from the tax rise. However, compared to the previous tax year 2017-18, the PA rises by £350, resulting in a tax saving of £70 for each Basic Rate taxpayer. This means that all taxpayers earning up to £18,800 would pay no more tax under these proposals than they did last year – however, they would not receive the full net benefit of the increase in the PA.
- Under the SNP proposal, taxpayers earning below the median income of £24,000 in 2018-19 would not see any changes in their tax liability.
In terms of economic growth.
- It is not possible to reach a conclusive opinion on the economic impact of any of the proposals without a fuller understanding of the spending plans that would go with the changes. It is possible, however, to make the following high-level observations. Small changes in income tax, such as those proposed by the Scottish Conservatives, would change income tax revenues by around 1% and are unlikely to have a measurable impact
on the Scottish economy. However, the Scottish Conservatives’ proposal would reduce the amount of revenue available for investment in public services and the economy.
- The Scottish Greens’ proposal would increase income tax revenues by between 2% to 4%, depending on the scale of the behavioural response. Since their proposal protects lower earners, the impact on consumer spending may be less immediate and therefore less likely to have a negative impact on growth in the short term. However, the Scottish Greens’ proposal to increase the Additional Rate to 60p could discourage high earners from moving to or remaining in Scotland given the large increase they would see in their taxes. Over time, this would have a negative impact on economic growth as individuals and companies adjust their behaviour. As with the other party proposals which also raise revenue for investment in public services and the economy, spending choices might generate economic benefits in the long term, particularly if the proposal raised revenue at the higher end of the estimated range.
- The scale of tax increases in the Scottish Labour and Scottish Liberal Democrats’ proposals is larger as these would increase income tax revenues by 4% to 5% respectively. In the short-term, these proposals could have a negative impact on growth because some of the tax rises would be borne by lower earners who are most likely to reduce consumption in response to a tax rise as they generally spend a larger proportion of their income.
However, as noted above, the increase in Government spending accompanying the tax rise could offset any fall in consumer spending in the short-term and could have a positive impact in the longer term.
- The Scottish Labour proposal would also increase the Additional Rate of income tax from 45p to 50p. As with the Scottish Greens’ proposals, this introduces a risk that some high earners change their behaviour in ways that impact on the economy. However, the scale of the tax rise high earners would face under the Scottish Labour proposals is smaller than under the Scottish Greens’ proposal, which in turn reduces the risk that high earners would change their behaviour.
- Under the Scottish Liberal Democrats’ proposal, the Additional Rate of income tax would be increased from 45p to 46p. An increase of this scale is unlikely to have a measurable impact on the economy.
- The SNP proposal would change income tax revenues by around 1% and is unlikely to have a measurable impact on the Scottish economy. However, it would raise additional revenue for investment in public services and the economy
It’s a complicated situation with each party proposal having potential benefits and drawbacks.
Personally, I like the Green plan the best. It raises a fair amount of extra income and it is the most progressive. Although, it may scare off higher earners. The Labour and Lib Dem plans are probably the most simple and do increase the budget the most. Not great for lower earners though.
At the end of the paper the Scottish Government proposed a few compromise positions that they think meet the four criteria better.
The first idea is to increase the Tax Rate by one percent for the two highest bands and leave the lower band the same.
Approach two adds an extra band and makes the rates for each band progressive.
Approach 3 is to have five bands with increasing tax rates as earnings increase.
Approach 4 is to have six bands with the rate increases with earnings.
The government estimate that out of those approaches, the third one would raise the most revenue.
And it is also progressive in that lower earners will pay less.
Approach 3 certainly seems to both be progressive and raises revenue and may well be better overall than the Green proposal as it has less chance of scaring off higher earners. If taxes do go up I’d rather they did so in a way that was progressive.
If you made it this far, let us know what you think about what should happen with taxes in Scotland.
Support us by making a donation.
Help us for free by doing your Amazon shopping through this link (bookmark it!).
Or by commenting on and sharing the blogs and joining our newsletter.