CommonSpace columnist Gary Elliot explores Scottish Labour’s recent 1p tax proposal and its potential consequences
LABOUR’S plan to raise the rate of income tax in Scotland raises a few interesting points – as does the reaction that has taken place since leader Kezia Dugdale’s policy announcement.
It also creates some interesting comparisons, both in relation to the previous SNP policy of ‘A Penny for Scotland’, but also against where Labour pitched itself under the leadership of Ed Miliband.
The reaction to the proposal, in my opinion, also poses some questions – and warnings – for the SNP, its members and supporters.
The SNP’s proposal in 1999 was that income tax rates would remain the same at a point in time when the UK Government had pledged a cut in the basic rate of tax of 1p. Dugdale’s plan is to increase the rate.
Firstly the comparison with the policy that the SNP held during the first Scottish parliamentary elections in 1999: christened a ‘Penny for Scotland’, there are obvious parallels that can be drawn with Dugdale’s plan.
There is, however, a crucial distinguishing feature. The SNP’s proposal in 1999 was that income tax rates would remain the same at a point in time when the UK Government, under Tony Blair with Gordon Brown as chancellor, had pledged a cut in the basic rate of tax of 1p. Dugdale’s plan is to increase the rate.
As pointed out by Wings Over Scotland, the Labour Party in 1999 savaged the SNP’s plans . In fact, many commentators at the time saw the UK Government tax cut as a deliberate trap for the SNP prior to the first Holyrood elections. The SNP took the bait.
If Labour was so keen to attack the SNP’s policy of retaining a tax rate while the rest of the UK had theirs cut, can they really be so surprised at the negative reaction to their plan to raise it?
There is another crucial point in relation to this plan that, in my opinion, requires some emphasis. There has been some debate about the extent to which this tax rise would be progressive, with Common Weal research suggesting that it marginally is.
In that Common Weal analysis , however, there was another point made and that is in relation to how the prolonged recession has affected wage rates. The ONS reported in 2014 that real wages had fallen for the longest period since 1964 while LSE research in 2015 suggested that real wages had fallen by nearly 10 per cent since 2008.
If Labour was so keen to attack the SNP’s policy of retaining a tax rate while the rest of the UK had theirs cut, can they really be so surprised at the negative reaction to their plan to raise it?
It is within this broader context that I think you have to examine any proposal for a tax increase because, let’s be frank, a tax increase, at this point in time would represent a further reduction in disposable income for most families.
At the best of times this may be a hard political sell. During an extended period of real wage contraction it suggests that Kezia Dugdale hasn’t fully considered the implications of people’s living standards over that period and what she is effectively asking of them.
The Labour Party, recently under Ed Miliband, did realise the predicament many families faced as a direct result of both wage stagnation and public sector cuts and made a specific pitch to the ‘squeezed middle’ .
By their own admission, Labour’s plan would see tax rises for 75 per cent of tax-paying Scots – by definition including Ed’s ‘squeezed middle’. It’s almost like Labour is saying: “We know you’re squeezed but can we just squeeze you that little bit more please?”
There are, I’m sure, many people of left-leaning principles who would genuinely be pleased to see a higher rate of tax. I’m sure that, among those, there were many who were less than happy about the negative reaction to Labour’s plans.
The problem Scotland faces at the moment, of course, is that we don’t have a basket of taxes to vary the way that the UK does and it is undoubtedly a flaw in the expected post-Smith settlement.
However, I think that reaction must be taken in context. After all, how many trade unionists would expect their union to argue for a pay cut? Especially after a long period of real wage cuts and especially when the hope of future real wage rises are extremely slim.
In saying that, some of the reaction rang alarm bells for me – particularly among a strain of SNP supporters whose response was: “Why should we in Scotland pay more tax than the rest of the UK?”
After all, for those who seek independence, what is it that we want: the ability to set our own tax rates, or to set a de-facto rule that the UK Government effectively sets a basic rate above which Scotland shalt not pass?
The problem Scotland faces at the moment, of course, is that we don’t have a basket of taxes to vary the way that the UK does and it is undoubtedly a flaw in the expected post-Smith settlement. It is the reality we face, though.
The other reality we face is that the current government in Westminster is made up of Tories and the next government in Westminster is very likely to be the same again. If the Tories’ deficit reduction plans bear any fruit at all then you can bet that at the first available chance their first instinct will be to seek to reduce income tax.
It may be fairly easy for the SNP to seek to hold income tax rates in Scotland against a suggested rise by a Labour Party that has virtually no hope of attaining office.
It is an entirely different proposition to have to face up to the dilemma of what to do if a Westminster Tory government cuts taxes in the rest of the UK. Would the SNP, or any other party of government in Scotland, mirror that cut or would it retain existing rates, creating the type of tax differential that some SNP members and supporters are currently decrying?
If you reduce the basic rate it is extremely difficult – electorally – to raise that rate again.
It is because of this that I think some people are being rather short sighted in their response to Labour’s proposal. It’s for this reason that I think some SNP members and supporters should maybe be a bit more circumspect in how they react to Labour’s plans.
There is another, wider point to bear in mind as well. When Labour entered government in 1997 there was a lower tax rate of 20 per cent for the first PS3,900 of taxable income with the basic rate of taxable income sitting at 24 per cent for taxable income from PS3,900 to PS25,500.
Although complicated by the introduction and then abolition of the 10p rate of tax, Labour left office having reduced the basic rate down to 20p for taxable income up to PS35,000.
Therein lies two lessons for Scotland as Holyrood gains further tax powers: firstly, if you reduce the basic rate it is extremely difficult – electorally – to raise that rate again.
Secondly, tax bands matter and Labour’s haste in an across-the-board rise – without taking into account what could be done once Scotland also gains control of tax bands – shows a real lack of both foresight and strategic thinking.
Picture courtesy of Alan Cleaver