The Scottish Rate of Income Tax, and its discontents

02/02/2016
CommonWeal

Ben Wray, head of policy and research at Common Weal, looks at the “tricky and confused” debate over the Scottish Rate of Income Tax, and asks whether Scottish Labour’s proposals match their ambitions

HAS there ever been an election defined by such constitutional confusion in policy terms? The upcoming Scottish election is looming with the strange spectacle of different parties proposing different tax proposals based on different possible devolution outcomes.

The Scottish Tories have said they will lower tax for those in the 40p band from PS32k-150k by 10p, a stonking tax cut that could only be implemented with the new Scotland Bill powers that will allow the changing of rates between bands, rather than the same change across all bands. As the Scotland Bill is yet to be agreed between the UK and Scottish Government, it is unclear what there policy would be if talks breakdown.

Scottish Labour have proposed a 1p rise across all bands with a PS100 rebate for those earning PS20,000 or less, which would be operational within the current devolved powers passed by the Scotland Act (2012) and to be implemented for the financial year 2016-17. It’s unclear whether this is Scottish Labour’s policy for the whole of the next parliament, or if the new Scotland Bill is passed and implemented for 2017/18 and 2018/19 they would then propose a new Income Tax policy. They have previously said they would raise the 45p top rate to 50p.

The Scottish Liberal Democrats are also working within the Scotland Act framework for their proposal for a 1p across the board tax rise, while RISE is looking towards the Scotland Bill, proposing a big tax hike for the richest Scots from 45 to 60p income tax on the top rate.

The SNP has yet to state what it would do with the Scotland Bill powers, but has posited a Budget for 2016/17 that would keep income tax the same as the UK Government on the basis that the Scotland Act doesn’t allow them to change rates between bands. The Scottish Greens have yet to announce their policy but said the current Scottish Rate of Income Tax is “something of a trap” .

“So that’s two for the Scotland Bill powers, two for the Scotland Act powers and two in between. Confused yet? How do you think those that aren’t political anoraks feel.”

So that’s two for the Scotland Bill powers, two for the Scotland Act powers and two in between. Confused yet? How do you think those that aren’t political anoraks feel. Media coverage of income tax policy is routinely forgetting to mention the fact that different policies of different parties are like comparing apples and pears because they obtain to different constitutional settlements.

It makes for a good debate on an important subject tricky and confused, but one thing we can say at least is that a debate of sorts appears to be breaking out. It has not always been the case that a Scottish election has seen many parties with clearly distinctive positions, but that is what appears to be happening. For the top 10 per cent, we’ve got big tax cutters and big tax raisers (Scottish Tories v RISE), for everyone else we have small tax raisers and tax freezers (Scottish Labour and Lib Dems v SNP).

Now, lets make a start on making some sense out of it all. Scottish Labour leader Kezia Dugdale’s announcement today seems the best one to start with, as it has perhaps caused the most polarisation in debate.

Dugdale has said the policy would raise PS500m and would be enough to prevent cuts to local government and education services. She added that it was progressive as it would hit the rich more than the poor, especially after the PS100 rebate. Lets break this down.

The HMRC have estimated it would raise PS475m, and the rebate is set to cost PS50m. Stirling University economist David Eiser stated at a workshop I attended in December last year that the 1p rate across all bands would raise PS440m.

“That is a PS604m cut [to the Local Government budget], substantially more than Dugdale proposes to raise from her Income Tax policy.”

In any case, assuming HMRC figure is correct, that’s PS425m to spend to cover local government cuts and school education. Can it fill in the funding gaps?

The cuts to Local Government in 2016/17 are severe. The Scottish Parliament Information Centre explains:

“The total allocation to local government in 2016-17 will be PS10,152.3m. This is a substantial reduction on the 2015-16 allocation of PS10,756.7m – more than 7% in real terms.”

That is a PS604m cut, substantially more than Dugdale proposes to raise from her Income Tax policy. The figure cut is almost exactly equal to the amount lost each year from the Council Tax freeze, and therefore the likely approach would have been to raise the money needed to avoid cuts to local services through a change in local tax policy. The Commission for Local Tax Reform was very clear in its recommendations that the Council Tax was regressive and should be brought to end. Dugdale has chosen not to do that, and unfortunately the Income Tax policy does not make up the money.

The Education budget has seen a real terms cut of 6 per cent, approximately PS150m is needed to make up the cost. So in total Dugdale needed about PS650m to end cuts to local services and Education. Her policy doesn’t achieve that.

Now on to the second part of the policy: is it progressive? We have run the figures based on five annual incomes across the bands: PS15,500, PS20,000, PS32,000, PS60,000 and PS270,000 (the average for top rate payers).

income tax table

The results present a complex picture. The policy is progressive on the basic metric that the poorest are having their tax burden reduced and the richest having it increased. Compared to the Scottish Government’s current policy, which will see tax liabilities reduced by PS80 across all bands due to the raising of the Personal Allowance, it is progressive.

However, two things need to be pointed out here: first, for basic rate taxpayers who do not receive the rebate (PS20,001 to PS32,000) the vast majority are likely to see a small increase in the tax burden. These people could not be considered wealthy by any means, being around about the average of Scottish incomes, and have seen nearly a decade of stagnating wages while costs rise. Wages still have not returned to their pre-crisis peak.

“The reality is that while these proposals are progressive, they are only marginally so. In practise they do little to alter a tax system which does not accurately reflect the huge increase in income inequality over the past twenty years in Scotland.”

Second, the increases in income for low-paid workers are very slight. For those earning PS15,500 they’ll have an extra PS55 per year compared to the Scottish Government’s plans, and for PS20,000 just PS10 per year extra. While the wealthiest will see a bigger decline in income, in the grand scheme of things it is not very great – if you earn PS270,000 will you feel PS2590 less per year? The reality is that while these proposals are progressive, they are only marginally so. In practise they do little to alter a tax system which does not accurately reflect the huge increase in income inequality over the past twenty years in Scotland. Income Tax is likely not even to be a solution in its own right: a restructuring of control and powers in the economy, and taxes on wealth and land will also be needed to shift the pattern of monstrous inequality.

None of this is to poo-poo Scottish Labour’s proposals – they are better than a kick in the teeth, and raise substantial sums for public service. But it is to say that we need need to strive for honesty in this debate; with all the other challenges the confused constitutional situation creates we don’t need outlandish claims to go with it. These measures won’t end cuts to Local Government and Education, and are only marginally progressive. Neither will any parties proposals so far. Let the debate begin.