It’s entirely appropriate and probably inevitable that taxation is at the heart of the debate about Scotland’s constitutional future. For tax is just very important: for generating the revenues required to fund public services, for supporting and targeting economic development and as a means towards the creation of a just Scotland where the fruits of economic growth are equitably shared by all citizens across all communities.
Sadly, the tax debate is, to put it politely, somewhat under-developed. The Scottish Government continues to promote cutting corporation tax as a key – the key? – economic development policy under independence; a blunt and expensive measure that confers no sustainable advantage. Others promote the high tax Nordic model while determinedly avoiding any detailed discussion about the nature and extent of change required to create such a tax system in the Scottish context. Many on the No side pathetically raise the spectre of tax increases – any tax increases – as a reason to maintain the constitutional status quo or limit further devolution.
It’s fair to say that Scotland’s tax system, like that of the UK which it closely mirrors, is hugely imperfect. The Council Tax is discredited and the ongoing freeze is not a serious remedy for its deficiencies. Comparatively low business taxes and marginal income tax rates on high earners have failed to generate the jobs and growth which their advocates claimed would inevitably follow. The bottom quintile of earners pay proportionately more tax than the top. Tax policy is centralised with no significant discretion left at local level.
Constitutional change does provide an opportunity to do things differently; to create a distinctive Scottish tax system that is fair, sustainable and supportive of job creation.
But first a word of caution. Pointing to the complexities, inconsistencies and occasional absurdities of the UK system, it is often argued that independence provides an opportunity to start again; the ‘blank sheet of paper’ metaphor is usually invoked. Yet it is almost inevitable that any new system would over time grow to resemble the old. The failures of the UK system are to a greater or lesser extent common to all democracies, reflecting the ebb and flow of lobbying power and political prejudice.
Considering the possibilities of constitutional change it’s also important to bear in mind that the economies and labour markets of Scotland and rUK will remain highly integrated (the extent to which any ‘border effect’ will reduce this integration over time is a highly contentious matter) and therefore some bold tax measures may be difficult to implement.
For instance, increasing the marginal rate for high earners would be a priority for the STUC; it’s a necessary though insufficient condition for both sustainable public finances and reducing inequality. However significantly increasing the top rate while the Scottish labour market remains highly integrated with rUK is bound to be problematic.
Also, the Scottish Government’s preferred currency union model would involve some sort of stability agreement that is likely to limit flexibility on fiscal issues; it’s doubtful for instance that competitive corporation tax cuts would be possible under this scenario.
Some important tax measures can be taken under the current devolution settlement or with the additional powers forthcoming in 2015. The STUC strongly supports immediate reform of the Council Tax: undertaking a revaluation of domestic properties, rebanding and changing the multiplier between bands. This addresses some of the key concerns with the Council Tax and should be relatively easy to achieve. In the longer-term the STUC is open minded about, and currently exploring, options for more radical reform with perhaps a greater role for land value and/or property taxes.
The really interesting area is how further tax powers could enhance local, regional and sectoral economic development. I’m strongly of the view that we need to start with a thorough re-examination of economic development policy and work backwards to tax measures; not the other way round.
It’s possible to be both highly sceptical about the Scottish Government’s view of tax as playing the central role in economic development and believe that the tax system could be better designed to benefit, for instance, manufacturing. The headline reductions in corporation tax introduced by the Coalition and proposed by the SNP under independence only provide a relative benefit to manufacturing over finance if not funded by reductions in allowances which disproportionately benefit manufacturers. In any case it’s doubtful whether savings on tax would be very helpful in helping Scottish firms address the productivity deficit vis a vis European competitors.
If policymakers are serious about rebalancing then targeted reductions in manufacturers’ corporate tax rate for increasing Scottish generated value added (not value generated by overseas subsidiaries or subcontractors) output is a much better policy. Other tax instruments could include an enhanced depreciation allowance or targeted national insurance relief. It is extremely disappointing that no real debate is taking place about the creative ways in which tax policy might be used to support specific policy priorities.
Of course, bold measures on tax will be politically difficult in any context. While the tax varying power available to the Parliament since its inception may be blunt and regressive, it could have been used to fund the kind of social transfers that underpin the Nordic models. That it hasn’t says an awful lot about the trepidation felt by politicians in all the main parties when it comes to raising tax.
But the evidence is clear: the association between tax progressivity and overall redistribution across countries is negative. Redistribution is primarily driven by the level of taxation, not its structure. If we want Nordic style public services then we’ll have to pay for them. There is simply no precedent for a socially just but low tax Scotland.