The issue of higher income tax for Scotland is back on the agenda as the Scottish Government reacts to the socialist instincts of its activists and tries to work out what to do about a resurgent Labour party.
This is a pity because what the Scottish Government should be focussing on is how to use more effectively the money it already has. Spending money makes you feel good but removing through taxation what people earn through hard work surely demands you spend as wisely as possible.
The real problem though, as well as history and experience showing us “tax and spend” eventually crushes the life out of an economy to the detriment of all those in it, is that the numbers just don’t add up.
The activists at the SNP conference want Nicola Sturgeon to spend more on public services but, crucially, this must be paid for not by “hard working families” but by “Them”, “the Rich” and - above all - “Other People”.
The difficulty is that these Other People already pay much more tax - a person earning £125,000 pays roughly 13 times as much income tax as a person earning £25,000. Higher income earners also tend to be highly mobile , they often already live in more than one place and could in many cases shift their residence - and tax payments - away from Scotland. There are not many Additional Rate taxpayers in Scotland anyway , less than 20,000 according to HMRC.
You might say “so what” let’s nail them anyway. This is the instinct of many but it is stupid. Let’s look at some numbers.
Let’s assume there are 20,000 Additional Rate taxpayers. We don’t know the average income of these people but we do know the number of them declines rapidly as you rise above the £150,000 Additional Rate income tax threshold. The number of people earning £250,000 will be much, much less than 20,000. A probably high assumption is that the average income above the £150,000 threshold of this group is £100,000. If you raise the top rate of tax to 50% you therefore theoretically get £100 million more each year. That sounds a lot but is actually less than £20 per head of population. The benefits bill in Scotland was £2.8 billion in 2015/16. £100 million would not make a material difference but, much worse, we would not actually get it.
If Additional Rate taxpayers move from Scotland to England we do not just lose the extra £5,000 we were trying to get from them, we lose the lot - we lose the £100,000 they were already paying in income tax, we lose their spending in Scotland, we risk the jobs, wealth and taxes their endeavours create. We lose the brightest and best and we deter others from coming here. It would take well under 1,000 of these Additional Rate taxpayers to leave for us to be worse off in the short term and much worse off in the longer term.
If we really want to become a higher tax society the truth is we are all going to have to put a hands in our pockets and pay some more. What would I do? - Reduce the point at which you pay 45% tax from £150,000 to £125,000 and when 40% tax is paid from £43,000 to £40,000 and put 1% on every rate including the Basic Rate. That way you actually raise meaningful money, the burden is spread but the well-off pay much more - and hopefully not too much damage is done.
Pinstripe is a senior member of Scotland's financial services community.
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