Scottish income tax – so who is afraid of the bogeyman?

Of course, in this febrile political environment, it was not surprising to see this warning to the fore as the bones of the Scottish Budget were picked over.

The warning related to the Scottish Government’s decision to increase the tax burden on higher earners. The 41% higher income tax rate is to be increased to 42% from next April, with the threshold for this frozen at £43,662. And the top rate of tax is to be increased from 46% to 47%, with the threshold for this lowered (in line with the UK) from £150,000 to £125,140.

The rises in these two rates might seem like major moves in increasing further the additional amount of tax paid by many people in Scotland, relative to the population elsewhere in the UK. And it is clearly interesting from a political perspective to observe how devolved tax-varying powers are being used in this time of crisis. However, while they are not insignificant, it is important to keep the scale of last week’s tax moves in context.

The view of David Ovens, joint managing director of Archangels, was characterised by the business-angel syndicate as a comment on the impact of Mr Swinney’s Budget on “Scotland’s tech entrepreneur community”.

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Mr Ovens said: “We understand the rationale behind increasing the tax burden on higher earners in Scotland. However, the practical implications require more consideration. By creating such a large differential between Scotland and the rest of the UK, we run the risk of a brain drain.

“Scotland’s thriving tech sector employs highly skilled people and founders who are generally mobile, and such a system is likely to result in many relocating elsewhere within the UK. In recent years, Scotland has made great strides to establish a reputation for supporting and nurturing entrepreneurs. We just need to be careful that we are not creating a fiscal environment which hinders entrepreneurial activity and damages our reputation as a place to start and grow a successful business.”

The tone of Mr Ovens was considered, and it was not in any way hysterical, although he was clearly expressing a firmly held view.

Of course, comments such as those of Mr Ovens which stimulate debate are to be welcomed.

However, many might feel with good reason that the coverage of the comments of Mr Ovens in some sections of the media, although clearly not all, was somewhat overdone.

After all, the differential between the income tax burden on middle and higher earners in Scotland and those elsewhere in the UK before Mr Swinney got to his feet last week, in terms of its effect on the largest numbers of people, was far greater than the moves on this front announced in the Deputy First Minister’s Budget.

The vast bulk of the existing differential was created in past years with an increasing divergence between the thresholds at which taxpayers move to higher rate tax in Scotland and elsewhere in the UK.

Scotland’s higher rate tax threshold of £43,662 compares with one of £50,270 for other parts of the UK. And this is where the big difference in the taxation policy really lies.

This divergence has arisen over time, with the Scottish Government having not in years past followed the Conservatives’ move to hike the threshold. At some points, long before the current freezing of thresholds in Scotland and elsewhere in the UK, the amount at which people north of the Border start paying higher-rate tax was not increased in line with inflation. The Scottish Greens have at times argued vociferously against raising this threshold even in line with inflation, championing a real-terms fall, as they have appeared to mistake middle earners for higher earners.

However, putting to one side what some might have viewed as a misjudgement from the Greens or even pettiness on their part in opposing even increasing the threshold by inflation, the divergence between Scotland and the rest of the UK on income tax is not necessarily a bad thing and may well be a positive.

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It is easy to argue it is a positive from a societal perspective. Quite simply, it would seem to create a fairer society.

The Scottish Government noted in the spring that it was “taking steps to mitigate the impact of the UK Government’s bedroom tax and benefit cap as fully as we can within our limited powers”. This is to be commended.

It also highlighted its focus on tackling child poverty, and flagged its introduction of the Scottish child payment for parents and carers on low incomes who have children under 16. The rate is currently £25 per week, per child.

It is a matter of simple arithmetic that putting money in the pockets of those on the lowest incomes, who have to spend all of their money to live, will also feed through directly to boosting aggregate demand and the overall economic performance and living standards.

And other policies put in place by the Scottish Government can also be viewed as providing an important economic, as well as societal, boost.

Young people between the ages of five and 21 who live in Scotland for at least six months a year are entitled to free bus travel. Towards the upper end of this age range, this could have a significantly beneficial effect in terms of enabling people, including perhaps those who are or have been furthest from the workforce, to take on jobs. For people in part-time and relatively low-paid work, free bus travel could make a huge difference in terms of whether or not this employment stacks up economically and will in any case give under-pressure households a bit more to spend amid the cost-of-living crisis.

Free university tuition for Scottish students is another policy which looks likely to have a major beneficial effect on the economy north of the Border over the long term. Ensuring to the maximum possible extent that access to higher education is based on ability – and that the talent pool is not narrowed dramatically by those who can afford to pay dominating the places – would seem absolutely crucial to future economic success.

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And, in terms of the brain drain we are being warned about, there seems to be precious little, if any, sign of such a phenomenon.

This should not be surprising. Denmark is a fine example of a country with relatively high personal taxation, and no sign at all of any “brain drain”, and there are plenty of others. In fact, the way of life in Denmark is rightly held up as something to which people would surely wish to aspire.

Scotland’s inward investment figures would also suggest there has been anything but a brain drain in recent years.

A survey published earlier this year by accountancy firm EY showed Scotland achieved a 14% rise in the number of inward investment projects secured in 2021, to 122. This compared with a 1.8% increase for the UK as a whole.

The increase in the number of inward investment projects won by Scotland last year was the fourth consecutive annual rise.

Scotland’s share of all UK foreign direct investment projects rose last year to its highest in the past decade. The nation secured 12.3% of UK FDI projects in 2021, up from 11% in 2020.

And the EY survey revealed 15.8% of potential future investors had rated Scotland as the most attractive location in the UK for FDI. This is a record attractiveness reading for the nation, with only London scoring better on this front.

By 2021, the year to which these figures relate, Scotland had already implemented major divergence from other parts of the UK on income tax, in terms of middle and higher earners paying more.

So it would seem best to take the warning of a “brain drain” being caused by last week’s Scottish Budget measures with much more than a pinch of salt.