A TARTAN tax ... a penalty for aspiration ... a tax on being Scottish. The Scottish Conservatives have been doing their best to arouse the wrath of middle Scotland over the fact that many of them will be paying more tax than they would if they were living in England. Now, with the Budget, they’ll be paying more earlier, since the Chancellor has accelerated the timetable for raising the threshold for higher rate tax. With all the tax changes, someone on £50,000 should find themselves paying well over £1,000 more next year in income tax than if they were in England. Serious money.
But I suspect the public response to the “tax gap” will be muted – as it was last year, when the Scottish Government put a penny on the basic and higher rates of income tax, technically in breach of an election promise. This puzzles many conservative economists who still believe income tax is the deciding factor in voter choice. It may have been in the 1990s, when Labour issued that “pledge card” in the 1997 election promising never to raise income tax rates. Full stop. No buts. Tony Blair wanted to make clear that, no matter what you earned, Labour would not increase taxes on it.
The picture is different now, partly because the proliferation of stealth taxes, many introduced by Gordon Brown. Most UK taxes are raised by manipulation of things like National Insurance, VAT, stamp duty (in England) and the like. People are consequently less focused on income tax. And anyway, there are fewer high earners in Scotland, where median earnings are half the £50,000 threshold.
This has allowed the Scottish Government to use its limited powers to increase the income tax take by inventing new bands and not increasing thresholds. It’s fiscal confusion marketing. But Nicola Sturgeon is still intensely cautious, and has not dared restore the old 50p tax band in Scotland in case there is a flight of wealthy Scots for the Border. They aren’t all businessmen either. As we learned last year, one of the largest groups liable to pay the additional rate are in the public sector, led by hospital consultants and bureaucrats.
But there are reasons why these well-remunerated souls have not skedaddled already to England, even though the wealthiest already face paying up to £1,800 more for the privilege of living here. And it isn’t just because Scotland has some of the most spectacular wild land in Europe and many recreational opportunities.
House prices in Scotland are lower than in the south of England, where most of the would-be tax escapees would have to go to find high-paid employment. A very modest terraced house in Battersea, South London, will now set you back £1.5 million. I know because I used to live in it, back in the late 1990s, when it was worth less than one-fifth of that. Moving to Scotland has generally yielded a significant cash windfall to professional relocatees.
House prices are only the start. What Alex Salmond used to call the “social wage” is actually quite well targeted at the relatively well off. They don’t have to pay £9,000 a year in university tuition fees for their teenage children, the vast majority of whom will go on to higher education. They have access, on their doorstep, to some of the best universities in the world, and living costs are lower for students.
Then there’s free personal care. This does not eliminate care home costs, of course, but it certainly helps elderly middle class people hoping to hang on to their homes and just needing some help to remain in them. Scots have also benefited over the years from not having to pay for prescriptions. The NHS is generally better here. These non-tax advantages compensate for losses on income tax, which many people hardly notice anyway.
I suspect that even if Ms Sturgeon were to restore the old 50p additional rate – which was still the SNP policy in the last UK election – most people would pay it without much complaint. Admittedly, it is difficult to predict exactly how the very wealthy behave – they’re not like us, after all. The Scottish Government’s civil servants claim that many high earners would “alter behaviour” to avoid paying an additional rate of 50p, and this doesn’t just mean by leaving the country. Some higher earners can set up companies and pay themselves in dividends, thus avoiding income tax altogether – though this is not as easy as it used to be, and isn’t available to most wealthy people in the public sector.
Moreover, the publicity associated with any further increases in income tax – as opposed to merely freezing thresholds – might discourage some high earners from coming to Scotland in the first place. That is an understandable concern.The First Minister is right to be cautious. Scotland is a small, open economy attached to a larger and richer neighbour. There is a relentless gravitational pull to the south for professionally-qualified people, and Scotland probably can’t afford to get a reputation for punitive taxation.
The reason the Scottish Government was given income tax-varying powers in the 2016 Scotland Act, but not powers over things like National Insurance and wealth taxes, was precisely to make life difficult for any high-spending Scottish government. But the Chancellor, Philip Hammond, has helped the Scottish Government in this Budget by choosing to raise income tax thresholds earlier than expected. Now, simply by doing nothing, the Scottish Government could gain many millions through our old friend fiscal drag. As inflation drives up wages, more people fall into £44k higher rate territory, and therefore more tax revenues come in.
Ms Sturgeon will need every penny of it. With Audit Scotland warning that the NHS is on its uppers, social care in chaos and with teachers demanding higher wages, the Scottish Government is under pressure as never before. The First Minister has also promised to mitigate of some welfare cuts – like the “bedroom tax” and the child benefit freeze. There will come a time when Scotland has to decide whether it wants to pay Nordic rates of tax for Nordic services. But it won’t be in December’s Scottish budget, which looks like it’s pretty well sorted.
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