IFS says SNP has made Scots tax system needlessly complicated

However it also said the biggest revenue raiser, income tax, had been made “unnecessarily complicated” with a five-band system that achieved “very little except as a political statement”.

Instead of income tax rates clustered at 19, 20 and 21p in the pound, it said it would be simpler and fairer to have a zero-rated band above the personal threshold and then one 21p band above that.

In an election briefing note, the IFS also accused the Scottish Government, like the one at Westminster, or failing to “grasp the nettle” and reform council tax. 

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Indeed, it said all three property levies devolved to Holyrood - council tax, business rates and the land and buildings transaction tax - were in need of “radical reform”. 

The IFS report said: “The area where the Scottish Government has most power to deliver radical reform is also arguably the worst designed part of the current tax system: property taxation.

“Despite widespread acknowledgement of the failings of the existing taxes and despite two fundamental policy reviews, the Scottish Government has shown no sign of being willing to take radical steps.”

The report coincided with the Scottish Greens proposing a new tax on millionaires with the launch of its manifesto yesterday.

The party wants a 1 per cent annual levy on all wealth and assets, including homes and pensions, above £1m which it said would “only apply to the wealthiest 10% in society”.

Co-leader Patrick Harvie said “taxing wealth properly is now more urgent than ever before”.

The Greens, who helped pass every SNP budget in the last parliament, also proposed a one-off windfall tax on “extraordinary profits” made by big companies such as supermarkets and online retailers during the pandemic.

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The SNP launches its manifesto today, and although it has already trailed a series of giveaways, it has yet to announce any tax plans.

On average, current SNP policies cost Scottish households £270 a year, or 0.8% of average income, rising to £1,940, or 2.4% of income, for the top 10% of households.

However redistribution of the extra tax means the poorest gain through benefit top-ups and a “tiny” £21 cut in income tax, with the poorest fifth £250 a year better off.

The SNP came to power in 2007 promising to scrap and replace council tax, but froze it for nine years instead when its plan failed. 

Despite repeated promises of reform, council tax only became slightly more progressive after 2017, when SNP ministers “ducked” a thorough overhaul, the IFS said.

It means the levy, as in England, is based on 30-year-old valuations, which the IFS called “inexcusable”.

The IFS also said the SNP’s changes to Scottish business rates had also brought more complexity, plus an unintended consequence.

It said the policy of lower business rates for small firms was more likely to be a “boon” to their landlords, as they would feel able to charge more rent. 

It said: “It is not clear that lower business rates will do much in the long term to reduce the overall cost of business premises to the firms occupying them, and therefore do much to make doing business in Scotland more attractive.”

And the IFS was scathing about land and buildings transaction tax (LBTT), calling it “an exceptionally damaging way to raise revenue” that ought to be replaced by fairer and reformed council tax and rates.

It said: “LBTT discourages people from downsizing, upsizing, or moving to a different location to take a job or enjoy their retirement. That misallocation of property makes everyone worse off.”

The IFS was more positive about SNP top-ups to UK benefits, which were aimed at low-income families, social housing tenants and carers.

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It said the intention behind some changes seemed “admirable”, while the greater flexibility around Scotland for universal credit payments was a “welcome improvement”, although it was not yet clear it had helped people manage their own budgets better, as intended.

However it also warned a more progressive benefit system “weakens work incentives”, as “with more generous means-tested benefits, there is more to lose by coming off them”. 

In conclusion, the IFS said: “The permanent tax and benefit policies of the Scottish Government follow a strikingly consistent pattern: both over time and relative to rest of the UK, they involve giveaways at the bottom of the distribution and tax rises at the top. 

“Changes to income tax, council tax, business rates, LBTT and social security benefits have all contributed to that pattern.

“The tax changes - particularly changes to income tax and business rates - have tended to complicate the system. 

“In contrast, the changes to the way benefits are paid - the universal credit flexibility and the planned new disability benefits - should make life easier for claimants.

“But the changes introduced by the Scottish Government largely represent tweaks to, rather than radical departures from, policy elsewhere in the UK.”

It said the caution was not necessarily a bad thing, but the Government had failed to make radical changes where they were needed most - in property taxation.

Report co-author Stuart Adam said: “Changes to the way benefits are paid should make life easier for claimants. In contrast, the tax changes have tended to complicate the system. The additional complexity in income tax is particularly unnecessary: a very similar pattern of tax payments could have been achieved without the need for separate 19%, 20% and 21% rates.”

Finance Secretary Kate Forbes said: "This report shows the positive consequences of the changes to income tax for many people in society – and is yet more proof of the SNP’s progressive approach to taxation.

“Tory cuts south of the border are hitting low-income families hard – while in Scotland we have taken positive action to protect public services, mitigate against the worst of the Tories’ cuts and properly fund our NHS and schools.

“We are committed to progressive taxation that, as is only right, ensures those who generally earn less are not asked to pay for tax breaks for the wealthiest - whilst delivering fairness for all taxpayers.

“But it is only with the full tax powers of independence that we will be able to protect public services, put money in people's pockets and secure a strong economic recovery which is in Scotland’s hands - not Boris Johnson’s.”