16 March 2016

For the SNP, taxing problems lie ahead...

In university, I had the misfortune to study the law of tax. In fairness to my teachers, they were learned, talented and clear. I didn't do badly. But the arcane, shifting, three dimensional geometry of tax law hurt my head. I had no real talent for it. At the time, jobless, incomeless, it all seemed a little arcane, gesturing towards a fantasy world of money which - as an undergraduate - seemed fantastical and remote. 

But now that I find myself holding down a job - and, ye gad - putting in tax returns - these old lessons which I neglected seem more interesting and urgent. In the House of Commons today, George Osborne presented his budget to MPs. From the headlines, it has all the hallmarks of another Tory budget chock full of unnecessary cuts to tax for folk who're already doing perfectly well, while screwing over folk with nothing. In Holyrood, in parallel, MSPs were debating the Scotland Bill, which will invest Scottish ministers with the responsibility, all too soon, with taking key decisions on taxation. Under the 2012 Calman powers, Holyrood is only entitled to set a single "Scottish rate" of income tax, which will apply across all the UK bands. 

MSPs have no control over tax allowances, or over personal allowances. This, as we've discussed before, is a famously blunt instrument. If you want to hike the tax obligations of the wealthiest in Scotland, John Swinney must also increase the bills of anyone earning more than the personal allowance. Understandably, the SNP have decided not to increase the bills of folk earning significantly less than the median, full-time salary of £27,000 per annum. Scottish Labour continues to promise a £100 workaround for the low paid via local government, but no further detail has been produced about how they would achieve this.

But in the near future, John Swinney or his successor will have the power to create a more nuanced Scottish system of income taxation. But critically, their decisions will continued to be framed in vital ways by decisions, taken by the UK treasury, over which they have no power. Scottish Finance Secretaries, with the support of the parliament, will in future be able to introduce new bands of taxation and thresholds, departing from the current UK dispensation, with its basic rate, higher rate, and additional rates of tax on income over £150,000. The economics of this are beyond my ken. But in terms of the powers themselves, Mr Swinney will have much more flexibility. 

Under the current rules, set by the UK treasury, the 40% rate kicks in £42,385. In the near future, Mr Swinney might pick a different threshold, or a different percentage. He might, for example,  introduce a basic Scottish rate of taxation, a higher Scottish rate, and an additional rate, and new, fourth, Eat the Rich rate. But the starting point for all of Mr Swinney's calculations will remain the personal allowance, which remains the UK chancellor's plaything.  Under the new Scotland Bill, George Osborne retains control over the personal allowance.

And the proverbial "direction of travel" on the personal allowance is clear - onwards and upwards, with more and more folk, and more and more income, being taken out of the income tax system altogether.  When I started studying tax law, the personal allowance was a slender £4,895 per year. Having cannibalised Liberal Democrat tax policy, the Chancellor today projected a personal allowance of £11,500 for 2017/18.

Why does this matter? Because continuing UK government control over when income taxation begins to bite means that even if John Swinney wanted to maintain the same level of tax liability in Scotland, he'd have to shift the thresholds or increase the rate of tax owed. The Smith Commission compromise - effectively - means that in order to maintain the status quo of tax in the teeth of a tax cutting UK government, Scottish ministers would be obliged - visibly obliged - to put taxes up in Scottish budgets. No harm in that, you might well think. You can't triangulate your way to social democracy. But I'm not sure this is a point everyone following Scottish politics has fully understood.

Confused? Let's try a very simple example. Imagine you are a Scottish taxpayer. Imagine also that the new Scotland Bill is now in force, and your Scottish Cabinet Secretary for Finance can decide what rates you pay, and then they bite. Say also that you earn £27,000 a year. In tax year A, you enjoy a personal allowance of £10,600, set by the Treasury. Your Scottish rate of income tax, set in Edinburgh, is 20% owed over this threshold. Your taxable income is £16,400, and you'll be handing over £3,280 to Revenue Scotland.  

But imagine that in the next year - tax year B - George Osborne decides to boost your personal allowance to £12,000. Even if John Swinney preserves the Scottish rate of income tax at the same 20% rate, your tax liability will fall significantly. Now, your taxable income will be £15,000, with reduced revenue for the Scottish exchequer of £3,000 (-£280). Small beer, you might think, but add all of these basic rate taxpayers up -- and Mr Swinney might end up with a substantial hole in his budget, as a result of the Chancellor's tax-cutting agenda.  

The key point? If you have a UK governing using the personal allowance to cut tax, then deciding to keep the Scottish and UK taxation rates at the same level is effectively a decision to cut taxes. You might pray nobody notices, and quietly give effect to it. But to paraphrase Orwell, it would be objectively pro austerity. There are good reasons not to invoke the Calman tax powers this year. But those reasons begin to evaporate very soon. This doesn't mean the Scotland Bill powers are a trap, but it does mean that Nicola Sturgeon will almost certainly find herself obliged to defend higher Scottish rates of taxation just to maintain the current tax take.

This remains one of the essential political instabilities of the United Kingdom. At least from a rhetorical point of view -- the UK and Scottish Governments have significantly different ideas about how large the state should be, and how much public money should be spent on collective projects and redistribution and responsibilities. The new Scotland Bill doesn't resolve these incoherences. Barnett leaves the two governments' spending decisions yoked together, for good or ill.

But given the ongoing direction of UK government policy expressed in today's budget, the SNP government must brace itself. With the passage of the Scotland Bill, a whole series of awkward questions arise for any Scottish Government, determined to preserve current levels of taxation, and public spending. 

And there's no triangulating your way out of that one. Very soon, the SNP will have to decide whether they are a proper social democratic party, or a nest of fearties.


  1. Or to put it another way, the Scottish Government can't be as regressive as they might want to be. They can only apply tax increases relative to the UK levels on the somewhat better off and not on the poor because the latter are protected by their UK-set tax allowances.

    Philosphically we can make a case for doing what we want, of course. But this case isn't going to be a "social democratic" one.

  2. Lallands Peat Worrier neatly illustrates the madness of devolution premised on the imperative of maintaining established structures of power, privilege and patronage.

    That the tax/benefit system should function, and be adminstered, as a coherent whole is a truth too obvious to be worth exploring. It stands to reason, therefore, that the very worst arrangement that might be envisaged is one in which the tax/benefit system is fragmented - with the devolved administration having partial and constrained control over only disparate bits of the system, while control of crucial aspects is retained by the central government.

    If one were determined to find a way of making this situation even more fraught with the potential for conflict, confusion and catastrophic failure, then one would surely choose to divide control of the tax/benefit system between two governments operating in significantly different and increasingly divergent political cultures.

    Such is the British establishment's 'solution' to the Scottish problem.

    Were one so inclined by a healthy cynicism honed over many decades of observing the British political class in action, one might fancy there was a certain maliciousness underlying the evident ineptitude of the UK Government's latest round of constitutional tinkering.