Scottish Government lays out income tax options ahead of budget

Parliamentary parties make the case for their preferred tax plans

THE SCOTTISH GOVERNMENT has laid out the likely options for changes to income tax in Scotland in a discussion paper published on Thursday morning.

The paper, ‘The Role of Income Tax in Scotland’s Budget’, compares the SNP’s tax proposals to those advocated by opposition parties in the Scottish Parliament, judging their potential effects through a series of tests.

“No economy will reach its full potential without a strong, fair, inclusive society.” First Minister Nicola Sturgeon

Speaking at the paper’s launch at the Royal Society of Edinburgh, First Minister Nicola Sturgeon said: “Everybody knows that a good society needs a strong economy.

“But it is equally true that no economy will reach its full potential without a strong, fair, inclusive society.

“That’s the question that should drive this debate - and unite us all - that question is that of what kind of country do we want Scotland to be. I hope this paper will help inform that debate.”

READ MORE: The Scottish Rate of Income Tax, and its discontents

In an effort to build a majority for the upcoming budget, Scottish Finance Secretary Derek Mackay will begin talks with opposition parties in an effort to find consensus.

During an argumentative discussion of the issue at First Minister’s Questions, Sturgeon noted that if every party sticks to their manifesto pledges, a budget will not be passed and urged the various parties to compromise on the matter.

The four tests set by the discussion paper are as follows:

  • Any income tax policy of the Scottish Government must “help maintain the provision of, and promote the level of, public services which people in Scotland expect.” This means it must mitigate UK Government spending cuts and the Tory policy of austerity in general.
  • Any new income tax policy must be more progressive than what came before, and have the effect of reducing inequality in Scotland.
  • Any new income tax policy must protect lower earners, with guarantees that the lowest earners will not see any increase in the amount of income tax they pay.
  • Scottish Government income tax policy should “support economic growth”

While the Scottish Greens and Scottish Liberal Democrats submitted their tax plans to these tests, the Scottish Conservatives did not respond. Scottish Labour outlined its favoured principles, but no full plan.

Based on these tests, only the Tories would fail the first and second tests. The third test would be passed by the SNP, the Tories and the Greens, but Lib Dem and Labour plans would yield mixed results.

As for the fourth test, assessing future economic growth is difficult, and the paper notes: “It is not possible to reach a conclusive opinion on the economic impact of any of the proposals without a fuller understanding of the spending plans that would go with the changes.”

READ MORE: Report: A Scottish Tax System – Imagining the Future

The Scottish Parliament gained control of income tax rates and thresholds in 2016, although its tax powers are not total. At the most recent FMQs, Sturgeon reiterated the SNP’s contention that Scotland would be better off with a wider range of tax powers, arguing that it was impossible to fully mitigate austerity with the powers it currently enjoys.

The Scottish Government has so far not altered the basic rate of tax, but has varied the threshold at which the higher 40p tax rate applies.

All parties other than the Scottish Greens agree that the current three-band system of income tax should be maintained, while the Greens propose a four-band system.

Based on tax policies laid out in their most recent manifestoes, the Scottish Conservatives’ proposals would see 14 per cent of taxpayers pay less, due to their policy of tax cuts, while Green plans would see 55 per cent of taxpayers pay less, due to their emphasis on progressive taxation.

Under Tory plans, no one would pay more tax, while Labour would see 100 per cent of taxpayers pay more, as would Lib Dem plans; the Greens would raise taxes for 45 per cent, and the SNP would raise taxes for 16 per cent, with no taxpayers paying less.

The SNP has in the past backed a 50p top rate of tax throughout the UK, but has previously rejected applying this policy in Scotland exclusively unless additional powers to combat tax avoidance were strengthened.

The SNP manifesto for the 2016 Scottish Parliament election laid out plans to freeze the basic rate of income tax for the current parliament, but the Scottish Government has reportedly conceded that this pledge may be abandoned in order to successfully pass a budget.

“The ‘four tests’ approach the government is using should ensure that the policies that come out of the process are rigorous and fair.” Common Weal head of research Dr Craig Dalzell

Responding to the release of the discussion paper, Dr Craig Dalzell, head of research at the Common Weal think tank, told CommonSpace: “I'm encouraged to see the Scottish Government taking a co-operative and rational approach to taxation in Scotland.

“That most of the parties are engaging with this process should be taken as a positive sign. The ‘four tests’ approach the government is using should ensure that the policies that come out of the process are rigorous and fair.

“However, these tests should not be used as an excuse for inaction; as a barrier to block change. Nor should it be forgotten that tax policy is about more than just revenue and can be used to reshape our society for the better too.”

“It is clear that Scotland must raise a greater level of tax in order to end austerity.” STUC General Secretary Grahame Smith

The Scottish Trade Union Congress (STUC) General Secretary Grahame Smith also commented on the Scottish Government’s tax announcement, saying: “The STUC has repeatedly highlighted the need to consider a range of tax and benefit options in Scotland that seek to positively influence behaviours and prioritises the redistribution of wealth.

“The Scottish Government’s economic tests seem positive but must be sensibly applied.

“It is clear that Scotland must raise a greater level of tax in order to end austerity, fairly pay public sector workers and properly resource our public services. When aiming to evaluate the economic impact of taxation, the economic gains that come from increased public spending and redistribution, must not be missed.

“The Scottish Government’s paper fails to consider the redistributive role that tax can play.” STUC General Secretary Grahame Smith

“The Scottish Government’s paper fails to consider the redistributive role that tax can play, by focusing narrowly on progressivity.

“We also need to ensure that any tax reform is accompanied by a commitment to fight for the retention of tax offices and protect the jobs of tax workers.  Without this tax avoidance will increase.

“The Scottish Government must focus on creating a tax system that is more redistributive which raises revenues for public spending, supports the Scottish economy and puts an end to a decade of recession and stagnation.”

“There is unfinished business with the need to reform the outdated, unfair council tax.” Scottish Green co-convener Patrick Harvie

Scottish Green co-convener Patrick Harvie, echoing his Scottish Green Party conference speech earlier this month calling on the Scottish Government to accept more extreme progressive taxation, said: “We have forced a serious examination of the principle of more, fairer rates and bands. Sticking with the system we've got is clearly now the least likely option.

“While the fundamental re-examination of the income tax system is a positive step, we should remember that's there is unfinished business with the need to reform the outdated, unfair council tax as well. Scotland has the power to start shifting the focus on tax away from income and toward wealth such as property, where there are far greater inequalities."

“The respected Fraser of Allander Institute has published a best case scenario for councils - £800 million more in cuts by 2021." Labour MSP James Kelly

Ahead of the paper’s release, Scottish Labour MSP and business manager James Kelly said: "Labour wants to see the tax powers used to end the cuts to local government, which have totalled £1.5 billion since 2011.

“The respected Fraser of Allander Institute has published a best case scenario for councils - £800 million more in cuts by 2021. The worst case is over £1 billion. That simply is not sustainable for public services.”

Speaking on behalf of the Scottish Conservatives, who argue that taxes in Scotland should be no higher than anywhere else in the UK, Scottish Tory finance spokesperson Murdo Fraser said: "Higher levels of taxation in Scotland will make it more difficult to grow the Scottish economy".

Scottish Liberal Democrat leader Willie Rennie also commented, saying: "Our plans are shown to be progressive and to have the most certainty behind them.”

Picture courtesy of the First Minister of Scotland

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