Analysis: Why a ‘tax divide’ is unlikely to see Scotland lose money

Despite recent Tory warnings that the Scottish Government must match English tax cuts, attempts by high-earners to pay tax south of the Border would be self-defeating

THE WARNINGS are both familiar and predictable. Should the Scottish Government use its limited powers to set income tax at too great a variance with that in England, disasters are prophesised – even if they seldom transpire.

The most recent of these came from Robert Chote, chairman of the Office for Budget Responsibility (OBR), who cautioned that higher taxes in Scotland could risk some high-earners moving their tax residency south of the Border.

Commenting in the aftermath of this week’s UK Budget, in which chancellor of the exchequer Philip Hammond announced the implementation of the Conservative pledge to raise tax thresholds a year ahead of schedule, Chote told the Commons Treasury select committee: “If you’re a relatively high-income individual with a property in Scotland and one elsewhere in the UK, writing to HMRC to say, ‘I live more than half the year in London rather than Scotland’ is not difficult.”

A few obvious objections could be raised to this analysis – most notably, high-income Scottish taxpayers with sufficient wherewithal to own multiple properties around the UK could almost certainly afford the less than £2,000 difference they would be obliged to pay under the higher rate threshold without breaking a sweat.

Nevertheless, putting aside questions of what higher earners could pay in favour of what they should pay is standard practice for politics, in which there will always be plenty of voices arguing “as little as possible”.

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Inevitably, Conservative MP for Gordon Colin Clark – possibly while licking his lips – announced this week that the OBR chairman’s evidence would “pile more pressure on Nicola Sturgeon and the SNP to pass on UK tax breaks for hard-working Scots. If that does not happen, then clearly there is a risk that people who have the option to do so may choose to pay taxes south of the Border instead.

“And if the gulf in income tax rates between England and Scotland continues, then the wider Scottish economy could be seriously hamstrung in the longer term. Ultimately, this will mean… less money to spent on vital local services.”

If Tory logic is adhered to, this leaves the Scottish Government in something of a quandry – lower taxes and you have less money to pay for local services. Raise taxes, and you provoke high-earners into rearranging their tax status into whatever suits them best, which also leaves you with less money to pay for local services. Why some people get the impression that the Tories are perhaps less committed to local services than the interests of the wealthy is a true mystery.

First Minister Nicola Sturgeon had little time for Tory warnings today (1 November) at First Minister’s Questions, arguing that the most recent UK budget delivered “tax cuts for the rich and just cuts for everybody else” and pledging that December’s Scottish budget would stand in “stark contrast” to Hammond’s policies.

Sturgeon can be forgiven for being unruffled by Tory doom-mongering, as it is hardly original; there are variations on the classic right-wing trope that higher taxes, regardless of what they are used to deliver, will inevitably backfire because they will trigger ‘capital flight’, causing the rich to flee to less demanding tax environments, where their status as ‘wealth creators’ – don’t snigger – is properly respected.

Such scenarios are popular with the American Right – which is even more fanatically opposed to taxation that their British equivalents – despite the fact they have little bearing on reality: a 2016 study from Stanford University found that flight from “millionaire taxes” in the US, with the rich moving from one state to another in order to pay less, occurs “only at the margins of significance,” and concluded that such taxes “raise a lot of revenue and have very little downside.”

Nevertheless, it is a stubborn trope, and the Scottish Government - cautious to a fault since the introduction of its fundamentally incomplete tax powers - has bowed to this argument in the past, shrinking from a potential introduction of an additional 50p rate of tax in past budgets because its civil servants warn such a move could “alter behaviour” amongst Scottish high earners.

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Potentially, the latest debate on the matter could reignite arguments over whether it should be possible for those rich enough to own multiple properties to exploit them in the manner envisaged by Chote, or even whether those who have benefited so lavishly from the Scottish economy should be permitted to abandon it without penalty.

The practical difficulties of tax migration have been often overlooked in this debate.

Firstly, as almost everyone knows, moving is not an inexpensive business, even when it involves moving a few streets away. Transferring one’s belongings, household and livelihood from Scotland to England would cost, and while high earners could almost certainly afford it, it might take some years for England’s tax regime to make the effort worth it.

Moving to England would also involve leaving behind those universal benefits which right-wingers may deride as “handouts” but which are available to all, from the richest to poorest, and save considerably money for individuals resident in Scotland, such as free prescriptions, free eye tests, free dental check-ups and the inclusion of water in council tax.

Even if one was prepared to overlook these considerations, the same money does not necessarily get you the same standard of living in England as it does in Scotland.

When tax migration is proposed, it is largely in terms of the Scottish business community, who would be unlikely to up sticks for England’s rural communities, but would instead likely to relocate to London, which is infamously costly even in comparison with Edinburgh, Scotland’s most expensive city to live. What one might pay for a spacious, multi-bedroom flat in the Scottish capital might – if you’re lucky – get you a small studio flat in the metropolis.

As the Common Weal think tank’s head of research Dr Craig Dalzell wondered, who exactly is thinking: "Let's sell up our manor house in Scotland and move into a shoebox in London to save a couple of pounds on our income tax"?

Despite it playing to fears of the Scottish Tories’ natural constituency – which is to say, the richest people in the country – their recent warnings are an odd rhetorical move for a party ostensibly committed to unionism above all else.

If being a part of the UK commits the Scottish Government to a race for the bottom, where it enjoys some tax powers but is unable to actually use them in any fashion that differs dramatically from London’s edicts, then why would Scotland want to be part of such an arrangement?

Picture courtesy of Tristan Martin

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