A taxing issue to grapple with

Earlier this month the Scottish Government published its discussion paper entitled ‘The Role of Income Tax in Scotland’s Budget’ to start warming the public up to the prospect of income tax rises in Scotland in the run-up to the Scottish Budget on December 14.

This Budget will follow in the footsteps of the UK Budget to be held this week.

Setting aside the political statements in the discussion paper, the document does disclose some interesting statistics relating to the Scottish adult population, the level of earnings each of us enjoys and how little effect income tax rises will have on the Scottish Budget as a whole.

In 2018-19, 30% of the Scottish Budget will come from income tax receipts in Scotland with a further 7% coming from other taxes set by the Scottish Parliament, including non-domestic rates, Scottish landfill tax, air departure tax, land and buildings transaction tax and aggregate levy.

The balance, a total of 63%, still derives from the block grant from Westminster. As a result, if the Scottish Government increases income tax receipts by 5%, the result will be to increase the amount that they can spend in the Budget by just 1.5%.

Increasing income tax receipts by 5% is a big ask, particularly when out of the total Scottish adult population of 4.57 million, almost two million do not pay any income tax at all.

Of the remainder, almost 2.2 million pay basic rate tax (20%), 346,000 pay higher rate tax (40%) with only 20,000 people paying the additional higher rate tax (45%).

With median earnings in Scotland expected to be £24,000 in 2018-19, half of Scotland’s taxpayers will earn under that amount. Taking the non-taxpayers into account, this means that more than three million Scots (approximately 70% of the adult population) earn under £24,000.

This does not give the Scottish Government much wriggle room to increase income tax receipts by 5% without seriously upsetting some groups of taxpayers.

A progressive tax system as operated in both Scotland and the UK means that those earning more pay proportionately more of their earnings in tax, with higher and additional rate taxpayers (in total 366,000 people) accounting for nearly 60% of all income tax paid in Scotland.

Those earning £24,000 pay almost 10% of their income in tax; those earning £90,000 pay 28%; and those earning £200,000 pay 38%. National Insurance is paid in addition.

The discussion paper focuses on increasing tax rates and the predicted behavioural changes expected by taxpayers should those increased rates apply. There is nothing on making the tax system simpler. Taxpayers already face a bewildering number of rates, bands, reliefs and rules. The last thing we need is more complication.

There is also mention in the paper of “fairness” – and by that the Scottish Government means earn more, pay more – but there is no examination of the unfairness of the existing system where, due to past political meddling, two people each receiving £16,000 in income can pay different amounts in tax ranging between nil and £1,000 depending on how that income is generated.

The tax system should also give an incentive to work, but introducing tax bands where a number of allowances are withdrawn at each transition point creates extreme rates of tax in the margin and thus acts as a barrier and a disincentive to taxpayers.

Government should endeavour to make tax simple, fair and transparent so that it acts as an incentive for individuals to concentrate on generating income rather than devoting time trying to avoid tax traps.

“Increasing income tax receipts by 5%isa big ask, particularly when out of the total Scottish adult population of 4.57m, almost 2m do not pay any income tax at all

The Scottish Budget will be announced next month.