‘There is a danger of a reputational effect on tax’
The Scottish Government has gained significant powers to control income tax revenues collected in Scotland and yesterday marked its first opportunity to use these powers. However, explaining how the Scottish Government plans to exercise these new tax powers to boost its revenues is quite a challenge.
Those most affected are people whose income this year is £43,000. This puts them at the top of the basic rate income tax band. They pay the basic rate, 20p, on all their income above the Personal Allowance, which is currently £11,000. Their total income tax bill is £6,400.
Suppose that in 2017-18 their income rises to £45,000. If they lived in England, they would still pay the basic rate on their extra £2,000 as the UK government is increasing the higher rate threshold to £45,000 next year.
In Scotland, the higher rate threshold is only being increased to £43,430. So taxpayers here will be paying at the higher rate – 40p – on all income above £43,430. This increases their tax bill by £314, compared with what it would have been had Scotland increased the higher rate threshold to £45,000.
This increase will also apply to everyone earning more than £45,000 – they will all have to pay 40p, rather than 20p, on their income between £43,430 and £45,000. Since there are 400,000 higher rate taxpayers in Scotland, the Scottish budget will be around £125 million larger than it would have been had Mr Mackay raised the threshold by the full £2000.
This is not a radical change in Scotland’s income tax. It will raise only slightly more than 1 per cent of total income tax revenue. Reaction to this change is unlikely to be dramatic. No individual’s tax bill will increase by more than 5 per cent.
This increase in income tax is unlikely to make a significant difference to the behaviour of Scottish businesses and workers in the short run. The amounts involved are too small to make, for example, emigration worthwhile. Nevertheless, there is a danger of a reputational effect: that Scotland is portrayed as a high tax jurisdiction, even though this may not be an accurate depiction of reality. l David Bell is professor of economics at Stirling University