Wales’ new treasury team will have major implications for business
Chairman of CBI Wales Michael Plaut on why new Welsh Government tax powers need to have the confidence of business and be used to support economic growth
“SOAK the rich won’t work in low-earning Wales” declared yesterday’s Western Mail as it informed us of a new indepth report from the Welsh Centre for Public Policy about the risks and opportunities of income tax devolution.
This is a welcome addition to the urgently needed public debate on the future shape of fiscal devolution in Wales.
For the uninformed, for the first time in over 800 years Welsh ministers and officials have been busy working to establish a Treasury and Welsh Revenue Authority.
From April the WRA has been administering Welsh stamp duty and landfill tax – and from next year the Welsh Government will have the power to set a Welsh rate of income tax.
You have to go back to 1282 and the creation of the Chamberlain of the Exchequer of North Wales to find the first time Wales went through a vaguely comparable process.
Today, we look to Whitehall but also to Revenue Scotland as examples to follow as we seek to establish Wales’ reputation as a credible and attractive tax location.
The decisions and choices made by Wales’ new Treasury team and Revenue Authority will have major implications for the perception of Wales as a place to do business.
The CBI views this process as a major opportunity for Wales to establish a strong reputation as a nation with a modern and efficient tax system while avoiding unnecessary duplication or confusion with existing HMRC processes and procedures.
The Welsh Treasury and Welsh Revenue Authority needs to build upon the existing strength of the UK’s single market – not undermine it.
Business in Wales needs to have confidence in the Welsh Government’s ability to use its new tax powers to support economic growth.
The CBI welcomes the Welsh Government setting out its tax principles. The principles of fairness, simplicity and “clear rules that minimise compliance and administration costs” and “provide stability and certainty” are ones the CBI can support.
As ever, the devil is in the delivery and the Welsh Government must continue to work hard to fulfil their pledge to “introduce legislation that reflects these principles and provides a clear and strong tax governance framework”.
However, there are some additional principles that need emphasising. The first is certainty.
When developing a tax collection and administrative regime for Wales, the most important factor is giving businesses clarity and certainty in advance to allow firms to plan and operate effectively.
A stable tax system is vital to business confidence.
The Welsh Government should avoid unnecessary changes to devolved tax policy and administration.
In bringing forward reform, the government should work with business to ensure that any changes improve the sustainability and longterm stability of the tax system.
When assessing the competitiveness of a country’s tax system, important factors include the effective tax rate, stability and advance warning of major changes.
Businesses making location decisions need stability, as long-term investments need a predictable tax system.
Unheralded shocks can have a destabilising effect that spreads beyond their intended remit, such as the windfall tax on the North Sea profits in 2011, the bank levy and U-turns on VAT.
Secondly, plan for unintended consequences. Where tax revenues are small or borders are permeable, the administrative cost and behavioural response of managing a devolved tax may offset to a large degree the benefits identified by officials.
Where this is a large revenue potential – as with income tax increases – the sheer complexity of having a different tax rate to England should not be overlooked.
The Scottish Fiscal Commission, for example, in a recent report identified the behavioural responses of a different Scottish income tax rate. The result?
That growth in tax revenues would be likely wiped out by the highestearners taking action to reduce their liabilities through legal tax avoidance schemes or relocation out of Scotland.
Wales needs to learn lessons from the reality of behavioural responses to tax changes.
Finally, improve economic analysis capacity and capability. At a UK level, more needs to be done to strengthen HM Treasury and HMRC’s tax economics expertise and increase the use of dynamic effects of tax rates on tax revenues.
Similar improvements to data collection and analysis are also important for the effective implementation and administration of devolved Welsh taxes.
“Full dynamic tax analysis” – which forecasts the effects of businesses’ reactions to incentives created by policy – strengthens the evidence base in supporting a move towards a more economically efficient tax system.
When comprehensive dynamic analysis has taken place, for example with HMRC’s 2012 analysis of the top rate of personal income tax, the analysis highlighted the mistaken assumption that higher tax rates automatically raise significantly more revenue.
Full dynamic analysis needs to be introduced for all major tax changes in Wales to ensure we are making an accurate trade-off between the need to maintain tax revenue and the potential cost in economic activity foregone as a result of differential tax rates.
We need to actively consider if lowering the tax rates, for example, would attract more people to Wales and increase long-term revenues.
If we have accurate data and behavioural analysis, we can make informed decisions and not assume higher tax rates mean higher tax revenues.
It is now vital the Welsh Government continues to be open about the decisions it makes in the months and years ahead.
The government needs to provide comprehensive information to support the decisions it makes, along with an appropriate cost benefit analysis.
Businesses play a key role both in collecting taxes paid by other taxpayers and also in delivering the economic growth and wealth that indirectly leads to higher tax revenues from consumers and larger incomes for pensioners.
The CBI is keen to play its part in helping the Welsh Government make the right choices for the longterm prosperity of Wales.