Today’s Smith Commission report duly contained the much foreshadowed devolution of income tax powers to Scotland. But what, in any likely world, will it mean in cash terms for Scotland?
Assume, as has been widely mooted, that the SNP carries through its intention to raise the top rate of income tax to 50%. And assume, also, that Labour remains out of power following the next General Election so that the rate of income tax in rUK remains 45%. And assume (as seems broadly reasonable) that Scotland’s share of the population of the UK (8.3%) is roughly equivalent to the share of UK income tax paid by Scottish residents.
Now, remember that HMRC calculated the yield for the UK from raising the top rate of income tax at £100m (a £3.5bn tax cut producing, after ‘behavioural effects’ a yield of some 3% of that sum). On that rough and ready calculation, we might expect Scotland to yield ~£8.3m from raising the top rate to 50%.
But bear in mind that the behavioural effects modelled by HMRC included, in particular, those who emigrate. And bear in mind, also, that emigration has a particularly powerful effect because those who emigrate to avoid a 50% rate of tax take with them not just the additional 5% but the other 45% too.
And ask yourself this: is it easier to emigrate from Scotland to, say, England than from the UK to, say, Monaco? And further, what might be the consequences for the strength of that effect of Scottish wealth being clustered near the English border?
Even before you begin contemplate that which has left the tax community in stunned silence – how on earth could you put in place legislative machinery to enable two different rates of income tax within a single country? And before you contemplate, too, the enormous additional administrative costs attached to administering two separate income tax systems (additional costs which the Smith Commission report (see paragraph 79) makes clear would be borne by Scotland). Even before you face up to those challenges, you are staring a hugely negative yield square in the face.