How much will devolving income tax to Scotland yield?

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.

8 thoughts on “How much will devolving income tax to Scotland yield?

  1. I could not agree more. Someone used the phrase intergalactic cluster ****. Too right.
    Cross border arbitrage, dual residents, companies set up to maximise tax minimisation and all the rest.
    And what are the implications of para 95(3)? The Scottish budget should be “no larger or smallerr” as a result of the initial transfer. Does that mean extra tax in Scotland means less UK block grant?

  2. Some legislative machinery already exists through the Scotland Act to vary the rate of income tax, but it has not been used. Varying thresholds will be a bit more difficult, no doubt. Hmm. I wonder how much of the expected extra tax revenue will be eaten up in paying for the additional PAYE coding notices, etc.

    And how will they identify “receipts raised in Scotland” to divide up the VAT revenues?

  3. In the words of Homer Simpson “D’oh!”

  4. Jolyon, here’s a it the brain game for you: ask exactly again exactly the questions and the modelling you have applied to your post, buy this time vary the basic rate and the Personal Allowance and perhaps the size of the basic rate band.

    You’ll find it interesting.

  5. Doesn’t it rathet depend on what you do with the basic rate, and the band? (The personal allowance isn’t going to be devolved).

  6. Jolyon – Isn’t the problem that an issue like the 50% tax rate has more to do with politics than with yield?

    For example even if it could be demonstrated that a single low flat tax of 20% would bring in more yield, would either Labour or Conservatives impliment it?

    Labour would oppose it on principle and the Conservatives would shy away from the negative image of favouring the rich.

    I suspect the reverse applies even if the 50% rate brings in less.

  7. Yep. I think that’s absolutely right. It’s up to you and me, Andrew Carter, to try and educate the public!

  8. Could I just take over from Sisyphus? His task was easier.

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