This year, the Scottish government took advantage of the positive devolution of tax powers granted by Westminster. Their use of those powers has been nothing but negative.
Workers earning £26,000 and above have seen their tax burden increase. This will negatively impact the local economy as the country now has higher tax rates than the rest of the United Kingdom. This might incentivise a lot of businesses to move their registered activity outside of Scotland, ultimately reducing, not increasing, the Scottish tax revenue. This contradicts the stated intention of raising revenue.
These increases were introduced to offset the reduction of the Block Grant from the UK government in accordance with Scotland Act 2012, using the additional tax powers implemented by the Scotland Act 2016. This policy has had a substantially adverse effect on the competitive and investor-friendly image of the country. These changes alongside others regressive taxes — such as VAT, council tax, alcohol and tobacco duty, air passenger duty, etc — makes Scotland’s tax system socially unjust, unequal, and extremely uncompetitive.
What kind of a tax reform could Scotland benefit from?
The way to solve this problem is systemic tax reform. An alternative income tax system is the single tax or flat tax system. The flat tax is a system which taxes earners income at an equal rate, regardless of the income of the individual. Opinions vary on whether or not to include a non-taxable allowance. Flat tax reduces the tax burden on every person, increases the competitiveness of the nation, and stimulates the economy. This is needed especially in times of uncertainty. Ultimately, a flat tax scales back government bureaucracy, and reaffirms the idea that the individual knows how to best spend their income.
Historical reaction to Income based taxation
Historically, income tax has plagued Europe for about 200 years, with the exception of Italy, where it was implemented in 1864 but was largely not paid and so it is overlooked. Its introduction was gradually accepted throughout most major European countries to cope with shockingly expensive military campaigns. In Russia, until its eventual implementation in 1907 by Tsar Nicholas II, the state largely avoided income tax due to a consensus by experts that a detailed assessment of businesses and households was practically impossible. Income tax proposals for Russia in 1880s were defeated in Paris, when Paul Leroy-Beaulieu wrote for Économiste français that income tax would be an instrument for personal oppression and a “true fiscal Terror”.
The single rate tax was originally conceived by Robert E. Hall and Alvin Rabushka in The Flat Tax in 1985. The flat tax is not a new idea. By 2010 there were 37 countries in the world who utilise the system. By 2015 there were 44. Among these countries is Bulgaria which implemented a flat rate corporate tax of 10% in 2007, and the following year did the same with the income tax. Interestingly, it was implemented during the “Trio Coalition”, including the Bulgarian Socialist Party. The tax was even implemented without any form of tax free allowance, a.k.a. Personal Allowance in the UK. With the exception of Russia, where empirical research was used to determine the exact figure for their flat tax — 13% — and Bulgaria where 10% was found to be Laffer curve optimal, all other flat tax countries have implemented their respective rates without specific research.
How could a flat tax affect Scotland?
In The Single Income Tax: Final Report of the 2020 Tax Commission, the TaxPayers’ Alliance propose a combined marginal tax rate of 30%. It may at first look like a large number, but it also proposes abolishing many other taxes:
- Employers’ National Insurance
- Employees’ National Insurance
- Corporation Tax
- Capital Gains Tax
- Inheritance Tax
- Stamp Duty Land Tax
- Stamp Duty on Shares
- Air Passenger Duty
Under the current Scottish tax rates, a person with the average gross income for Scotland in 2016 (£22,918) is taxed the following per annum:
Scottish Income Tax and National Insurance 2018/19
- £2,193.4 in Income Tax
- £1,770.96 in Employee National Insurance
Such is the tax burden for the employee. However, there is also the Employer National Insurance, which no one should be fooled that it does not come from the employee’s wage, as that amount could have been extra salary or extra employment.
- £2,036.6 Employer National Insurance per annum
- A grand total of £6,000.96
If we apply the same Personal Allowance of £11,850 as applied in the current 2018/2019 tax regime to the TaxPayers’ Alliance’s proposal of a single 30% tax we get the following result – £3,320.4 total tax per annum, which is a significant reduction in overall tax burden. If we take a more modest income of £14,094 (based on 37.5h/week and minimum wage of £7.83) we get the following per annum:
Scottish Income Tax and National Insurance 2018/19
- £428.6 in Income Tax
- £712.8 in Employee National Insurance
- £818.9 in Employer National Insurance
- £1960.3 in Total Tax
TaxPayers’ Alliance Proposal
- £673.2 in Total Tax
In the 2020 Tax Commission report we can deduce that the tax burden can be significantly reduced while leaving everyone across the board better off. Not just the many, but the few as well. It is much better than the Scottish Government’s new tax rates. In fact research suggests that if the UK implemented flat tax nationwide, it would actually boost GDP 9.3% by 2030, while almost completely offsetting the deficit within 10 years. This would give the UK a necessary competitive advantage over the European Union, increase faith in the business environment, and improve the economic performance of the country post-Brexit.
For further analysis read the TPA report here.
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