Update reflects advice by the Council of Economic Advisors.
The Scottish Government’s Chief Economist has published an updated assessment, informed by advice from the Council of Economic Advisers, on the potential impact of raising the Additional Rate of Income Tax in Scotland.
The report concludes there is likely to be significant revenue and policy risk associated with any substantial divergence from the equivalent rate in the rest of the UK, such as increasing the rate from 45p to 50p for incomes above £150,000. However, it also recognises that smaller changes could alleviate the risks identified.
The Cabinet Secretary for Finance and the Constitution will outline his income tax proposals in the Draft Budget on Thursday.
Scotland’s Chief Economist Gary Gillespie said:
“Earlier this year the First Minister asked the Council of Economic Advisers to advise on the potential impact of increasing the Additional Rate of Income Tax in Scotland to 50 per cent. Specifically our advice has considered behavioural impact, and options for mitigating any such behaviour.
“The analysis shows that Additional Rate taxpayers tend to be more mobile and have more opportunities to reduce their tax bill compared to those on lower incomes. As such, an increase in the Additional Rate is likely to generate a larger behavioural response than changes to the basic or higher rates.
“However our analysis also notes that a lower increase in the additional rate could mitigate the behavioural response and provide a greater opportunity to raise revenues.
“The report concludes that there is likely to be a revenue and policy risk associated with increases to the Additional Rate that result in a substantial divergence from the rest of the UK but that smaller changes could alleviate the risks identified.”
The paper updates the analysis published by the Scottish Government in March 2016 to incorporate new research and data and has been informed by technical advice and input from the Council of Economic Advisors.
The paper is available here.
The Council of Economic Advisers was first established in 2007 to advise Ministers on how to best position Scotland amongst the world’s most competitive economies. The membership of the Council draws upon a range of knowledge and expertise and consists of leading figures from the private sector and academia, including two Nobel Laureates.