The role of income tax in Scotland's budget
A discussion paper that aims to provide useful background to help inform the debate on future use of the income tax powers devolved to the Scottish Parliament.
6 Comparing the parties’ proposals against the policy tests
We now comment on how the parties’ proposals perform against the tests set out in Chapter 4.
Any income tax changes in 2018-19 should provide an increase in funding to mitigate the additional cuts we face next year. In 2018-19, the income tax policies outlined in Chapter 5 are estimated to raise the following amounts after behaviour is accounted for:
- The Scottish Conservatives’ proposal is estimated to reduce the Scottish Budget by around £140 million (£150 million without behaviour change)
- The Scottish Greens’ proposal is estimated to increase the Scottish Budget by between £200 million and £470 million (£870 million without behaviour change)
- The Scottish Labour proposal is estimated to increase the Scottish Budget by between £550 million and £630 million (£760 million without behaviour change)
- The Scottish Liberal Democrats’ proposal is estimated to increase the Scottish Budget by between £440 million and £450 million (£500 million without behaviour change)
- The SNP proposal is estimated to increase the Scottish Budget by around £90 million (£100 million without behaviour change).
Chapter 5 presented the relative progressivity of each of the proposals by showing who pays more or less tax.
The Scottish Conservatives’ proposal does not improve the progressivity of the current system. This is because it reduces the tax paid by higher rate taxpayers, the top 8% of highest earning adults in Scotland, by up to £432 while leaving taxes unchanged for those on lower incomes.
The Scottish Greens’ proposal is progressive as tax rises are largely concentrated amongst the top earners. At the same time, taxpayers on incomes below £19,000 would pay a lower rate.
Both the Scottish Labour and Scottish Liberal Democrats’ proposals would increase tax rates across all three income tax bands and therefore improve progressivity.
The SNP proposal would also improve the progressivity of the tax system.
Looking at income inequality, as measured by the Gini co-efficient (where the current value of the Gini co-efficient for Scotland is 34, as explained in section 4.2), the Scottish Conservatives’ proposal would result in an increase in the Gini co-efficient (0.1). The Scottish Greens’ proposal would result in the greatest reduction in the Gini co-efficient with it falling by 0.6. The reductions would be smaller under the Scottish Labour (0.3), Scottish Liberal Democrats (0.2) and SNP proposals (around 0.1), respectively.
Protecting Lower Earners Test
Under the Scottish Conservatives’ proposal, taxpayers earning below the median income of £24,000 in 2018-19 would not see any increases in their tax liability.
Under the Scottish Greens’ proposal taxpayers earning below the median income in 2018-19 would not see any increases in their tax liability. Reducing the Basic Rate up to £19,000 would benefit those earning less than £26,150.
The proposals put forward by Scottish Labour and the Scottish Liberal Democrats would increase the income tax paid by everyone earning more than the PA, compared to the current regime. As such, taxpayers earning below the median income in 2018-19 would not be protected from the tax rise. However, compared to the previous tax year 2017- 18, the PA rises by £350, resulting in a tax saving of £70 for each Basic Rate taxpayer. This means that all taxpayers earning up to £18,800 would pay no more tax under these proposals than they did last year - however, they would not receive the full net benefit of the increase in the PA.
Under the SNP proposal, taxpayers earning below the median income of £24,000 in 2018-19 would not see any changes in their tax liability.
As highlighted in Chapter 3, tax changes can have an interaction with the social security system, in particular Universal Credit. The Scottish Greens’ proposal, by lowering tax liabilities for the lower deciles, could have the effect of increasing post-tax income and therefore reducing Universal Credit payments to those individuals. We will discuss this issue with the UK Government to ensure, in line with the fiscal framework, that this does not reduce incomes or increase complexity for individuals.
Economic Growth Test
As we note earlier in this paper, it is not possible to reach a conclusive opinion on the economic impact of any of the proposals without a fuller understanding of the spending plans that would go with the changes. It is possible, however, to make the following high- level observations.
Small changes in income tax, such as those proposed by the Scottish Conservatives, would change income tax revenues by around 1% and are unlikely to have a measurable impact on the Scottish economy. However, the Scottish Conservatives’ proposal would reduce the amount of revenue available for investment in public services and the economy.
The Scottish Greens’ proposal would increase income tax revenues by between 2% to 4%, depending on the scale of the behavioural response. Since their proposal protects lower earners, the impact on consumer spending may be less immediate and therefore less likely to have a negative impact on growth in the short term. However, the Scottish Greens’ proposal to increase the Additional Rate to 60p could discourage high earners from moving to or remaining in Scotland given the large increase they would see in their taxes. Over time, this would have a negative impact on economic growth as individuals and companies adjust their behaviour. As with the other party proposals which also raise revenue for investment in public services and the economy, spending choices might generate economic benefits in the long term, particularly if the proposal raised revenue at the higher end of the estimated range.
The scale of tax increases in the Scottish Labour and Scottish Liberal Democrats’ proposals is larger as these would increase income tax revenues by 4% to 5% respectively. In the short term, these proposals could have a negative impact on growth because some of the tax rises would be borne by lower earners who are most likely to reduce consumption in response to a tax rise as they generally spend a larger proportion of their income. However, as noted above, the increase in Government spending accompanying the tax rise could offset any fall in consumer spending in the short-term and could have a positive impact in the longer term.
The Scottish Labour proposal would also increase the Additional Rate of income tax from 45p to 50p. As with the Scottish Greens’ proposals, this introduces a risk that some high earners change their behaviour in ways that impact on the economy. However, the scale of the tax rise high earners would face under the Scottish Labour proposals is smaller than under the Scottish Greens’ proposal, which in turn reduces the risk that high earners would change their behaviour.
Under the Scottish Liberal Democrats’ proposal, the Additional Rate of income tax would be increased from 45p to 46p. An increase of this scale is unlikely to have a measurable impact on the economy.
The SNP proposal would change income tax revenues by around 1% and is unlikely to have a measurable impact on the Scottish economy. However, it would raise additional revenue for investment in public services and the economy.
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