Scottish Labour Party Report Outlines Tax Devolution Issues
23 April 2013
Posted by: Author: Amanda Banks
Source: Amanda Banks
A new report by the Scottish Labour Party identifies income tax as "the best candidate for further devolution" among taxes, and expresses scepticism that Scotland could afford a significant decrease in corporation tax.
The Scotland Act 2012, which grants Scotland fiscal autonomy from the UK, is expected to allow Scotland to set its own rate of personal income tax from April 2016. The SLP report, which is based on the work of a commission set up by the party, was debated at the party's conference at the weekend. It argues that devolved income tax "would provide a broader range of fiscal choices, enhancing accountability and responsibility for decisions made by the Scottish Parliament on taxation and public expenditure. It would also enable the Scottish Government to make the tax system more progressive."
However, the report also draws attention to three potential issues: the administrative challenges of running different allowances and tax structures; the fact that the Scottish Budget may be dependent on just one tax for almost half of its revenue; and the impact of Scotland having a different degree of progressiveness than the rest of the UK.
The report also notes other taxes that could be devolved, highlighting Air Passenger Duty, Capital Gains Tax in relation to land, and Inheritance Tax, although it warns that a devolved Inheritance Tax may "incentivise tax avoidance." In the case of tax revenue from North Sea oil, the report argues that devolution would be "highly difficult in practice" and would create a "fiscal cliff." It adds that there will be "a big drop in tax receipts" when companies need to decommission platforms.
In the case of corporation tax, however, the report describes comparisons with Ireland's 12.5% as "highly dubious." It argues that Scotland's welfare provisions mean that its public spending-to-GDP ratio is higher than Ireland, and that companies would use the lower rate to relocate profits, but not economic activity: "Corporation tax avoidance by multinational companies is a major problem for governments across the world, as has been very clearly seen in recent months in the UK and elsewhere. It would be undesirable for any scheme of tax devolution to provide further opportunities for corporations to avoid their obligations." On the other hand, the report adds that arrangements suggested for Wales by the Holtham Commission may provide a way to avoid this risk.
The report also considers welfare devolution in relation to tax. It argues that devolved welfare would widen the fiscal gap between what the Scottish government raises and what it spends "hugely." This is because, under European law, Value Added Tax cannot be devolved, and VAT accounts for around 19% of revenues from North Sea oil.