Those subject a to rise in the top rate of income tax from 45p to 46p would mitigate the increase through means such as tax avoidance schemes or relocation out of Scotland, the Scottish Fiscal Commission predicted in a report.
Of the £27m extra tax revenue arising from the increase to the top rate in 2018-19, £25m would be lost through changes in taxpayer behaviour, the body responsible for Scotland’s independent economic and fiscal forecasts said in the paper out yesterday. The top rate applies to those earning in excess of £150,000.
A more muted response is expected to follow the increase in the next highest income tax band from 40p to 41p, which covers those earning between £43,431 and £150,000.
As a result of that change, £21m of the expected £95m increase in tax revenue would be lost through behavioural changes.
In contrast, positive changes in behaviour following the introduction of a new 19p starter rate, for those earning between £11,850 and £13,850, are expected to increase tax yields by £1m a year as people are attracted into the labour market.
But it is the response of the highest earners that was of greatest interest, according to the paper. “These individuals have the largest incentives to change their behaviour,” it said.
“They will also have greater means to change their behaviour, for example the money and connections to access sophisticated and expensive avoidance schemes.
“Whilst significant changes in behaviour may be limited to a small number of high income individuals, these individuals pay large amounts of tax revenue, and so can have a disproportionate impact on tax revenues.”
It added that divergent UK and Scottish income tax systems could create opportunities for behaviour, such as artificially shifting income to or from the UK or migrating into or from Scotland.
In total, the income tax shake-up is expected to leave the Scottish Government with a net increase in income tax revenue of £219m in 2018-19, after taking account of a loss of £56m through behavioural changes.
By 2022-23, behavioural changes will amount to £71m, leaving a net revenue increase of £267m.
