Scottish Government warned against further income tax hike

17 Oct 18

The Scottish Government has been warned against further raising the top rate of income tax, which would create greater divergence in the tax system north and south of the border.

The Council of Economic Advisers, whose remit is to provide expert advice ahead of each draft budget on the risks associated with a rise in the top rate, said an increase could mean a loss of revenue due to behavioural changes, such as high earners artificially shifting their income from Scotland to the rest of the UK.

A shake-up of the income tax system last year saw a 1p rise in the higher and top rates, bringing them up to 41p and 46p respectively, as well as the introduction of two new bands at the lower end in a bid to make the tax more progressive.

In newly released minutes of its meeting in August, the council noted that although there was “little evidence” of substantial migration effects as a result of an increased top tax rate, it feared that action taken by Scotland’s top earners to reduce their liabilities would offset any growth in tax revenue.

“Members…agreed that there continues to be a behavioural driven revenue risk which the Scottish Government can only partially mitigate, if the top rate in Scotland were to diverge significantly from the rest of the UK,” it said.

The council’s advice follows analysis from the Scottish Fiscal Commission earlier this year which suggested that of the £27m extra tax revenue arising from the increase in the top rate, £25m would be lost through changes in taxpayer behaviour.

A report from the SFC last month also found that income tax receipts in 2016-17 were £0.5bn lower than anticipated, mainly due to the number of high earners in Scotland being smaller than previously thought.

In its most recent meeting, the council also discussed the need for the new Scottish National Investment Bank to take a distinctive approach to infrastructure investment and to ensure it did not revert to traditional funding models.

“Members…reiterated the importance of ensuring the bank differentiates itself from the existing landscape,” it said.

In particular, it described the ability of the bank to raise capital on the open market after initial capitalisation by the Scottish Government as a “positive ambition”.

It also stressed the need for diversity in the board of the new bank.

Chaired by Scottish Equity Partners chairman Crawford Beveridge, the Council of Economic Advisers was set up in 2007 to advise ministers on making Scotland’s economy more competitive.

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