Taxes in an independent Scotland
Presentation prepared for conference: Economic aspects of
constitutional change, Edinburgh September 19-20 2013
Stuart Adam and Paul Johnson
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Outline
• Tax revenues in Scotland
• Principles for tax reform
• The Scottish context
• Tax raising options
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Tax revenues
• Onshore revenue in 2012 £47.8 bn (in 2013 prices)
– £9,000 per resident
– 37.1% of onshore GDP
• With 8.4% of UK GDP Scotland contributed 8.2% of onshore
revenue
– In earlier years Scottish tax revenues were a higher proportion of
GDP
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Scottish and UK revenues as % onshore GDP
55%
Scotland
50%
UK
45%
40%
35%
30%
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-06
1994-95
1993-04
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
1985-86
1984-85
1983-84
1982-83
1981-82
1980-81
Source: Authors’ calculations using data from GERS 2011–12 and Historical Fiscal Balance Calculations from Scottish National Accounts Project (SNAP).
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Tax revenues
• Onshore revenue in 2012 £47.8 bn (in 2013 prices)
– £9,000 per resident
– 37.1% of onshore GDP
• With 8.4% of UK GDP Scotland contributed 8.2% of onshore
revenue
– In earlier years Scottish tax revenues were a higher proportion of
GDP
• Revenue shares are similar
– A bit more from CT, VAT, “sin taxes”, environmental taxes
– A bit less from IT, CGT, IHT, council tax, SDLT
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Composition of onshore revenue UK and
Scotland 2011/12
100%
Other receipts
90%
Other indirect taxes
% of Non-North Sea Revenue
80%
VAT
70%
60%
Property taxes
50%
Capital taxes
40%
Corporation tax
30%
National Insurance contributions
20%
10%
Income tax
0%
Scotland
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UK
Tax revenues
• Onshore revenue in 2012 £47.8 bn (in 2013 prices)
– £9,000 per resident
– 37.1% of onshore GDP
• With 8.4% of UK GDP Scotland contributed 8.2% of onshore
revenue
– In earlier years Scottish tax revenues were a higher proportion of
GDP
• Revenue shares are similar
– A bit more from CT, VAT, “sin taxes”, environmental taxes
– A bit less from IT, CGT, IHT, council tax, SDLT
• Though Scottish tax base is different
– Fewer very high incomes
– Less capital income
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Population shares by income tax band
Income tax band
Scotland
UK
Non-taxpayers
39.5%
40.9%
Basic ratea
53.7%
51.5%
Higher rate
6.4%
7.0%
Additional rate
0.3%
0.5%
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North Sea Revenues
• Have been hugely important
– An make a big difference to overall fiscal balance
• But also very volatile
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North Sea oil revenues
50%
45%
Scotland - Population Share of North Sea Oil
40%
Scotland - Geographical Share of North Sea Oil
35%
UK (100% of North Sea Oil)
30%
25%
20%
15%
10%
5%
0%
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
1985-86
1984-85
1983-84
1982-83
1981-82
1980-81
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Post independence
• Scotland would have the opportunity greatly to improve its tax
system
• Little sign under devolution of whether it would take the
opportunity
– Freezes in council tax
– Reform of SDLT
– Some small reforms to Business Rates
– No use of power to change income tax rates
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What we have
• Does not work as a system
– Lack of joining up between income tax and NI
– Personal and corporate taxes
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What we have
• Does not work as a system
– Lack of joining up between income tax and NI
– Personal and corporate taxes
• Is not neutral where it should be
– Inconsistent savings taxes with normal return often taxed
– Corporate tax system that favours debt over equity
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What we have
• Does not work as a system
– Lack of joining up between income tax and NI
– Personal and corporate taxes
• Is not neutral where it should be
– Inconsistent savings taxes with normal return often taxed
– Corporate tax system that favours debt over equity
• Is not well designed where it should deviate from neutrality
– A mass of different tax rates on carbon
– Failure to price congestion properly
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What we have
• Does not work as a system
– Lack of joining up between income tax and NI,
– Personal and corporate taxes
• Is not neutral where it should be
– Inconsistent savings taxes with normal return often taxed
– Corporate tax system that favours debt over equity
• Is not well designed where it should deviate from neutrality
– A mass of different tax rates on carbon
– Failure to price congestion properly
• Does not achieve progressivity efficiently
– VAT zero rating a poor way to redistribute
– Tax and benefit system damages work incentives more than need
be
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So lots of change would improve efficiency
• Simplify direct tax system, integrate income tax and NI
• Much broader VAT base
• Reform taxation of savings (and pensions)
• Single tax schedule for income from all sources
• Consistent carbon price
• Council tax levied at proportionate (not regressive) rate on up-todate values
• Abolish stamp duty land tax
• Congestion charging replacing much of petrol taxation
• Replace business rates with land value tax
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Personal tax issues for an independent Scotland
• More equal income distribution
– Fewer with very high incomes reduces role of higher rates in
redistribution
• Mobility between Scotland and rUK
– Taxation of savings
• Additional behavioural margin likely to increase taxable income
elasticities
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Corporate tax issues in an independent Scotland
• Companies need to allocate profits between Scotland and rUK
– Same set of transfer pricing issues we currently face but with new
instance
• Scope for tax competition with rUK
– Proposals to reduce headline rate
– Could move (or add) real activity or where profits are reported
– Optimal rate for both Scotland and rUK lower with competition
• Formula apportionment one option
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Indirect taxes in an independent Scotland
• Cross border trade zero rated for VAT
– Increases administration costs
– Opportunities for MTIC fraud
• Exemptions create incentive for exempt bodies (e.g. financial
services companies) to purchase inputs from lower rated country
• Different rates could encourage cross-border shopping
– 2% of total consumption in Denmark accounted for by crossing
border to shop in Germany due to lower VAT rate
– Scope for excise duties to be affected
• Fuel duties should reflect externalities from driving
– These are considerably less in (less crowded) Scotland than (more
crowded) England
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Property taxes in an independent Scotland
• Land and property form a particularly suitable tax base for a
small open economy
• Scottish government already has control
• They have frozen council tax since 2007 (and rates rose less
quickly before 2007)
– Undermining local tax base
– And role of a property tax
• Reformed SDLT
– In a broadly sensible direction to end cliff edges
– (note there are proportionately fewer very expensive properties)
• Introduced cliff edges to business rates
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If a Scottish government wanted to raise revenue
Income tax and NI
Increase basic rate 1%
£365m
Increase higher rate 1%
£60m
Reduce allowance £500
£280m
Raise employee NI 1%
£330m
Raise employer NI 1%
£360m
Abolish NI UEL
£465m
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If a Scottish government wanted to raise revenue
Income tax and NI
Indirect taxes and council tax
Increase basic rate 1%
£365m
1p on main rate of VAT
£430m
Increase higher rate 1%
£60m
1p on reduced and zero
rates of VAT
£200m
Reduce allowance £500
£280m
10% on alcohol and
tobacco duties
£120m
Raise employee NI 1%
£330m
10% on road fuel
£215m
Raise employer NI 1%
£360m
10% on council tax
£175m
Abolish NI UEL
£465m
Abolish single person
discount
£140m
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Conclusions
• Tax per head very similar to UK average
– Though some differences between taxes
• Narrower income distribution and fewer very rich has effect on
tax base
– And reduces optimal redistribution
• Lots of opportunity to improve the tax system
– And if a newly independent country can’t take the chance, who can?
• But some constraints
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