‘Morally wrong’ for Scots to avoid higher taxes

John Swinney made the remarks in an evidence session with the Scottish Parliament’s Finance and Public Administration Committee on Tuesday (10 January 2023). The committee are undertaking scrutiny of the Scottish Government’s budget proposals for 2023-24.

Background

Last month, the Scottish Government’s budget included proposals to increase taxes on higher earners in Scotland, with the higher rate of Scottish income tax increasing from 41p to 42p and the top rate from 45p to 46p. Ministers have also proposed reducing the Scottish Top Rate threshold from £150,000 to £125,140, bringing it into line with the changes announced by UK Chancellor Jeremy Hunt at the Autumn Statement.

Changes were also announced to the Additional Dwelling Supplement (ADS) of Land and Buildings Transaction Tax (LBTT, increasing from 4 per cent to 6 per cent) alongside inflationary increases to Scottish Landfill Tax and support for businesses through the Non-Domestic (Business) Rates regime. Councils will also have flexibility to set council tax rates without central government limits.

You can read more about the Scottish Government’s tax proposals here.

The evidence session

The tax issues discussed during the evidence session focused largely on behavioural responses to further income tax divergence.

Committee convener Kenneth Gibson (SNP) noted that concerns have been raised about the potential for behavioural change as Scotland’s income tax diverges further from the rest of the UK, citing evidence from Professor Graeme Roy of the Scottish Fiscal Commission that income tax divergence may result in taxpayers taking steps to lower their liabilities.

Gibson also pressed the interim finance secretary on the prospect of taxpayer incorporation and of perceptions of Scotland as a high tax country.

John Swinney told the committee that he accepted that there was a risk that people may look to alter their tax affairs but said that while it was technically possible, ‘morally, I think that’s wrong’.

Swinney argued that there was a ‘strong moral dimension’ to the Scottish Government’s approach to tax policy that ‘show[s] the values of this government’.

The interim finance secretary highlighted the benefits of Scotland’s ‘social contract’ a number of times during the session, citing the provision of services including free university tuition and prescriptions, ‘comparatively lower’ (to England) council tax bills and access to childcare. He said these were all factors that should be considered alongside tax policy when considering the benefits of living in Scotland.

Liz Smith (Conservative) wondered how higher taxes could be justified in light of continuing problems in the provision of public services, with pressures in the NHS prominent in the media. Swinney defended his government’s record on public services, arguing that Scotland was performing better than the UK’s other nations in spite of current travails.

Asked whether the budget would have a detrimental effect on taxpayers earning more than £27,850 (the point at which Scottish taxpayers start to pay more income tax than someone on the same salary elsewhere in the UK), the interim finance secretary told Smith that the proposals had no discernible effect on middle earners, adding that the Scottish Government had chosen to focus its tax changes on the higher earners (who he described as ‘the top two quartiles of the population’).

Ross Greer (Green) sought to understand what evidence existed on the behavioural impact of previous income tax changes (dating back to 2018, when rates and bands of Scottish income tax began to noticeably diverge from the rest of the UK). The interim finance secretary said that previous changes had not appeared to have led to much divergence from what had been anticipated.

John Mason (SNP) wanted to know why the Scottish Government had not been bolder in its income tax choices. He specifically asked the interim finance secretary whether ministers had considered higher rate increases and if consideration might be given to introducing additional rates of tax (he cited a 31p rate between the 21p intermediate and 41p higher rate of tax).

John Swinney told the committee that ministers had to make ‘careful judgements’ on income tax policy. While he acknowledged that ‘there are many other ways we can structure our tax system’, ministers had to be mindful of the potential impacts of tax divergence. He added that he was ‘confident’ the steps taken by the government struck a ‘sufficient balance’ between the need to generate revenue and maintain the attractiveness of Scotland as a place to live, work and invest.

He added that to go further, ‘I think, might take us into territory that would create some wider difficulties for the Scottish tax base, and I’ve got to be mindful of the importance of sustaining the Scottish tax base at all times’.

Swinney would also acknowledge the challenges associated with forecasting Scottish taxes and Scottish taxpayer behaviour, telling Michelle Thomson (SNP) that the situation had become far more complicated in the six years since he last held the finance brief, adding that a more sophisticated understanding of the choices people make was needed.

The committee’s evidence session is available to watch here. A full transcript of the meeting is expected to be published in due course.