Tax competition – that would be something to thank the Scots for
A 30% tax bracket. A rise in the standard rate, with a rebate for lower earners. Higher taxes all round to finance more spending. In Scotland, ahead of May’s elections for the devolved parliament, a fascinating debate on tax and spending is under way, with the main parties setting out very different proposals (see below).
Unless you live there, you might not think this particularly relevant. But it is. This could be the start of tax competition within the UK, similar to the tax competition that already exists in the US and Switzerland. Such competition would allow new ideas to be tested and, if successful, flourish – which can surely only be for the better.
So far, in economic terms, it’s hard to think of any obvious good that has come from the devolution of powers to the Scottish and Welsh parliaments. But that could be about to change. Scotland looks set to get similar powers over income tax to any other sovereign nation, although VAT and national insurance will remain off-limits.
The Conservatives, who may even steal second place from Labour in the upcoming election, are now toying with a 30% tax bracket between today’s 20% and 40% rates. That is surely much needed – the 40% rate now hits many middle-income, rather than “rich” families, and must deter some from earning more.
Meanwhile, Labour wants a rise in the 20% rate, with rebates for low-earners so that they are not penalised, in order to protect public services from Tory cuts. The Scottish National Party is keeping strangely quiet. But as an aggressively anti-austerity party (or at least one that presents itself that way), it may be unable to resist putting up the top rate for long.
It is not just Scotland. Northern Ireland is close to adopting a 12.5% rate of corporation tax to match the Irish Republic. That makes sense. It’s tough for an economy to grow when firms know they could pay a far lower tax rate just a few miles down the road. If it happens, who knows? Google might even move to Londonderry.
There is nothing especially unusual about all this. In the US, different states impose very different tax rates. California has an income tax of 13% on top of federal taxes, while Florida charges 0%. Likewise, the Swiss cantons vary taxes considerably, which is why hedge funds are usually in the smallish town of Zug.
This has a big impact on where jobs and wealth are created, although it is only one of a range of factors. California has higher taxes than any other state, but it is still pretty wealthy. The key point is that regions can choose. Some can cut taxes to try to draw investment. Others can try higher taxes and see if improved public services and less austerity generates more prosperity. I suspect it won’t, but if that is what people believe, they are entitled to try it – which is why tax competition is a good thing.
The SNP’s leader Nicola Sturgeon could stop complaining about austerity and raise taxes to pay for everything she thinks the state should provide. A relatively poor Wales could cut taxes – plenty of firms might decide the Severn Bridge was not such a barrier if they paid a lot less to the government on the other side.
London’s booming economy has become so different from the rest of the UK’s that it might well need its own tax system – a tourist tax might make sense, as might far higher property taxes, given how out of control house prices have become. In return there might be lower banking taxes, and lower capital gains taxes for its fast-growing tech sector. We could try out ideas. We might even have something to thank devolution for – rather than it just creating political headaches.
How the parties in Scotland differ
Scottish National Party: Has not ruled out future tax rises once new tax powers come in next year, but has not specified plans as yet.
Labour Party: Wants to increase the three main rates by 1p in the £1 to 21%, 41% and 46%, but those earning less than £20,000 will be given a £100 rebate, making them better off overall. Bring in an additional rate of 50% in 2017. Use the £500m raised to reverse cuts in education.
Liberal Democrats: Raise all rates by 1p, increasing the personal allowance to protect low earners, and use the £475m generated to increase education spending.
Conservatives: No formal policy as yet, but considering a new 30% band to cover many of those currently paying 40%.
