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Tax-raising powers for Scotland

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United against the common enemy of an independent Scotland, the Conservative, Labour and Liberal Democrat leaders have been joined by former prime minister Gordon Brown and others in promising more tax-raising powers for Scotland if voters reject independence in the forthcoming referendum. What impact will these promises have?

Encompassing taxation as they do, some of the recent pronouncements remind us wryly of the mythical newspaper headline ‘Politician makes shock pre-election tax giveaway promise’. But what’s the substance behind the party statements?

So close to the referendum, neither the UK nor the Scottish government can publish anything which argues ‘for or against a particular outcome’, so we thought it might be useful to identify what’s really on offer on the tax front from the various parties.

It’s helpful to approach this by looking at the responsibility for collecting taxes.

Scotland Act 2012 – Scotland responsible for collecting 16%: Before any further taxes are devolved, under the Scotland Act 2012, Scotland will be responsible for collecting 16% of all taxes raised in Scotland, with Westminster collecting the remaining 84%. That’s a far cry from the SNP intention that an independent Scotland will be responsible for collecting 100% of all taxes raised.

Conservatives – 71.7% of taxation controlled by Westminster: The Conservatives have promised full control of all income tax rates and bands, with a possibility of some VAT receipts too, albeit with the income tax threshold and income tax on dividends and savings remaining under Westminster’s control. The Conservative proposals will therefore see 28.3% of taxation controlled by Scotland, and 71.7% controlled by Westminster.

Labour party – 80% of taxation controlled by Westminster: The Labour party proposes control of 20% of income tax with an ability to raise income tax by several percentage points (but not lower it) beyond rUK rates. There are no proposals to control income tax bands. The Labour proposals will therefore result in 20% of taxation controlled by Scotland, and 80% controlled by Westminster.

Liberal Democrats – 60% of taxation controlled by Westminster: The Liberal Democrat proposals include control over inheritance tax, capital gains tax, income tax and a ‘good share’ of corporation tax. The Lib Dems proposals will result in 40% of taxation being controlled by Scotland and 60% controlled by Westminster.

Time will tell whether the Scottish electors are swayed by these proposals, but on the face of it none of them look like real vote winners.

There is of course another angle to this. Whether or not the ‘yes’ campaign is successful, income tax seems set to become a hotly contested issue between England and Scotland. Of course, the vast majority of the Scottish population and businesses reside within 100 miles of the border. There is a growing concern, therefore, that any differences in income tax rates north and south of the border – whether Scotland remains part of the Union or becomes independent – would create loopholes for tax avoidance or even evasion as workers and companies flit across the border to wherever the rates are lowest.