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Taxes in an independent Scotland. Presentation prepared for conference: Economic aspects of constitutional change, Edinburgh September 19-20 2013 Stuart Adam and Paul Johnson. Outline. Tax revenues in Scotland Principles for tax reform The Scottish context Tax raising options. - PowerPoint PPT Presentation
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© Institute for Fiscal Studies
Taxes in an independent ScotlandPresentation prepared for conference: Economic aspects of constitutional change, Edinburgh September 19-20 2013
Stuart Adam and Paul Johnson
© Institute for Fiscal Studies
Outline• Tax revenues in Scotland• Principles for tax reform• The Scottish context• Tax raising options
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
© Institute for Fiscal Studies
Scottish and UK revenues as % onshore GDP
© Institute for Fiscal Studies
1980-811981-821982-831983-841984-851985-861986-871987-881988-891989-901990-911991-921992-931993-041994-951995-061996-971997-981998-991999-002000-012001-022002-032003-042004-052005-062006-072007-082008-092009-102010-112011-12
30%
35%
40%
45%
50%
55%
Scotland
UK
Source: Authors’ calculations using data from GERS 2011–12 and Historical Fiscal Balance Calculations from Scottish National Accounts Project (SNAP).
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
© Institute for Fiscal Studies
Composition of onshore revenue UK and Scotland 2011/12
© Institute for Fiscal Studies
Scotland UK0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Other receipts
Other indirect taxes
VAT
Property taxes
Capital taxes
Corporation tax
National Insurance contributions
Income tax
% o
f Non
-Nor
th S
ea R
even
ue
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
© Institute for Fiscal Studies
Population shares by income tax band
© Institute for Fiscal Studies
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%
North Sea Revenues• Have been hugely important
– An make a big difference to overall fiscal balance• But also very volatile
© Institute for Fiscal Studies
North Sea oil revenues
© Institute for Fiscal Studies
1980-811981-821982-831983-841984-851985-861986-871987-881988-891989-901990-911991-921992-931993-941994-951995-961996-971997-981998-991999-002000-012001-022002-032003-042004-052005-062006-072007-082008-092009-102010-112011-12
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%Scotland - Population Share of North Sea Oil
Scotland - Geographical Share of North Sea Oil
UK (100% of North Sea Oil)
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
© Institute for Fiscal Studies
What we have• Does not work as a system
– Lack of joining up between income tax and NI – Personal and corporate taxes
© Institute for Fiscal Studies
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
© Institute for Fiscal Studies
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
© Institute for Fiscal Studies
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© Institute for Fiscal Studies
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-to-date values• Abolish stamp duty land tax• Congestion charging replacing much of petrol taxation• Replace business rates with land value tax
© Institute for Fiscal Studies
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
© Institute for Fiscal Studies
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
© Institute for Fiscal Studies
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
© Institute for Fiscal Studies
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
© Institute for Fiscal Studies
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
© Institute for Fiscal Studies
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
© Institute for Fiscal Studies
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
© Institute for Fiscal Studies