Scotland’s messy tax decision shows need for real federalism

Amid the genuine trauma of the Brussels attacks yesterday (which remain too raw to write about), something of great constitutional significance happened in the UK.

From 2017/18, on the safe assumption that the SNP will remain in government at Holyrood, Scotland will have a different income tax band from the rest of the UK (with the 40% rate applying from £43,337 in Scotland but from £45,000 in England, Wales and Northern Ireland). The SNP also announced that the rate at which 20% applies would be raised to £12,750 from 2021/22, which is theoretically higher than will apply elsewhere in the UK (although in fact, I am sure that a Conservative UK Government would at least match it by then, given the current rate of travel).

The SNP has left the above £150,000 rate at 45% (as opposed to the 50% it once supported) and has left the actual tax rates the same, but the significance is that it now effectively controls the rate of income tax and the bands at which it applies – income tax is now, in effect, a devolved tax. Whereas once you had to move to the Channel Islands or the Isle of Man to enjoy different tax bands, you will now be able to move within the UK.

This is bad news for the political Left generally, because whenever tax differentials begin to be an issue, they inevitably become a race to the bottom. However, it does make devolution slightly fairer – within Scotland, there is now a real debate between Labour (which would put income tax up to “fund public services”), the Conservatives (which would keep rates and bands in line with the rest of the UK to “keep money in people’s pockets”) and the SNP (which will keep rates in line but change bands in the interests of “fairness”). The practical impact is that Scotland will have marginally more money for public services but also that a couple each earning over £45,000 a year will be over £1400 better off in England, Wales or Northern Ireland in 2017/18 than they are now; but in Scotland this gap will be under £500.

There is a further issue that this differential will for the first time challenge the tax authorities to specify who lives in Scotland and who does not (already an issue with the Channel Islands and the Isle of Man). Inevitably, people who spend time on both sides of the border, and perhaps have homes in both, will argue they live in England. This, added to the sheer administrative burden, means that in fact Scotland may make no practical gain in terms of money available for public services than it currently has.

These issues are the result of an increasingly messy devolution settlement. It is time it was tidied up. It is time for proper federalism.

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One thought on “Scotland’s messy tax decision shows need for real federalism

  1. Scots Anorak says:

    There are two respects in which current devolution is “messy”.

    The first is its patchwork nature, with Scotland, Wales and NI all negotiating with Westminster bilaterally and coming away with wildly different things (and now the same asymmetrical process having been initiated for the English regions).

    The other “messy” aspect concerns the particular mix of powers that Scotland has, with decisions in that regard having transparently been taken in a mistaken attempt to box the SNP in, for example, by devolving income tax because it is the most visible form of revenue-raising and thus annoys people most, but not corporation tax, on which Scotland might compete with England.

    A majority of people in Scotland want full control over all domestic decisions, regardless of whether they also want independence. In essence, genuine Home Rule would be what the Isle of Man has, but with representation in Westminster on foreign affairs and defence (the Isle of Man would probably only qualify for one Westminster MP if it were part of the UK, making that less of an issue in its case).

    We have to ask ourselves to what extent Westminster’s view of “federalism” could clear up these two problems, particularly since there does not seem to be much appetite in Wales and NI for full fiscal autonomy: my suspicion is that it might tidy up the patchwork somewhat — introducing symmetry in the English regions, a Welsh Parliament, etc. — but without doing away with it entirely. On the other hand, it is highly unlikely that any “federal” offer would come close to satisfying Scottish demands for Home Rule. And it might even involve tacked-on limitations on the Scottish people’s democratic right to secede that would do Unionists more harm than good.

    In any case, none of the above addresses the elephant in the room. Any attempt to move to a federal system based on hard-and-fast legal principles is likely to hit one very big snag: you cannot have a written constitution while preserving the doctrine of the sovereignty of parliaments.

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