taxes in an independent scotland

© 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


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


Scottish and UK revenues as % onshore GDP


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).




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


Composition of onshore revenue UK and Scotland 2011/12


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




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


Population shares by income tax band


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


North Sea oil revenues


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


What we have• Does not work as a system

– Lack of joining up between income tax and NI – Personal and corporate taxes



– 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



– Lack of joining up between income tax and NI– Personal and corporate taxes


• Is not well designed where it should deviate from neutrality– A mass of different tax rates on carbon– Failure to price congestion properly



– Lack of joining up between income tax and NI, – Personal and corporate taxes


• 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


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


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


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


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


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


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


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


taxes in an independent scotland

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