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Why higher earners will be paying more tax

Terry smiling headAll of a sudden constitutional issues have become yesterday’s news. Tax has moved to the top of the political agenda and it looks like being just as explosive.

After the debate in parliament on Wednesday MSPs have voted themselves into a corner. It now looks like tax rises are inevitable.

The vote may have been a narrow one, but the SNP’s abstention effectively signalled that the party was ready to accept Labour’s call for it to use the tax powers the party has spent years campaigning to secure.

We shouldn’t be too surprised. Since Finance Secretary Derek Mackay invited other parties to put forward their ideas on tax it has been a good bet that taxes would be going up. Only the Tories oppose the status quo, or a cut, and Mr Mackay now has a measure of what sort of support he can expect when he unveils his Budget.

But what exactly will he do? Labour makes a big play about the imbalance in the tax system and wants the top earners to pay more. The SNP government, which has wavered on a 50p top rate, may be readying itself to accept the additional levy.

A 1p increase in the basic rate would bring in £500m, but it’s thought unlikely it will raise it because the basic rate is the most sensitive. It hits all but the very lowest earners. 

A number of options have been proposed. The Green Party wants several bands, while the Liberal Democrats are seeking a new zero rate band.

Most likely is a new rate of tax, perhaps something along the lines proposed last year by the Iain McMillan led group which suggested an intermediate rate of around 30p to ease the step up from the lowest band to the 40p tax rate.

A 30p band could raise about £450m and, as tax expert Stephen Hay at RSM says, this would bring in almost as much as a 1p rise in the basic rate without the poorest having to pay.

Combine this with a 5p increase at the higher rate and the Scottish government could bring in around £650m.

Hay therefore believes that the top and middle earners should prepare for a tax hike in April.

The rise will be justified as a necessary burden to improve public services. This is a spurious argument.

Labour is talking doublespeak, claiming a need to raise taxes to end austerity, despite the fact that hitting thousands of families with a tax rise will reduce their disposable income and therefore worsen their living standards.

Willie Rennie is kidding himself if he thinks every penny of the £500m raised will be handed over to the education budget and, in any case, it wouldn’t bring about the improvements in schooling that he claims. The issues over education are far more complex and demanding than anything that a lump sum of cash can solve.

The Tories say the rises will be damaging for the economy by making Scotland the highest-taxed part of the UK. This too is debatable, given that some regions of the world, notably Scandinavia, manage to increase GDP while having relatively high taxes.

Wednesday’s vote suggests the Tories are shouting into a gale of opposition. There is a clamour to pour yet more money into public services despite little evidence that it will improve their performance.

That won’t matter to Holyrood which still regards itself as a spending authority. And, of course, better to get in a tax rise now before the next election campaign comes around.

 

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