Think tank labels Scottish Budget income tax plans an ‘unnecessary risk’

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The Scottish Government has taken an “unnecessary risk” with its planned income tax changes, an independent think tank has said.

Reform Scotland said the increase for some ratepayers could end up raising less money and highlighted Holyrood has a disproportionate dependence on income tax, which accounts for around two-thirds of all tax raised by the Scottish Parliament, which in total raises around 40% of what it spends.

Alan McFarlane, Reform Scotland chairman, said: “We think the Scottish Government has taken an unnecessary risk today which could end up producing less revenue.

“For the first time in the life of the Scottish Parliament we now have real differentiation on tax policy.

“It is incumbent on our political parties to continue to debate in a positive, mature and robust way, creating fresh ideas and offering the country clear positions on how they will tax and spend.

“One of our key contributions to that debate is that Finance Secretaries should be able to consider tax reform as a key lever in delivering the policy programme on which the Government was elected.”

He added: “In our view the present devolution settlement does not allow for these changes to take place without introducing significant risk to the overall budget.

“An over-reliance on any single tax, in this case income tax, means that the risks to any changes outweigh the potential benefits, and could result in raising less money than expected.

“For tax reform to be a meaningful option for future Scottish governments, there is a need to return to a wider discussion about how and where taxes are raised in line with the services they are used to fund.”

The Common Weal think tank welcomed the income tax changes but said more needed to be done and called for more reform of local taxation.

The organisation’s head of research, Craig Dalzell, said: “The changes to income tax are a move in the right direction, but we should not overestimate this change – those on low incomes will be very marginally better off, while those on middle and higher incomes will be very marginally worse off.

“The super-rich in particular are still not paying their fair share. It’s positive that the Scottish Government has now committed to using its tax powers in a way which is more reflective of Scotland’s income distribution and thus more progressive, and this should be the start of a journey to seriously reducing Scotland’s income inequality.”

Don Peebles, Head of Devolved Nations at the Chartered Institute of Public Finance and Accountancy, said: “This is a historic budget and means that there is now a direct link between income tax and public services.

“Although the method of raising income through taxation may be unpopular, it is welcome news that Scottish public services will receive more funding a s, without extra resources, the financial resilience of many services would inevitably be put into question .”

Business organisations highlighted uncertainty over whether the tax changes will bring in the revenue forecast.

Mark Bevan, chief executive of the Scottish Council for Development and Industry (SCDI) said: “This is a progressive, mature and significant use of Scotland’s income tax powers.

“However it comes on the back of a sustained period of weak growth in 2017 of 0.7% for the Scottish economy. We need to review whether the revenues forecast are actually raised.”

Andy Willox, the Federation of Small Business’s Scottish policy convenor, said: “We wanted to see a Scottish Government budget which offered firms a little ballast in choppy market and political conditions.

“Instead the Scottish Government has chosen to steer us into uncharted economic waters.

“A majority of those in business in Scotland were against changes to the income tax regime. However, the Cabinet Secretary underlined that his tax changes were designed to cause minimum economic disruption.

“Only time will tell what the wider impact will be, but our members have a real concern about the effect of these changes on household spending power.”

John O’Connell, chief executive of the TaxPayers’ Alliance, called on the Scottish Government to reconsider the income tax plans.

He said: “This decision will make Scotland a less attractive place to live and work. With wage growth stagnating and the cost of living on the rise, it beggars belief that politicians in Scotland have decided to take even more of people’s money.”

David Eiser, of the Fraser of Allander Institute, said: “In revenue raising terms, the policy announcements today are relatively modest adding less than 1% to the Scottish resource budget.

“But combined with changes announced last year, the Scottish income tax schedule now looks quite different from that in the rest of the UK.

“Alongside increases in the higher and additional rate for income tax, the announcement of a new starting rate of 19% will have surprised many.

“That being said, the maximum gain to any taxpayer from this lower rate is just £20 per annum.”