UK Edition
IFS warns wealthy could avoid Nicola Sturgeon tax hike and 'uncertain' if extra revenue raised
Nicola Sturgeon has been warned by Britain’s most eminent economic think tank that her planned tax increases for the wealthy could backfire and there is “a lot of uncertainty” over whether more money would be raised.
The Institute for Fiscal Studies (IFS) told the Telegraph that the behaviour of top rate taxpayers, earning more than £150,000, was unpredictable and there was a range of actions they and other higher earners could take to limit their tax liability.
Thomas Pope, a research economist specialising in the tax system, said they could move to England, “work a bit less hard” or incorporate their tax affairs.
The latter option sees workers route their salaries through companies so they can avoid income tax. They can take their money as dividends, which attract a lower rate of tax, or pay corporation tax at only 19 per cent through a personal service company.
Both corporation tax and income tax on dividends are reserved to Westminster and Mr Pope warned that higher earners incorporating “would have particularly bad consequences for a Scottish exchequer.”
A report outlining possible tax changes, unveiled Ms Sturgeon last week, included projected revenues based on the tax rises provoking a low, medium and high amount of behaviour change among workers.
Although he acknowledged the move might generate extra revenues, Mr Pope recommended that she plan on the basis of a medium-to-high behavioural response from taxpayers, to try and protect against a shortfall.
He said income tax was a “top heavy tax”, with Ms Sturgeon’s paper pointing out workers who fall into the higher and additional rates account for less than 10 per cent of income tax payers but 60 per cent of the revenue.
The First Minister insisted last week “the time is right” for “modest” income tax hikes and published the paper as the starting point for discussions between her minority government and the opposition parties, ahead of the 2018/19 Budget.
All four scenarios in her report suggested increasing the 40p higher rate and 45p top rate of income tax in April next year, with three of them also backing a penny rise in the 20p basic rate and a 50p top rate. They proposed the creation of up to six income tax bands, compared to the current three.
The average impact, if introduced now, would see any Scot earning more than £24,000 paying more tax than at present, with middle and higher earners handing over hundreds of pounds more.
Mr Pope agreed with the paper that “it’s not necessarily obvious” that tax increases will hinder economic growth, but warned that Gordon Brown’s government increasing the top rate of income tax to 50p “didn’t raise very much”.
He also agreed that bordering a larger country like England, with a lower tax regime and part of the same internal market, could impact on the movement of businesses and people to Scotland.
A spokesman for the Scottish Conservatives said: "The IFS is absolutely right to issue a warning like this. The SNP is totally deaf to any criticism on this matter, but if it doesn't listen, workers and the overall economy will pay the price.”
The Scottish Government said its paper included “a range of potential revenue impacts for the different policies and approaches that we costed, due to the uncertainty that surrounds behavioural impacts of tax changes.”
A spokesman said: “The IFS have endorsed this view by suggesting that a range of revenues should be considered. The First Minister has asked her Council of Economic Advisors to consider the revenue risks arising from different additional rates of income tax in Scotland and the UK, and any potential mitigating actions that can be taken. Their work will inform our decision making ahead of the Draft Budget.”