Questions raised over benefits of income tax hike

Increasing the top rate of tax in Scotland would have limited impact on receipts, warns RSM

Following the publication this week of new Government statistics showing the breakdown of income taxes paid by Scottish taxpayers, accountancy firm RSM is warning that raising the top rate after the election would only have a limited impact on overall tax receipts.
The figures for 2013/14 raise some stark differences between Scotland and the rest of the UK and will, no doubt, be closely reviewed by the Scottish political parties as they prepare their manifestos for the forthcoming Scottish Parliamentary Elections, now that the fiscal framework has been agreed between Holyrood and Westminster.
Stephen Hay, RSM’s head of Tax in Scotland, said: “We all know the saying ‘lies, damned lies and statistics’ but these figures really do raise some interesting points for consideration.  UK taxpayers with incomes over £150,000 number 340,000, of whom 15,000 have incomes of over £1 million. Tax raised from this group is in excess of £32.7bn or 28 per cent of the UK total.  In Scotland, only 19,000 tax payers have incomes over £150,000 raising a mere £2.1 billion which is less than 18 per cent of the Scottish total.
“So what can we take from these figures? Well, on the basis that Labour have indicated that they would increase the top rate of tax in Scotland to 50 per cent and the SNP have also highlighted an intention for higher earners to contribute more, given the relatively low numbers of high earners in Scotland and their comparatively lower incomes, a 5p increase in the highest rate might only raise around £220 million, but what would that buy?
“For example £220 million is about 16 per cent of the budget for the new Forth crossing or around 1,500 feet of bridge. The A9 dualling project is expected to cost £3 billion.  £220 million might pay for around six miles. It might also contribute 7 per cent of the estimated £3 billion cost of the 50,000 affordable homes required in Scotland, some 3,500 homes. The extra tax is not going provide future economic security for Scotland on its own.
“Of more concern is the thought that the new devolved powers being handed to the Scottish Parliament would allow for some redistribution of the tax burden among Scottish taxpayers.  If Scotland wants to emulate the UK position whereby 28 per cent of tax raised is met by the highest rate taxpayers, then the existing 19,000 Scottish taxpayers would need to pay about 50 per cent more tax than they do at present.  Given the lower incomes of this group compared with the UK, this would be an impossible task.
“The next Scottish Parliament may have a once in a generation opportunity to use more imagination to create a tax system that recognises and incorporates the diversity of Scottish taxpayers but which is seen as fair. Whether this is possible with the current range of devolved powers remains to be seen.”