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Scottish taxation? Now could be the time many Scots begin to walk away

THERE IS an important insight in economics called “what is unseen” – a shorthand description of a treatise offered by Frederic Bastiat about the effects of political actions through time.  The “through time” here is important, because what Bastiat recognised was that the interests of politicians are to be popular in the present, and so they present actions as ideas that help people now.  Economists on the other hand, look at trends and why changes occur through time in reaction to interests and incentives of individuals and groups.

As John Swinney worked his way through his recent budget statement his emphasis on what he noted from the past, in outside influences, and saw as rational support plans for the next year were, as usual with the SNP, aimed politically at near future gains.  However, they hid some serious realities about what could happen unseen through time as individuals react to his policy measures; raising taxes for middle and higher earners and re-distributing further largesse to those in need.

For many, the idea that a high tax burden will make people engage in what is called “voting with their feet” is non-credible. Among Scots on the left, who generally live off the central state’s sponsorship, it’s not a sensible option; they are wedded to the public purse. In addition, re-distribution fits within their moral stance and agrees with an ethic of promoting egalitarianism – even if the re-distribution is taken from their own middle and high-level salaries.

So be it, but as an economist I can only warn that this view, when looked at over a longer time scale across all sectors is mistaken. It is also extremely dangerous when the state expands to the size we have in most social democratic nations, and particularly in left-leaning Scotland. The outcome of these re-distributions will create the opposite of what their advocates support.

To understand why, the first thing to recognise is that the phrase “voting with their feet” is unhelpful. First, people vote with their brains – calculating what is in their and their families’ interests – and, second, we have to declare who these people are; with a specific emphasis on how many are in families that sit around the kitchen table together, with shared wealth and prospects.

Those who are self-reliant; in business, professions or talented trades live with a highly conscious grasp of the balance of their overheads and earnings. They see the former continually grow, and the latter – unlike most of the public sector – as subject to annihilation at short notice. That makes them wary, thrifty and usually incentivised to be hard-working and enterprising.

They also talk to their kith and kin, and like kind. This feeds into their calculations.

So, let me now put this into a personal story. My Great Grandfather was a blacksmith. Around 1860 he began to describe himself as an ironfounder – running his own small casting foundry.

My Grandfather grew up as an ironfounder but innovated as an iron product engineer, using novel casting and machining techniques and opening three factories in the Glasgow area employing more than 300 people. Late Victorian Scottish success in engineering made an innovative family wealthy.

My father grew up as a manufacturing engineer, fell out with his family partners over changing to modern alloys, sold out to a large plc and started again in high tensile steels. My brother took that company over and moved it into agricultural systems engineering based on a semi-automated factory that was again sold recently to a larger concern.

There were a lot of kitchen table conversations in those 150 years. Every change was unseen to any politician; the interests of the individuals concerned and their incentives were hidden. The talents and expansive knowledge of the actors in the family story are unknown to the state.  Its primary interest was also not to be super-wealthy, in business we are a creative mathematical and technical family who like innovating, and to a goodly extent like most Scots do a bit of wallowing in occasional “whae’s like us” Scottish exceptionalism – hopefully in good humour rather than all too common bigotry. I can remember my father saying, “we’re just in the middle of the middle”.

I have, however, (dragging out the family bible) counted the accumulated successors from my patrician great-grandfather to today and where they are now. There are, I think, 37. Only ONE is left in Scotland. Of the latest generation one is in Illinois, one in Auckland, one in Cambridge, and two in “the South”.  All of them are graduates, and all of them have technical/scientific skills.  Earlier generations have been in Australia, India, Tanzania, California and Canada; most of them engineers or technologists; most likely Scots in their souls.

This is the unseen story of a kitchen table derived diaspora. How does it fit in with the Scottish Government’s declared aim to be an innovative nation with a skilled workforce – and how does the latest high earner taxation support that aim?

I think I know how; it shows that any government that likes to interfere with enterprising people ensures they leak to other more friendly shores.

This does not happen quickly, initially the kitchen table is used to create coping strategies.

Step one is to duck and weave to keep your cash flow.

Rather than pay too much tax, you cut your salary, you give your children a job and a car, you push money into pensions, and you thin down your employees, while reducing your spend on property assets to maintain production – making expansion more difficult.

Step two is that you agree to a move away among those who can; the young in the family.

Step three is that you grow old, you stop expanding – then you just stop.

These steps can take fifty years, but they do happen.  In the process, Scotland loses its talent and its tax base. It sees its industrial infrastructure reduced to branch offices and distributors of the products of large corporates; both of which have strong cash flows generated worldwide.  Low-grade, low pay repetitive jobs subject to back office closures are the norm.

The Scottish Government has a budget statement which says “a lot of the budget goes directly to a range of public bodies. They then decide how to use this funding, thinking about the impact on equality”.   This focus on equality self-promotes the ethics and goals of the left; that profit making is a sin, that equalising of outcomes is a good, if “fairness” is to be achieved. The fact that equalisation works against competition, kills off jobs, reduces innovation, drives away talent, puts people into boring jobs, increases large corporate control of product streams in a slow-moving leakage is unseen.

What is also unseen is that the state loses out on the benefits of economic growth for collective services; debt and deficits become the accepted norm.

Those on the left do not care; they focus on the redistribution to their voter base for short term gain. In the process, they devalue those who receive transfers of income; denying them the chance through the freedom to work and gain skills that increase their personal wealth in useful knowledge and the freedom to save. They are creating dependent serfs, which is politically advantageous as they become a captured market.

I fear that this is what is now happening more and more rapidly across Scotland. The big state is making a big error.  Swinney and his like will not accept that talent is heading out the door – and it’s unseen.

The opposite of what is intended will be the result – we will all be less equal and poorer than the politicians told us.

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