FACE IT John Swinney – you owe Malcolm Offord an apology. Worse still, because apologies cost nothing, you are due the Scottish taxpayers a £22m rebate. Not that anyone expects you to face up to either responsibility.
A new report by Tax Policy Associates shows the SNP’s creation of a top rate of income tax in Scotland at 48 per cent actually led to lower tax revenues. That’s right, introducing a new higher rate of income tax, the highest in the UK, did not result in greater revenue, it actually caused tax revenues to fall.
The reason is simple, higher taxes do not always result in higher revenues, because taxpayers change their behaviour to avoid paying more tax. They work shorter hours by limiting their availability because they can afford to; avoiding overtime because it pays them to; cancelling operations and going to the golf course (yes, really); closing their business early or taking longer holidays, well, why not?!
Realising that the more they work, the more of their earnings they give to the faceless tax collectors, people find more efficient ways to manage their tax liabilities – such as investing more in their pensions.
Some people even move out of their Scottish tax residency to England. It is actually possible to live in beautiful Northumberland and occasionally commute to Edinburgh from Berwick-upon-Tweed (a very pleasant town) or beautiful Alnmouth and bustling Morpeth. The same approach to working occasionally in Glasgow can be taken from Carlisle, Penrith and even farther south in Oxenholme. Working from home most days and only occasionally visiting an office or base in Scotland is much more acceptable in these post-covid times.
Being close to Scotland means that many of the Scottish foods one might miss are still easy to obtain – while an added bonus for many is that there’s no ridiculous minimum pricing of alcohol law that makes the weekly shop more expensive and rules out many supermarket discount deals.
The net result is that although the highest Scottish tax rate of 48 per cent is higher than England’s 45 per cent, taxpayer behaviour can mean fewer taxpayers than there should otherwise have been – and the possibility of a smaller total taxable income liability.
We are therefore living through a real-time example of the Laffer Curve, where raising taxes has led to a fall in revenues but cutting taxes would change behaviour so that the revenues would increase. This is exactly the message Malcolm Offord was making during the run up to the Holyrood elections held back in May.
Offord’s idea was on point. Cutting taxes can generate greater revenues than increasing them because lower taxes encourage greater economic activity while higher taxes depress it – and so the revenues can go above what a higher tax might have brought in. The phenomenon is named the Laffer curve after US economist Dr Arthur Laffer, who first popularised how it works.
Here he is, explaining it very simply.
Oh how the other political leaders laughed and ridiculed Malcolm Offord as if he was some naïve innocent out of his depth – and no one laughed louder than John Swinney who had in the past been in charge of Scotland’s finances and supposedly knew all there was to know. Well they are not laughing now – for the ramifications are not just expensive but profound – but Offord will be entitled to laugh at them.
(The fact that Malcolm Offord is a self-made multi-millionaire with homes, cars and boats to enjoy might just have given a clue that he is no innocent abroad and knows exactly what he was talking about – as opposed to the many grifting professional politicians who have sucked at the public teat for most of their adult lives.)
The SNP first created a top rate of income tax of 46 per cent – one percentage point above the UK’s rate of 45 per cent – back in 2017. It was a seminal statement – an intentional abandonment of Alex Salmond’s belief that Scotland had to be tax competitive to prosper, if it was to ever secede from the UK. It was a wrong turning up a blind alley and, unsurprisingly, it only led to yet more tax increases. The SNP government got greedy and raised the rate to 47 per cent in 2023 and 48 per cent in 2024.
When Shona Robison raised the top rate from 47 per cent to 48 percent she was warned by her own Scottish Fiscal Commission that taxpayers would change their behaviour. Instead of the straight line increase in revenues bringing an extra £53m it estimated it would only raise £8m. Now the report by Tax Policy Associates shows it has likely crossed the line into negative values – costing the taxpayer £22m in its first year.
`who’s going to cover that shortfall – John Swinney? No, the Scottish taxpayer of course!
As if the UK tax code is not complicated enough, the SNP has made Scotland’s even more complex with not just the highest income tax rates in the UK – but also six income tax bands rather than the three tax bands in England.
In the grand scheme of things it is arguable that £22m is not a huge amount in a total tax revenue of around £19bn or its spending of £52bn. Unfortunately the ramifications of the SNP tax policy go far further than the cost in 2024/25 of £22m.
For a start the report only covers the probable impact of Scotland’s Top Rate of 48 per cent against England’s Higher Rate of 45 per cent. It does not establish the data for the impact of Scotland’s own Higher Rate of 42 per cent kicking in earlier in Scotland at £43,633 – against England’s 40 per cent starting at £50,271.
Nor does it consider Scotland’s unique “Advanced Rate” of 45 per cent starting at £75,001 before the 48 per cent rate starts at £125,401.
The impact of these other higher rates and extra bands is likely to be similarly damaging to Scotland’s dynamic and highly productive tax-creating workers, be they the self-employed contractors, entrepreneurs founding new businesses, or highly skilled professionals in management.
Nor does the report capture the wider cost of discouraging inward migration of the world’s most talented people to our businesses or public services – when working in neighbouring England is more rewarding. Even the basic process of recruiting the best talent from within the UK labour force is made harder as Scotland becomes less competitive.
Then there’s the encouragement to move income into legitimate tax shelters (such as pensions) or the reduced entrepreneurial activity that pays better to do elsewhere.
One doesn’t have to be a millionaire before thinking of changing one’s tax exposure by abandoning Scotland for warmer climes. I know of teachers who have already left Scotland to work in English speaking schools in the likes of Dubai, South Korea or communist China. The job security is better, the discipline is safer and it makes teaching more rewarding, while the salaries are higher as well as the taxes being far lower.
Scottish politicians really need to get out more, not just beyond Holyrood and into the private sector, but also to experience how different life can be in lands where faster growing economies exist.
And it doesn’t have to be Asian countries or high tech hotspots; living standards and real disposable income has grown almost twice as much in the US as in the EU since 2000.
We know people are leaving Scotland but the impact is not just on income tax revenues, these people still buy new cars, they still renovate properties to their taste – they just don’t go to a Scottish car dealership or engage Scottish trades to revamp a hidden gem of a property. Other tax revenues are therefore sub-optimal – in other words lower than they could have been.
Instead wealthy tax refugees spend in other tax jurisdictions where jobs are made and taxes are paid. We also know that previous Scottish tax divergence has reduced net migration into Scotland among higher earners, with larger responses in the highest incomes.
The report cannot quantify these losses but they mean we are all the poorer. The bill for lost revenues will be far, far larger than £22m once the other tax bands are included – and greater still when the indirect impacts to the economy are considered. Swinney’s lost tax revenues have to be found somewhere and it inevitably means we all pay more.
Malcolm Offord knew this, which is why he advocated tax cuts to begin to reverse the economic decline the country is suffering under this SNP administration. Only Offord had the guts to tell us the truth. Meanwhile John Swinney is looking for Dead Cats and Red Squirrels, but nothing will deflect attention away from the fact he owes Offord an apology and must make good the £22m shortfall by changing his tax policy.
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Photo by Lucas Kendall – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=187413436
