Taxation and independence

The media today has put a real focus on taxation aspects of the constitutional debate and Corporation Tax in particular. The Scotsman has used a new book, “Scotland’s Road to Socialism” as their starting point. The Herald focuses on the SCDI paper and there will be a piece on Newsnight Scotland. 

From a pro-independence perspective, Jim and Margaret Cuthbert argue that Alex Salmond’s vision for Scotland falls, “far short of any meaningful concept of independence”. On taxation they argue that keeping the pound will bind Scotland in fiscal ties that will radically limit the country’s ability to pursue its own taxation policy. While I am somewhat more sceptical about the general case for independence than Jim and Margaret, I couldn’t agree more and made the same argument in Red Paper publications. 

The Scotsman chooses taxation aspects of my chapter in the book to make a similar point. I argue that, “The evidence that tax cuts pay for themselves (Laffer curve) is simply not there. Any saving goes into profit, not investment and many of our companies are sitting on vast cash reserves already. There will certainly be a huge hit on public finances that is unsustainable. A better way is actually higher taxation to fund investment in people, plant, infrastructure and research.” 

There isn’t even any great enthusiasm in the wider business community. The SCDI paper, based largely on a business survey, that I reviewed yesterday notes, “There is no great desire to participate in a race to the lowest tax environment”. That survey put much greater emphasis on infrastructure and skills that all require public investment – not tax cuts. 

Andrew Goudie makes the point in his Scotsman article that even if the Laffer Curve delivers the outcomes its supporters claim, it is a medium term strategy at best. He asks, “What would be the short-term – and hopefully transitory – compensating changes in policy and expenditure? That is, what is the opportunity cost of the corporate tax reduction in terms of foregone alternative policy and alternative public expenditure?” 

Gus O’Donnell, the ever cautious former civil servant, said that there may the odd “obstacle” in the way of a Sterling zone. Other academics, such as Sebastian Payne, a public law expert at Kent University, declare more forthrightly, “The proposal of a joint sterling zone is economically unattractive and politically unsellable within the UK”. Precisely because taxation would need to be harmonised and our respective economies might not always be at the same stage of the economic cycle. Something that Dr Angus Armstrong from NIESR has articulated well. 

And on the subject of forthright, there is a biting piece from Brian Wilson in response to Jim McColl’s rather strange interview earlier this week. On tax Brian says, “The next obvious question is how far this race to the bottom would go. If Scotland set out to undercut corporation tax in what was left of the UK, then it seems likely that our (by then foreign) neighbours would respond. And then another cut? It is easy to see why this scenario appeals to Mr McColl – but who pays? Certainly not residents of Monaco. More likely the same people who are currently paying, throughout the UK, for the same kind of priority.” 

Jim McColl might regard these views as ‘unenlightened’, but they go to the heart of the SNP strategy dilemma. Nicola Sturgeon is keen to tell us about the prospects of a socially just Scotland, while Alex Salmond is promoting Scotland the tax haven. Sorry, but you can’t have both.

 

‘Scotland’s Road to Socialism’ is available from Scottish Left Review Press.

SCDI: Future Scotland – Future Growth

Given the capacity, and understandable reluctance, of many in the business community to engage in the constitutional debate, today’s Scottish Council Development and Industry (SCDI) survey is worth a read. 

While, SCDI takes no political view on independence, the organisation’s role has always been to examine and consider impartially the industrial, commercial and economic challenges and opportunities facing Scotland. Today’s paper, ‘Future Scotland: Future Growth’ is based on extensive interviews with members and a number of larger gatherings. 

The report gives a good (if gloomy) overview of the Scottish economy and the long term challenges. On taxes, you might have expected such a survey to have strong views on cutting taxation, but in fact the report states:

 “While a stable and affordable tax environment was important to businesses, many respondents were reasonably satisfied with the existing fiscal regime, and would only be seeking marginal improvements. While there were some calls for reductions in taxation rates to assist businesses, including business rates, VAT, national insurance and fuel duties, no particular consensus was detected for a significantly lower tax environment.”

As the latest Scottish Government paper emphasises the benefits of cutting Corporation Tax, again you might have expected this survey to encourage that position. However, it was not a priority for most respondents that Scotland is able to lower its rate below that of rUK. The list of reasons given is interesting:

  •  The UK’s current corporation tax rate is relatively competitive and is reducing.
  • Ireland’s corporation tax rate had been set in a different era, and an independent Scotland may have “missed the boat”.
  • A marginal reduction would have some, but not significant, positive impact for an independent Scotland’s economy.
  • There is no great desire to participate in a race to the lowest tax environment.
  • There is doubt about the extent to which tax competition will be permissible within the EU.
  • The rate would have to be sustained over a reasonable timeframe, and avoid any sign of volatility, to be credible to potential investors.
  • Many respondents raised questions about how a competitive corporation tax would be funded, and acknowledged that the benefits would depend on the wider package of the prevailing business environment – e.g. it would have no real benefit if the result was that Scotland could not afford to maintain competitive infrastructure.
  • Corporation tax was not the sole reason for locating business – decisions also took account of physical infrastructure, access to raw materials, skilled labour etc.
  • It was pointed out that global enterprises have in-built systems for ensuring tax efficiency, and that the funds going to a Scottish exchequer from corporation tax would not necessarily be large-scale.
  • The headline rate is only one consideration – tax certainty and allowances are also important factors

 Even more encouraging was that, “most respondents articulated the desirability of a wider business environment that ensures we can invest appropriately in good infrastructure, skills and education to support the economy’s long-term needs.”

Sectors that rely on the wider GB market were not keen on creating new barriers, although few indicated that the current debate was having a marked impact on investment decisions. The economic climate was much more significant. The emphasis was on long term stability, “relative uncertainty can jeopardise decision making.” 

While respondents had mixed views on the new Scotland Act and greater devolution in general, the overwhelming view was, “it is not the powers, but the policy decisions that will count”. Hard to disagree with that as the Red Paper consistently argues the same point.

There was a clear preference for a monetary union with the rUK but, “Numerous respondents voiced reservations about how well an independent Scotland would fare in negotiations post-referendum, and thought there was a reasonable probability that an independent Scotland’s influence could be weakened. Some respondents also questioned whether such an arrangement would in fact negate the idea of Scottish independence, and considered that an independent Scotland should have its own Central Bank”. There were also concerns about Scotland’s credit rating and the impact of speculation. 

Unsurprisingly, SCDI and the respondents value impartial information from within and outwith Scotland. They also urged that their contributions should be listened to and not shouted down by one side or another. The latter may be more challenging!

Economic case for Indy undermined by Laffer Curve economics

The Scottish Government’s economic case for independence is strong on historical analysis but light on how Scotland would address the challenges it highlights. It also falls into the same complacency as the Treasury paper, in not explaining why current devolved powers have not been fully used to tackle inequality.

The Scottish Government has published ‘Scotland’s Economy: the case for independence’.  It sets out their analysis of Scotland’s relative balance sheet in terms of public finance and the strengths of the Scottish economy. It then claims a better future is possible if Scotland had access to all the economic and policy levers.

The first section sets out Scotland’s relative financial strength with a balance sheet as an annex. I say relative because it still looks pretty challenging, but probably in the short term slightly better than the rest of the UK, if you include oil revenues. The debate is over the medium to long term because of the reliance on volatile oil prices.  Then we get a decent analysis of Scotland’s economic strengths sector by sector. So far so good.

Then the paper starts to go downhill a bit. A predictable section on how Scotland has been held back by Westminster in tune with the daily refrain from Scottish ministers. Now, there is much here that I would agree with, particularly the importance of tackling inequality. However, there is little explanation of how the Scottish Government has used their existing powers to address this issue. You should always judge politicians on what they have done – that’s the best evidence of what they promise for the future. Sadly, the Scottish Government’s balance sheet on this is decidedly mixed. On many of the issues they criticise successive UK governments for, there is little evidence that they would have done anything different at the time. Banking regulation is an obvious example.

Finally, we get to how they would use the powers that independence would bring. This is the lightest part of the paper. Of course there are good examples of successful small countries. However, the paper gives insufficient weight to the challenges facing small countries with a large neighbour as their dominant trading partner.

Then we have the currency union argument. I have covered this at length before, but the proposal is being taken to new lengths of absurdity. It is frankly ridiculous to assert that if we vote to leave the UK then we have some sort of entitlement to remain within the institutions of that union. We are entitled to our share of the assets and the liabilities. That might mean 10% of the desks in the Bank of England, but not to put our bums on any of the seats that remain. And even if we did agree a new Sterling union, there would be significant constraints on our fiscal and monetary polices. All the policy drivers that earlier sections of the paper complains about.

That leaves us with cutting Corporation Tax as one of the few concrete proposals in the paper. The FM confirmed that this remains the cornerstone of their policy. In the context of this paper there is a rich irony in the FM wanting to adopt Osborne economics as they are clearly both supporters of the Laffer Curve. The problem is that not even Osborne really believes that it will work as the Red Book shows anticipated revenues falling, even when they predict the economy picking up. There is simply no chance of a future UK government in a currency union agreeing to differential tax rates and even if they did, it would simply lead to a race to the bottom.

Overall, the paper makes a decent case for Scotland’s strengths as an economy and even for our relative position with regards public finances. The paper’s big weakness is on how Scotland would use the powers of independence and the consequences of separating from the UK.  Much more work is needed on these issues.