The challenges of reducing inequality

One of the Scottish Government’s strategic aims and claims for independence in the White Paper is to reduce inequality. New research from University of Stirling indicates that Scotland faces significant challenges in closing its “inequality gap”.

Scotland and the UK currently have much higher income inequality than comparable Nordic countries such as Norway and Denmark, with Scotland having a gap against these Nordic countries of 4.7 points on the Gini Coefficient – the recognised measure of the equality of a nation’s income distribution.

The research found the Scottish Government’s current fiscal powers – including council tax and the new Scottish Rate of Income Tax – are relatively ineffective at tackling inequality because they cannot be targeted at specific income groups. While an independent Scottish government would have access to the full range of fiscal powers, the research found the impact on inequality of exercising these additional powers would in fact be relatively small.

The authors argue that because the UK will remain highly integrated, any change in tax on income would trigger migration between countries. In addition, the small numbers of top rate tax payers means that tax changes have limited impact. Income support at the bottom is more effective in reducing inequality.

Co-author David Eiser added: “The Nordic countries have lower levels of inequality than Scotland not only because they have more progressive tax and benefit policies, but also because the level of inequality in income before taxes and benefits is much lower than in Scotland.

“Our report shows once the effect of tax rises on migration and labour supply are considered, the revenue raised from a one pence increase in the basic rate of income tax in Scotland could fall from £320 million to £210 million, and the revenue raised from a one pence increase in the upper rate of income tax could fall from £40 million to only £2 million.”

He added: “given the scale of labour mobility between Scotland and the rest of the UK, a fiscal solution to inequality could be detrimental to government finances because raising taxes will increase incentives for high earners to relocate, and likewise raising benefits could harm work incentives. Achieving Nordic levels of inequality in Scotland will likely have to involve some equalisation of incomes before taxes and benefits, rather than a large increase in redistribution.”

I am personally pretty sceptical about claims of tax flight because there are many other constraints on geographic mobility. However, we do have to recognise that the scope for significant redistribution is limited and involves difficult political choices that Scotland’s political parties have been unwilling to make. The research does strengthen the case for pre-distribution policies such as the living wage and tackling low pay generally. That is potentially a better route to reducing inequality.

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