The Scottish Secretary has announced that the government will introduce a White Paper on implementing 39 of the 42 proposals made by the Calman Commission on Scottish devolution. The most eye-catching proposal is that the Holyrood Parliament will get partial control over income tax.
Well, I’m certainly glad that some tax powers are being devolved. But as I wrote at the time, the Calman Commission’s proposals are a bit of a dog’s breakfast. Take the tax proposal. Under the plans, HM Treasury will take 10 percent off the basic and upper rates of income tax in Scotland, and reduce the block grant from Westminster to Holyrood accordingly. The Scots will then decide how much additional income tax they want to charge – if they go for rates higher than 10 percent, they’ll be sent more money, and if they go for lower rates, they’ll get less.
My first problem is that this arrangement would institutionally entrench a naïve view of taxation – that a higher rate always means a correspondingly higher amount of revenue, while cutting taxes has an equal and opposite effect. Everyone except the Treasury, which insists on sticking with its static model of the economy, even though it hasn’t correctly predicted tax revenues in years, knows that this is rubbish. In the real world, taxes affect incentives, incentives affect behaviour, and behaviour affects tax revenue. Sometimes, cutting taxes will raise revenue, and raising them will reduce it. It’s called the Laffer curve.
Furthermore, does everything to do with devolution have to be such a muddled fudge? Couldn’t Calman and the government just embrace a simple principle – that the Scottish Parliament should be made responsible for raising the money it is in charge of spending – and follow it to its logical conclusion? You could do this very simply. My preferred option is to keep VAT and National Insurance as UK taxes, split North Sea Oil revenues 60/40 in Scotland’s favour, and then transfer responsibility for all the other taxes to Holyrood, and let them do what they want. The sums more or less work out.
Reform Scotland has produced an excellent report on Scottish fiscal autonomy. Click here for details.