Shirley McIntosh: Tax is not driving election campaigning this year, but should it be?

Shirley McIntosh: Tax is not driving election campaigning this year, but should it be?

Shirley McIntosh

Shirley McIntosh, RSM’s head of tax in Scotland, details the importance of tax during an election campaign.

Five years ago tax was a hot topic in the Scottish Parliamentary election. How the newly devolved tax powers would be used to deliver policy was part of every party’s manifesto. But this time around, the parties are relatively quiet on tax changes. The forthcoming election is set against an unprecedented backdrop of Brexit and a global pandemic, which means no elected party will want to rock the boat further for businesses or individuals. but this doesn’t mean there won’t be tax changes for taxpayers.

The SNP’s pledge to freeze the income tax rate and bands threshold with increases of no more than inflation, sounds like a good option for most taxpayers; but as wages increase taxpayers will fall into the higher tax band quicker; effectively a stealth tax for any employees receiving a wage rise above inflation which many will be hoping for.

This will acutely hit the public sector in Scotland which sits at its highest level since 2013 at almost 600,000, following the Scottish Government’s commitment to guaranteed basic pay increases and manifesto pledges to increase public sector roles; which in turn will increase the tax take.

Recent polling suggests that the SNP will gain a majority in the next parliament and if so, to win budget approval, they will no longer need to negotiate with the Greens, who are keen to create new starter and intermediate tax bands while increasing taxes on the wealthy.

However, without increasing taxes, only significant cuts to services or an increase in borrowing will be required to raise the planned £6bn of increased spending detailed in the SNP manifesto. Borrowing more would need further devolved powers from Westminster to remove caps on capital borrowing and restrictions on borrowing to fund day-to-day costs. If this request is denied then tax reform may come back into play to generate funds to support the manifesto pledges.

In common with most other economies, borrowing our way out of the pandemic brings other issues. Independence is a key battleground in this election, but further borrowing on top of a deficit which now sits at £40bn challenges the fiscal framework for independence. A recent survey from The TaxPayers’ Alliance highlighted that an independent Scotland would have the highest deficit in Europe, which could give the EU cause for concern in considering an application from Scotland to join.

The SNP is looking to strengthen Scotland’s tax powers with the devolution of VAT and full powers over income tax and national insurance contributions in the short term. More powers also bring more complexity as increasing taxes is rarely straightforward and the behavioural impact of any move could result in a reduced tax take. With only around 15,000additional rate taxpayers in Scotland bringing in circa £1.2bn in income tax revenue, a few deciding to relocate outside Scotland could have a significant impact.

Could the introduction of an ‘Amazon tax’ which the SNP are proposing be the answer? This could mean a two per cent levy applied to firms that sell goods online with the aim of ‘levelling the playing field’ with traditional retail; but it could also encourage existing online retailers to move out of Scotland, and prevent online retail start-ups choosing Scotland as a place to invest. This would have wider implications for jobs and growth with a knock on effect on the tax take. In addition, it is estimated to bring in around £200m, which seems like a lot of money, but a drop in the ocean towards the proposed £6bn increase in spending as proposed by the SNP.

While the economy may not be top of most voters’ priority list at this election with independence in pole position, as Brexit has demonstrated, it can’t be ignored indefinitely.

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