There appears to be broad consensus this morning that Scotland will get devolved powers over all income tax on earnings but not savings in the review of its authority to be announced today. Some other taxing rights, which are much less contentious, will also be devolved.
I have to say I am very worried about this compromise solution for Scotland. In saying so I stress I was in favour of independence and felt Scotland should have embraced its own currency: little else made sense in September. Two months on a worst possible outcome for everyone now seems to be the option.
The settlement reached appears to be based on the premise that tax's sole purpose is revenue raising and that Scotland must have taxing powers if it spends. At the core of my concern is my belief that this is wrong. Tax has not less than six purposes:
1) It reclaims the money that a government has spent into an economy
2) It reprices goods and services that the market misprices
3) It redistributes income and wealth
4) It raises representation in democracies as people are motivated to vote by tax
5) It reorganises an economy
6) It regulates money by giving it value in exchange by requiring that tax be paid using the state currency.
You will note that none of these refers to raising revenue and that's appropriate. We know governments can and do spend money they do not have and we know governments can also spend without ever borrowing: QE has proved that. This is why I refer to tax collection as the reclamation of money the government has already spent into the economy using the power a state has to create money at will.
The trouble is Scotland does not have that power to create money. That will, as the whole referendum debate focussed upon, stay with London. So Scotland ends up with revenue collection rights but no control over money: that's half a power at best. And it has even been denied the right to reprice necessary parts of the economy to achieve the goal of redistribution which many think absolutely vital to economic recovery because tax rates on savings and rents are going to be taken out of its control meaning it can only redistribute earned income - which is precisely what is probably not needed in Scotland.
What's the outcome? A mess, is the best answer. The West Lothian question remains on the table and is too uncomfortable to answer. UK fiscal control is reduced, and Scotland has powers too limited to really effect change. Macro economic policy will be hard to deliver. The practicalities of administering two, related, domestic tax systems will be enormously difficult (who will be resident in Scotland, and how will they know?). And Scotland will remain frustrated that some real reforms will remain beyond it for time to come.
If ever we wanted to know that the No vote in September was a very big mistake this is the proof. We will now live as two nations with two tax systems and no macro economic control on some key issues living under one umbrella state with one currency that no-one can be sure they control. That's the definition of a macro-economic mess in the making. I am, I think, appropriately worried. There could have been worse outcomes - and they may still come - but this is a potential nightmare in the making.
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totally agree Richard. It’s good to have your contribution to this debate. I’m a CA (ICAS) and an independence supporter and will take what additional powers we can get for Scotland. But it seems to me this pick and mix this power but not that obe appraoch is as odd as it is illogical. Those resistibg more powers for Scotland need to examine why this power but not that one is an answer. I really wish we could jist get on with the job. But, with the no vote we are where we are. It’s frustrating.
“If ever we wanted to know that the No vote in September was a very big mistake this is the proof.”
Yes, indeed. If, however, we consider the new political awareness which is currently sweeping through Scotland, and the fact that people are more cautious than ever about accepting the line taken by the mainstream media on constitutional matters, the eventual outcome may well be an even more solid foundation for an independent Scotland than would have been achieved by a narrow YES vote in September. The fat lady has not yet begun singing.
I see the person who claimed most credit for the vow, Gordon Brown, is not standing for re-election in 2015. Some might say he’s bottling it. I predicte a different outcome in September, but didn’t take people’s disgust at Labour campaigning with the Tories into account. This is nowhere near what was promised in the vow and nothing like what most of the media are spinning it as.
Agreed
“6) It regulates money by giving it value in exchange by requiring that tax be paid using the state currency.”
I’ve no idea what this means, but I do know that the last bit is wrong: tax can be paid in currency other than sterling.
No it can’t: you have to convert into sterling
If you don’t settle the sterling value you haven’t paid
Which is why people in the UK trade in sterling because that way they know they have the currency to pay their tax
“6) It regulates money by giving it value in exchange by requiring that tax be paid using the state currency.”
Reminds me of “TWINTOPT” (that money is “That Which Is Necessary TO Pay Taxes”)from MMT (Modern Monetary Theory).
Spot on
At least Scotland will not have the power to undermine its neighbours by setting lower rates of corporation tax.
Although I had some sympathy with the concept of Scottish independence I think the SNP got people carried away on a romantic mission. I don’t think the Scots have any more “right” to independence than other regions of the UK -which are more heavily populated and hence have a more democratic case. Devolution should have gone to all parts of the UK not just to the Celtic fringe. The inter mixing of peoples and economies over centuries has just gone too far. So, I don’t think ANY devolution of the tax system is going to satisfy everyone. Far better to improve the system we already have.
Only an Englishman could have said that
Said by someone with an Irish passport
Stephen you really don’t have a clue about Scotland, do you my friend?
The difference that the Scots have more of a “right” to independence or devolution than areas of England, say, goes back to the “Union of the Crowns”. Scotland and England, as individual countries, formed a union, although that is totally ignored today and has been for centuries. With the English population being so much bigger, Scotland has no chance of being taken seriously by Westminster. There is no longer a “union” since the peoples are regarded as one entity. Scotland was a country in its own right, bits of England were not.
Who has said that the other regions shouldn’t have devolution?
I currently reside in NZ and it is obvious that independence from Britain can work perfectly well. I do not understand the double standards I have seen, that happily accepts independence for ‘overseas’ nations, but looks differently towards Scotland. It almost suggests Scotland is in some way inferior and would be unable to manage it’s own economy. There is no other way to take that than insulting.
Thank you Richard for these most interesting and educational posts on tax – until now I had no interest in the subject. I knew they were necessary, but it’s good to know why. 🙂
I think we all knew that Scotland was going to be shafted if the referendum did not got in favour of independence, as if it were an audacity to ask.
Thanks
Kathleen.
The double standard is not because Scotland is inferior – it is because Scotland has Oil. Western powers will create wars with terrorists that do not exist, to protect the people from WMD that do not exist; just so they can invade and get their hands on another country’s oil.
That is why they won’t give up Scotland. Without Scotland – England would be bankrupt.
Independence is not based upon the number of people in a country, a very strange notion. Wales and N.I. also want independence. So indeed every one wants independence but unfortunately for the time being we are all tied to England. England… who do they want independence from… well Westminster and the City of London comes to mind, but that can easily be changed by voting. Neither Scotland, Wales or N.I. have the population to affect the English vote.
But the notion that we are too connected to become independent is not a carefully thought out argument. How could be become connected from a far longer disconnected state if the reverse is not possible? No, the world is far more within reach today. It is far easier for us to become independent now than it was. We can use our own currency or anyone else’s, we have international travel, communications, trade agreements (separate from those of England) and a reputation of being good people (thanks to the lack of international football violence; which has so often characterized English football – although of late it seems to be improving).
No, the fact is – Independence was and is a National necessity for Scotland; one which can easily be achieved. Wales and N.I. have a few more hurdles to cross before they are ready for independence; but the desire is there.
But you are correct devolution is not going to satisfy anyone – which is why independence is the only option.
As a Scot I completely agree with Richard Murphy here. It’s a dog’s breakfast; the worst of all worlds. The thing that concerns me most is that it gives a lot of administrative responsibility but very little power.
Richard, can I ask your opinion on why the representatives from the SNP, who were assigned to the Smith Commission, agreed to the proposals and duly signed off on them. As a supporter of independence there was nothing I wanted more than for Scotland to become independent, however, I fully believed that the SNP did not present a strong enough case to convince many that independence was not about the SNP. How can they now argue that what we have received is not enough, which it clearly isn’t, when they have agreed to it and signed off on it
Ask the SNP
I do not know!
I suspect they took what they could as an opening offer
As you probably know by now, what has been presented is only a snippet of what the Commission actually contained.the SNP did NOT sign off on what is being presented now – but on a much grander proposal – the full details of which we probably will never know. Also don’t forget SNP and the other parties Labour, Conservative et al had equal voting rights to approve the report.
However, you are thinking about this in a very negative way. Scotland was never going to get much through the Commission and an agreement had to be made otherwise Westminster would simply say that Scotland is being unreasonable or can’t make up their minds.
What we have now is a broken promise. All the things the people were “vowed” if they voted No have disappeared into nothing. More No voters will realise that they have been made fools of by Westminster and that the Government is laughing their faces off at them for being so gullable. With this there may well be enough demand at the next Scottish Elections to give SNP the mandate to go for independence again; either with or without the support of Westminster.
Totally agree. The power to vary rates (but not allowances) on earned income (but not unearned income) is meaningless if compensatory adjustments to other taxes are not possible: think Geoffrey howe’s first budget where the top rate of income tax was cut to 40% but the standard rate of VAT increased from 8 to 15%. I realise that under EU rules, VAT operates at Member State level and cannot be devolved but the principle is valid. The Smith report looks lie a cosmetic exercise.