The road to devolved tax powers could be fraught with difficulty and an end to redistribution

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The Guardian reports this morning that:

The people of Wales will vote in a referendum to decide whether to take control of powers over income tax, David Cameron and Nick Clegg have announced.

The prime minister and his deputy said Wales would be given a new ability to borrow, and control over stamp duty revenues, as part of the package of measures giving more responsibility to Cardiff Bay.

The democrat in me wants to cheer: in fact it does, unambiguously do so on the issue of borrowing powers. But on tax? there I am worried for a number of reasons.

First, income tax remains at the heart of our revenue raising powers in this country. But we also know that revenue raising capacity varies enormously across the country because our income distributions are widely geographically different: London and the South East have by far the highest incomes and places like Wales have a low tax base. Now that should not be an issue except for the fact that we know that as a result there is s net redistribution through taxation from the South East to Wales, the North, Scotland and so on. And I believe that's right.

But suppose that if Wales secures its own right to tax income then London follows - which has by far the highest level of income? And suppose London then cuts rate - as you can imagine Boris doing. What then? Will there be as much income to redistribute? Or will Wales have to increase taxes to compensate for London not paying enough to Wales?

And if so will we create regional tax havens?

Now I know evidence in the US says people do not over across state lines to avoid tax - quite surprisingly given how strongly economic theory would suggest that they should - but  there are other issues in play here too. Who is in Wales for a start? Just because you live there does not mean you work there. And vice versa. So we have an admin nightmare and net pay differentials between people doing the same job on the same pay with the same circumstances just because they live either side of the border. Does that make sense?

My answer to this is it does not, at all. I do not think there is capacity for more than one income tax in a country. Administratively and in terms of justice that makes no sense. It would make even less sense when the case is made against redistribution 'because they can raise their own tax' which is, I am sure, the real motive for this move by Cameron and Clegg.

There is though a tax that can be applied and which should be applied and which would make a difference and which we are missing in our tax system right now - and that is land value taxation. This is the obvious local tax for the UK - and it could be used to make a big difference to the way local economies work whilst administratively the position is a lot clearer.

So I want devolved taxation - but please take care what you ask for. Devolved income tax powers could be the route to ending redistribution and that could be a disaster for Wales.